#1HOW DOES BRAZILIAN AGRIBUSINESS BENEFIT FROM DEFORESTATION? ( instituto Escolhas)#2Board of Directors Mariana Luz (Chairperson) Marcos Lisboa Ricardo Sennes Sergio Leitão Scientific Council Rudi Rocha (Chairperson) Ariaster Chimeli Bernard Appy Fernanda Estevan Izabella Teixeira Marcelo Paixão Marcos Lisboa HOW DOES BRAZILIAN AGRIBUSINESS BENEFIT FROM DEFORESTATION? Audit Committee Plínio Ribeiro (Chairperson) Fernando Furriela Zeina Latif instituto Escolhas THE ESCOLHAS INSTITUTE DEVELOPS STUDIES AND ANALYSES ON THE ECONOMY AND THE ENVIRONMENT THAT PROMOTE THE FEASIBILITY OF SUSTAINABLE DEVELOPMENT. General coordination Jaqueline Ferreira (Escolhas Institute) Technical realisation Economic analysis team: Joaquim Bento de Souza Ferreira Filho, Adauto Brasilino Rocha Junior, Giovani William Gianetti (Esalq/USP) Spatial analysis team: Gerd Sparovek, Alberto Barreto, Arthur Fendrich (Geolab/GPP - Esalq/USP) Escolhas Institute February 2022#3Presentation The incorporation of new areas is one strategy Brazilian agribusiness employs to increase its production capacity. The problem is that this expansion has occurred through deforestation, regardless of legality. Between 1985 and 2020, since the systematic monitoring of land use began in Brazil, the country has lost 82 million hectares (Mha) of native vegetation. Over the same period, the area occupied by agriculture and animal husbandry increased 81 Mha¹. The biomes most affected in absolute numbers by this expansion were the Amazon and the Cerrado, with native vegetation losses totalling 44 Mha and 27 Mha respectively, and equivalent area increases for agricultural use². In spite of the evidence, many agribusiness agents refute their connection to deforestation and the encroaching agricultural frontier because "they do not have a chainsaw in their hands". Is this a reasonable claim? What are the economic effects of new areas constantly appearing on the country's land market? What happens to the price of this asset and the price of agricultural products? How does Brazilian agribusiness benefit from deforestation? These are some of the questions this Escolhas Institute study addresses, employing new econometric and spatial analysis techniques in order to isolate how deforestation has affected land prices and agricultural product prices differently to other variables. * US$ 1 = R$ 5,04 (Source: Brazilian Central Bank, 03/03/2022). MAIN RESULTS * THE DEFORESTATION THAT OCCURRED BETWEEN 2011 AND 2014 DEPRECIATED THE VALUE OF BRAZILIAN LAND IN 2017 BY AN EQUIVALENT OF US$ 27.1 BILLION (5% OR AN AVERAGE REDUCTION OF US$ 77.57 PER HECTARE), COMPARED TO WHAT WOULD HAVE BEEN OBTAINED IN THE ABSENCE OF DEFORESTATION. IN 2017, THE DEPRECIATION RATE HIT US$ 16.5 BILLION, OR 25% OF LAND VALUE IN THE MUNICIPALITIES WHERE THE EXPANSION OF THE AGRICULTURAL FRONTIER OCCURRED, EQUIVALENT TO US$ 195 PER HECTARE. DEFORESTATION ALSO WEAKENED AGRICULTURAL PRODUCT PRICES. IN THE CASE OF SOYBEANS, THERE WAS A US$ 0.6 (-4.5%) REDUCTION IN THE AVERAGE BAG (60KG) PRICE A US$ 1.32 BILLION CUT IN THE COUNTRY'S GROSS SOYBEAN PRODUCTION VALUE FOR 2017. 93.5% (5,218) OF BRAZILIAN MUNICIPALITIES SUFFERED A DEVALUATION IN LAND PRICES DUE TO DEFORESTATION. HOWEVER, HALF (50%) OF THE OBSERVED DEPRECIATION WAS CONCENTRATED IN 61 MUNICIPALITIES (1.15%). 1 Projeto Mapbiomas. Collection 6.0 of the Annual Series of Land Cover and Land Use Maps of Brazil. Infographics. Available in English at: https://mapbiomas.org/en/infograficos-1?cama_set_language=en, accessed on 8 February 2022. 