(Bloomberg) -- For six months, not a drop of rain fell on José Orlando Cintra Filho’s coffee crops.
The white flowers that typically inspire hope of a good arabica harvest — the bean variety favored by chains including Starbucks Corp. — still haven’t blossomed. Instead, the trees withered. Cintra Filho, knowing he didn’t have enough water in his reservoirs, stopped irrigating his farms and trimmed some branches earlier than usual. Next year’s harvest is already shrinking.
“I’ve been in coffee for 36 years and I have never been through this,” he said, hectares of parched trees surrounding him in a major coffee producing area known as Mogiana Paulista.
The worst drought in Brazil’s history is doing more than jeopardizing coffee, sugar and soybean crops. Dead vegetation is giving way to fires, sending greenhouse gases into the atmosphere and disappearing more of the Amazon rainforest. Key rivers, responsible for transporting a third of the nation’s prized soy crop, are drying out. Utility costs are up given that the country gets two-thirds of its energy from hydropower.
And as one the world’s largest crop exporters, any trouble in Brazil’s agriculture business has knock-on effects for food prices around the world.
What’s worse is that because of climate change, this is becoming the norm. Brazil has been facing “chronic and severe drought” since 2012, according to Bráulio Borges, a senior economist at LCA Consultores in Sao Paulo. Such issues have cost the nation between 0.8% and 1.6% of gross domestic product each year. While fiscal spending had lifted growth so far this year, the long-running problems with rain have “chronically taken away more than 10% of accumulated growth from 2012 until now.” That’s a significant problem for an economy that gets almost a quarter of its GDP from the agriculture business.
Nearly 60% of Brazil has suffered some degree of dryness since late 2023.
It’s a microcosm of how climate change is turning lives and whole economies upside down. Households in Zambia are only receiving three hours of electricity a day, as the hydropower-dependent nation faces a historic drought. Ghana in late August banned the export of some grains to avert a food shortage as it faces a lack of rain. Greece is enduring its worst wildfire season in two decades. Extreme weather damaged soybean, peanut, sugar and corn crops in China early this summer.
“Brazil is a relevant country in the sense that, when it is affected by a big drought or a big frost, international prices can be affected,” said Marcos Jank, a senior professor of global agribusiness at Insper. “The world does not depend only on Brazil, but in the most important commodities that Brazil exports such as soybeans or sugar, a lack of production can indeed impact international prices.”
Pricier Goods
Breakfast tables everywhere are feeling the pinch from what’s happening in the nation that supplies a third of the world’s coffee and half of its sugar trade.
While rains expected for October can still aid crops, the fears that Brazil’s harvest might get ruined next year already drove an 11% surge in arabica coffee futures in September alone, as price touched the highest in 13 years during the month. In the first few trading days of October, the rally has cooled a bit.
Prices for the cheaper robusta variety, which Brazil also grows, have also jumped. That has left companies and consumers paying for pricier coffee, and retailers — especially in Europe where upcoming anti-deforestation rules could further tighten supply — have been scrambling to secure beans.
“We are certain to have problems with production in 2025,” said Antônio de Salvo, the president of the agriculture federation of Minas Gerais, Brazil’s largest coffee-producing state. “We just don’t know yet how large the loss will be.”
Sugar supplies are also under threat. Dry sugar-cane crops became prime victims of record wildfires seen at top producing state of Sao Paulo in August.
Farmer Sergio Bota da Silva, who owns a few sugar-cane plantations hit by fires near the city of Sertaozinho, believes about a third of his production was lost to fire and drought.
“It was a horrible thing,” Silva said as he remembered working on the fields and spotting fire coming his way. The blazes also hit crops that would only be harvested next year. “I had done all the treatments, and now I’m going to have to rip that cane off because it is not going to sprout anymore.”
Raw sugar futures traded in New York climbed 16% in September, and the rally has so far continued in October with prices trading near the highest in more than seven months.
The impact is cascading through the finances of major sugar groups in Brazil. Because the drought reduces quality of the raw material, mills are forced to produce more sugar-cane ethanol, a product with lower prices compared to sugar.
