Physical Climate Risks Pose Risks for Agriculture in Latin America and the Caribbean : Moody’s
Coffee Network (Bogota)- Latin America and the Caribbean face multiple, increasingly frequent risks from a changing climate in which extreme climate events disrupt operations more frequently while tightening supply chains for the logistics and infrastructure, agriculture, mining, fishing, power generation, water utilities, and telecommunication sectors, credit rating company Moody’s Investor Service said.
Changing weather patterns are threatening losses of crops and productivity for Brazil's agriculture and protein producers, though geographic diversification eases that risk. Heavy rain and flooding can disrupt mining and logistics operators, cutting their cash flow and revenue. Water stress poses the main risk for utilities in Brazil.
In Peru and Colombia, floods and rising sea levels pose direct threats to Peru's fishing, protein and agriculture sectors, while its mining sector faces some risk from geographic concentration. In Colombia, floods and rising sea levels are also affecting the agricultural sector and mining, Moody’s said.
In Colombia, torrential rains for the past 24 months have curtailed coffee production to about 12.6 million bags last year, and output is expected to be around 12 million bags in 2022, according to the coffee growers federation. Colombia is the world's third largest coffee producer and the largest producer of high-quality Arabica beans.
Moody’s said severe droughts have increased in Latin America. Heat stress directly affects the productivity, health and safety of workers in open-air
locations such as agriculture and protein, or in mining, which uses heat-sensitive equipment. It also affects utilities operations such as hydropower generation via water stress risks.
Most governments in Latin America are already crafting climate-change policies and legislation, but they are in general late on their net-zero agendas compared with peer countries. But the implementation of policies to phase out greenhouse gas emissions and achieve carbon neutrality will be slow, and since climate-change threats will only intensify, many sectors are adopting their own measures. Companies are cutting emissions and reducing physical climate risks through geographic diversification, reducing operational redundancies and using technology to prevent physical damage.
Brazil
Brazil's agriculture and protein producers are highly exposed to physical climate risks, with changing weather patterns threatening losses of crops and productivity. Wildfires also pose a risk in Brazil's central-west region.
Raizen's (Baa3 stable) sugarcane production is concentrated in Brazil's center-south states, but the very large scale of its plantations leaves the company less exposed to different weather patterns, such as heat stress or frosts. Adecoagro's (Ba2 stable) concentration of cash flow from the state of Mato Grosso do Sul leaves the company more exposed than some of its larger and more diversified peers.
But production yields in neighboring Mato Grosso state tend to vary less than in other Brazilian regions more prone to water stress.
Andre Maggi Participações (Ba3 stable), one of Brazil’s largest trading companies and agricultural producers, has a heavy presence in the state of Mato Grosso, but production yields for soybeans in this state tend to have less volatility than those observed in other regions more prone to water stress in Brazil. Moreover, price dynamics alleviate its risk of water stress; its soybeans and corn are essential food items with fairly inelastic demand through economic cycles.
Geographic diversification mitigates physical climate risks for protein producer JBS (Baa3 stable), whose diversified operations across North America, Brazil, Europe and Australia do not have any particular exposure to water-stressed regions or drought.
Brazil's largest retail banks Itau Unibanco (Ba2 stable, ba2), Banco Bradesco (Ba2 stable, ba2), Banco Santander (Brasil) (Ba1 stable, ba2) and Caixa Economica Federal - CAIXA (Ba2 stable, ba3) all had little exposure to the industries most vulnerable to physical climate risk. These banks, along with state-owned development bank Banco Nac. Desenv. Economico e Social - BNDES (Ba2 stable, ba2), together held about 68% of the system's loans as of March 2022. We assess a low exposure to physical climate risk for the four retail banks because of their granular loan operations with large corporate clients, diversified exposure to small and midsized companies, and in Caixa's case, a loan portfolio with about 78% of operations to households as of June 2022. For BNDES, physical climate risks are
Peru and Colombia
Climate change appears to be intensifying El Niño and La Niña events, which change Pacific Ocean temperatures.
Floods and rising sea levels both pose direct threats to Peru's fishing, protein and agriculture sectors, but other sectors less exposed to physical climate risk such as mining and tourism also face hazards from floods, water and heat stress. For fishing companies, a decline in anchovies hinders the production of fish meal. Weather-related events damage important crops such as blueberries and avocados for Camposol (Ba3 stable).
In Colombia, infrastructure's vulnerability varies depending on asset location. Colombia’s medium to high risk of heat and water exposure reflects its high share of power generation from hydropower—roughly 72% and still rising—which leaves its utilities and power generation vulnerable to flooding and extreme precipitation from El Niño and La Niña disturbances
Colombian banks had a 2.3% total loan book exposure to agribusiness in March 2022, less than in Argentina and Chile. But Colombian banks have a greater loan book exposure to agribusiness than their Peruvian peers, but less than those in Brazil or Argentina.
Meanwhile, Mexico's agricultural producers are susceptible to weather-related events. Droughts pose a high risk to Mexico's agricultural producers, which depend heavily on water and are susceptible to weather-related
factors that affect the harvest of corn, the country's biggest crop. Industrial activities face lower risk than agriculture, yet despite their well developed water management plans, water-intensive industries will face higher costs from rising water stress.
By Diana Delgado