2 See previous reference. HOW DOES BRAZILIAN AGRIBUSINESS BENEFIT FROM DEFORESTATION? LO 5#4THE VARIATION IN BRAZILIAN LAND PRICES (2006-2017) Between 2006 and 2017, the country's total land value ranged from US$ 380.9 billion to US$ 849.2 billion an increase of 122.92%, equivalent to an average appreciation of 7.56% per year. For comparative purposes, the 2017 value corresponds to 57.8% of Brazil's GDP when quantified in 2020 values (US$ 1.4 trillion). In absolute values, the data shows a significant increase in central southern Brazil, and greater relative variations in the northern region and in Matopiba³ (Figure 1). The country's average price per hectare increased 90%, while this percentage reached 205% in the northern region and 195% in Matopiba. These regions also registered the country's highest deforestation rates between 2006 and 2017, concentrating 59% of all deforestation in Brazil, the equivalent of 13.6 million hectares (Mha). However, the evolution in land prices over the years may be the result of several factors, some of them localised, such as the increase in infrastructure availability. Therefore, to understand the specific impact of deforestation on the Brazilian land market as a whole, it was necessary to isolate its effect. FIGURE 1. ABSOLUTE VARIATION (R$/HA) AND RELATIVE VARIATION (%) OF LAND PRICES FROM 2006 TO 2017 Absolute variation (R$/ha) 0 250 500 1000 2000 4000 8000 16000 3 According to the Brazilian Agricultural Research Corporation (Embrapa), Matopiba is a region mainly comprising Cerrado areas in the states of Maranhão (MA), Tocantins (TO), Piauí (PI) and Bahia (BA) [MATOPIBA is the acronym combining the four states' initials]. This region stands out for its agricultural and animal husbandry production, especially grains and fibres. Available in Portuguese at: https://www.embrapa.br/tema-matopiba, accessed on 26 January 2022. Relative variation (%) +25% + 50% + 100% + 200% >+ 400% Source: original survey results. Prices in real terms from 2017. HOW DOES BRAZILIAN AGRIBUSINESS BENEFIT FROM DEFORESTATION? 7#5Type of use (agricultural, cattle raising etc.) Type of production Expectation of future gains derived from land Availability of water for irrigation Precipitation conditions Soil quality and conditions WHAT INFLUENCES THE PRICE OF LAND? Producer's education level Proximity to cities, ports, logistical centres Land supply Available infrastructure (roads, internet) Agricultural aptitude Access to technical guidance The market value of a piece of land is influenced by several factors. Some are concrete and visible, such as infrastructure availability and proximity to cities. Others are less tangible, but still contribute to the development of the area and its consequent increase in value, such as access to technical guidance, for example. Demand for land By isolating the land supply that derives from deforestation from the other factors influencing land price variation — that is, by observing deforestation's specific impact on price variation as if the other factors did not exist - we can identify that: Deforestation Increas supply in the Brazilian land market Reduction in land prices ↓ Producer with resources and land supply in his region Producer without resources or without land supply in his region BENEFITTED from deforestation, more favourable prices, increasestate size and production volume. IMPAIRED by deforestation land. HOW DOES BRAZILIAN AGRIBUSINESS BENEFIT FROM DEFORESTATION? 9#6METHOD: HOW WAS THE EFFECT OF DEFORESTATION ISOLATED? To isolate the effect of deforestation on the price of land and agricultural products, the study employed new spatial and econometric modelling techniques, with the former generating the data necessary to analyse the latter. The method posits that the "deforestation effect" represents the increase in land stock and the consequent incorporation of land for agricultural and animal husbandry purposes. The econometric analysis was conducted at the municipal level, canvassing an 11-year period (2006-2017). 