Brazil Farmland Investment Risks
Brazil’s Cerrado region, one of the most sensitive environmental ecosystems in the world, has seen a surge in soy expansion and large-scale land acquisitions in recent years. The conversion of native savanna and forest vegetation into farmland causes a range of negative environmental and social impacts. This week Aidenvironment, as part of Chain Reaction Research, published two reports that provide investors and financial analysists with credible information on the financial risks associated with these developments.
The expansion of farmland in the Cerrado is particularly noticeable in the Matopiba region, consisting of the Brazilian states of Maranhão, Tocantins, Piauí and Bahia. Here companies acquire land, clear it of its native vegetation, and transform it into farmland. Their business models not only rely on revenues from soy production, but for also on the value appreciation of their farmland assets. By highlighting that these business models inherently include financial, environmental and social risks, Chain Reaction Research aims to mitigate the economic drivers of deforestation. Mainstream investors that are informed about the sustainability and financial risks of these investments are more likely to seek more sustainable, alternative models.
Chain Reaction Research’s thematic issue paper on “Farmland Investments in Brazilian Cerrado”, argues that investors in farmland companies should consider financial, environmental and social risks related to land acquisition practices, but that these risks remain largely hidden. Financially, there are indications that Brazil’s Cerrado region is subject to an overheated farmland real estate market. Environmentally, the conversion of native Cerrado vegetation into agricultural land, contributes to increased carbon emissions, less biodiversity, reduced drinking water supply for Brazil’s large cities, and erratic rainfall. Socially, Illegal land grabs – that can precede the acquisition of farmland by investors – negatively impact the livelihoods of indigenous groups and local communities, heightening the risks for violence, social unrest and litigation. As the soy market is showing signs of reduced appetite for deforestation-linked raw materials, farmland investments are increasingly at risk of becoming stranded.
The company profile on SLC Agrícola highlights how the company actively purchased, cleared and transformed 39,887 ha of land in the Cerrado biome from its original vegetation between 2011 and 2017. For over 30,000 ha, this vegetation is classified as Cerrado forest by Brazil’s Ministry of Environment. SLC faces the potential risk of losing access to clients with zero-deforestation commitments and an overvaluation of its land portfolio resulting from its sustainability impacts. This could result in SLC Agrícola losing half of its profits from its main customers and at the same time there is a noticeable upside if the company commits to zero-deforestation.
For more information, please contact Tim Steinweg.