Recent fires also mean millers will likely have to spend more to replant, XP Inc. commodities analyst Samuel Isaak said. The brokerage firm recently warned of risks for smaller-than-expected profits for sugar producers such as Sao Martinho SA.
The government of President Luiz Inacio Lula da Silva announced that farmers affected by recent fires will have access to a credit line designed for the recovery of degraded areas. Resources of as much as 6.5 billion reais ($1.2 billion) from the country's Crop Plan are available, with better borrowing conditions compared to the wider credit market.
Inflation Risk
Transportation of some of what Brazil is able to produce is also dependent on rain.
Water levels are historically low at some key points of the “Northern Arc,” an array of ports responsible for about a third of exports of the nation’s main agricultural product: soybeans.
If dryness persists, barge operators such as Hidrovias do Brasil SA will be forced to split volumes into smaller portions so lighter barges can make it through critical points. A similar situation last year resulted in the company reducing its earnings outlook.
The crisis also results in costlier bills for Brazilians as the country’s dependence on hydro for two-thirds of it’s power means lack of rains push electricity bills higher.
Additional charges set to be applied could add about 0.3% to the year-end headline inflation reading, according to LCA’s Borges.
“The drought is putting pressure on costs and limiting GDP growth,” he said.
For the general Brazilian population, Borges stressed that inflation is the biggest concern. That can be seen in the gap between the main gauge of inflation and so-called core inflation, which strips out volatile items like food and fuel. While headline inflation clocked 4.27% in August, core was estimated to be around 3.6%.
Of course, the increased costs of food and power will be felt most by Brazil’s poorest. As of 2022, 31.6% of Brazilians, or 67.8 million people, were living in poverty, which is defined by the World Bank as living on less than $7 a day.
Delayed Planting
What’s preventing forecasts of even bigger impacts to the economy is that, for now, it’s too early to tell if there will be any meaningful damages to soybeans.
Farmers typically start planting by September or October, and are expected to delay doing so until regular showers hit, XP’s Isaak said. While delays do not necessarily mean there will be damages to crops, they increase risks for the development of corn or cotton crops which are typically planted after the soy harvest, he added.
“The situation in Brazil is quite bad,” said Ryan Truchelut, president of WeatherTiger LLC.
Persistent dry weather in key Brazil areas risks delaying the planting of soybeans in the world’s largest supplier of the oilseed used in everything from animal feed to biofuel. While it is still early, woes about farmers’ ability to put the seeds in the ground during the ideal time window — when yields tend to be higher — has helped drive benchmark prices in Chicago in September, with futures trimming some of the gains in the first days of October. A much delayed soybean crop is a major threat for the nation’s corn production, which is mostly cultivated right after the soybean harvest and before the end of the rainy season.
The wet season in central Brazil — responsible for soybeans, corn and cotton — will likely be delayed, Truchelut said. The region “north of Parana” — in the country’s south and where soybeans, sugar cane and coffee grow — “will likely tilt warmer and drier than average.” Bahia, in the northeast, may be the luckiest and receive normal rains.
That means soybeans, sugar and coffee in center-south and center-west Brazil could see lower yields. La Niña could also determine just how bad things get. However, the climate phenomenon, in which the Pacific cools, is expected to arrive late and in a weakened form. That may spare southern Brazil and Argentina from any potential drought issues that are common when the phenomenon is stronger, according to Joel Widenor, chief administrative officer at Commodity Weather Group.
Dryness and fires in Brazil, which were preceded by severe floods earlier in the year, “not only devastated forests and crops, but also created a tragedy – an economic, social and environmental tragedy – without precedence,” Jorge Hargrave, a director at Maraé Investimentos and the co-founder of the Brazil Climate Summit, said at the group’s recent 2024 gathering in New York. “This crisis underscores the immense responsibility we all carry.”
--With assistance from Clarice Couto, Simone Iglesias, Andre Loureiro Dias, Barbara Nascimento, Ilena Peng and Brian K Sullivan.
©2024 Bloomberg L.P.