2006 2007 Econometric modelling Spatial modelling Land price Spatial estimation of land prices with data on coverage, agricultural aptitude and annual regionalised price bulletins (FNP) for the period spanning 2006 - 2017. Area prone to deforestation Analysis and spatial distribution of natural vegetation that is unprotected by environmental legislation. Deforestation rate Analysis and spatial distribution of deforestation data for the period spanning 2006 - 2017. Agricultural Inputs Tractors, staff, agricultural area. Agricultural products Rice, bananas, coffee, sugar cane, oranges, milk, corn and soybeans. Variables Access to technical guidance, internet access, storage, higher education, agricultural aptitude, concentration of establishments, average distance to ports and highways, deforestation, among others. 2008 2009 2010 2011 2012 Deforestation 2013 2014 For each year of the timeline, the necessary timeframe for the market to visibly show the estimated effects of deforested land being incorporated was considered (between 3 and 6 years). 2015 3 years 2016 Observation of 2017 the effect 6 years HOW DOES BRAZILIAN AGRIBUSINESS BENEFIT FROM DEFORESTATION? 11#7TERRITORIAL CLASSIFICATION SYSTEM ACCORDING TO LAND USE DYNAMICS 13 FIGURE 2 - SPATIAL RESULT OF TERRITORIAL CLASSIFICATION SYSTEM Considering the breadth of Brazilian territorial diversity, a municipal classification system was defined on a national scale and according to the development stage of the agriculture and animal husbandry market and the local land market. This classification considered: → the evolution of the municipality's total surface area allocated to agriculture and animal husbandry - the variation of the area used for agriculture and animal husbandry between 2006 and 2017; → the remaining area of native vegetation - the proportion of native vegetation, including legal nature reserves and permanent preservation areas, in relation to the area used for agriculture and animal husbandry in 2017; → productivity - the ratio between agriculture and animal husbandry's gross production value and the total area allocated for these purposes in 2017; → the transition from pasture to crops - the reduction of pasture areas and the expansion of agricultural areas; → the condition of available infrastructure - the percentage of establishments with access to electricity. In expansion In transition Stagnated Consolidated In crisis Municipal class Definition In expansion Municipalities demonstrating a considerable expansion in their total surface area allocated to agribusiness, with significant remaining native vegetation or lower levels of native vegetation, but whose agribusiness productivity levels remain low. MOST MUNICIPALITIES WITH AN EXPANDED AGRIBUSINESS AREA ARE FOUND IN THE LEGAL AMAZON OR MATOPIBA. Source: original research results. In transition Stagnated Consolidated In crisis Municipalities with moderate remaining native vegetation and moderate to high agribusiness productivity levels. Municipalities with a stable or decreasing total surface area allocated to agribusiness, and with significant remaining native vegetation. Municipalities with a stable or decreasing total surface area allocated to agribusiness, and with little remaining native vegetation and high agribusiness productivity levels. Municipalities with a stable or decreasing total surface area allocated to agribusiness, little remaining native vegetation and low agribusiness productivity levels. DEFORESTATION AND LAND PRICE DEPRECIATION The deforestation that occurred in Brazil from 2011 to 2014 reduced the value of land stock in 2017 by 5%, compared to what would have been obtained in the absence of deforestation. This percentage represents US$ 27.1 billion, or an average price reduction of US$ 77.57 per hectare. The depreciation rate reached 25% of the value of land stock in municipalities where the agricultural frontier expanded - an amount equivalent to US$ 16.5 billion, or an average price reduction of US$ 195 per hectar. 4 The Legal Amazon comprises the states of Rondônia, Acre, Amazonas, Roraima, Pará, Amapá, Tocantins, Mato Grosso and part of the state of Maranhão (west of the 44th meridian), as indicated in Article 2 of Complementary Law No. 124 of 3 January 2007. HOW DOES BRAZILIAN AGRIBUSINESS BENEFIT FROM DEFORESTATION?#8Percentage variation (%) 25% GRAPH 1. VARIATION IN THE VALUE OF LAND STOCK IN A ZERO-DEFORESTATION SCENARIO WHERE AGRICULTURAL LAND HAS BEEN INCORPORATED, AS COMPARED TO 2017 VALUES, USING THE MUNICIPAL TERRITORIAL CLASSIFICATION SYSTEM AND AT A FEDERAL LEVEL. 30% FIGURE 3. MUNICIPAL DISTRIBUTION OF THE IMPACT OF DEFORESTATION (2011 TO 2014) AND LAND INCORPORATION FOR AGRIBUSINESS ON THE REAL PRICE OF LAND IN 2017. FOR MUNICIPALITIES LOCATED IN THE LEGAL AMAZON AND MATOPIBA, THE EFFECTS OF LAND DEPRECIATION WERE MORE INTENSE. 20% 83,5 15% 25% 45,5 10% 5% 0% -5% -10% 136,8 135 35 17,3 2,1 5% 5% 3% 1% -11,5 -15 In expansion In transition Stagnated Consolidated In crisis Brazil -9% Percentage variation in the value of land stock in a zero-deforestation scenario where the cultivated area has not been altered. Absolute variation in the value of land stock in a zero-deforestation scenario where the cultivated area has not been altered. -65 85 Absolute variation (R$ billions) [R$ 0/ha; R$ 2303/ha) [-R$ 122/ha; R$ 0/ha) [-R$ 149/ha; -R$ 122/ha) [-R$ 173/ha; -R$ 149/ha) [-R$ 196/ha; -R$ 173/ha) Source: original survey results. [-R$ 223/ha; -R$ 196/ha) [-R$ 258/ha; -R$ 223/ha) [-R$ 320/ha; -R$ 258/ha) [-R$ 4130/ha; -R$ 320/ha) Data unavailable Source: original survey results. HOW DOES BRAZILIAN AGRIBUSINESS BENEFIT FROM DEFORESTATION? 15#9R$ 1,20 R$ 1,00 R$ 0,80 R$ 0,60 R$ 0,40 R$ 0,20 R$ 0,00 Grain maize (R$/kg) Milk(R$/L) DEFORESTATION AND LOWER AGRICULTURAL AND ANIMAL HUSBANDRY PRODUCT PRICES DEFORESTATION AND THE INCREASE IN CULTIVATED AREAS ALSO DEPRECIATE THE PRICE OF AGRICULTURAL PRODUCTS. GRAPH 2. AVERAGE PRICE REDUCTION OF AGRICULTURAL AND ANIMAL HUSBANDRY PRODUCTS DUE TO DEFORESTATION AND LAND INCORPORATION IN 2017 R$ 1,40 FACTORS THAT IMPROVE PRODUCTIVITY ALSO INCREASE LAND PRICES Factors that directly impact productivity — such as rainfall or access to technical guidance and infrastructure - also positively influence land prices. GRAPH 3. ELASTICITY OF LAND PRICES WITH RESPECT TO PRODUCTIVITY DETERMINANTS AND DEFORESTATION IN 2017, USING THE MUNICIPAL TERRITORIAL CLASSIFICATION SYSTEM. Paddy rice (R$/kg) R$ 0,00 -R$ 0,01 -R$ 0,02 -R$ 0,03 -R$ 0,04 -R$ 0,05 -R$ 0,06 Soybean (R$/kg) Average reduction of deforestation on price in 2017 (R$/kg) Internet Technical guidance Energy Average price in 2017 (R$/kg) Average reduction of deforestation on price in 2017 (R$/kg) Source: original survey results. Only the most statistically significant impacts selected for inclusion (≤1%). Deforestation caused a US$ 0.61 reduction in the average price of a 60kg bag of soybeans (US$ 0.009/kg as per Graph 2), i.e. -4.5% compared to the 2017 level. This number was more pronounced in municipalities classified as "in expansion" due to their higher deforestation rates. If there had been no deforestation from 2011 to 2014 in those municipalities, the price of soybeans in 2017 would have been, on average, 22% higher. The reduction in the price of agricultural and animal husbandry products is a positive and desirable effect if we consider the consumption levels of Brazilian families and the competitiveness of Brazilian producers in foreign markets. However, lower commodity prices can also be achieved by factors designed to increase productivity, such as access to technical guidance. Access to technical guidance in areas totalling 840,000 to 996,000 hectares, depending on the product, renders the same effect as the deforestation of 7 million hectares as regards reducing prices for soy, corn, rice and milk. According to the IBGE5, only 20% of establishments (51% of the agribusiness area) received technical guidance in 2017. 5 Brazilian Institute of Geography and Statistics - IBGE. 2019. 2017 Agricultural Census: Definitive results. Available in Portuguese at: <https://sidra.ibge.gov.br/pesquisa/censo-agropecuario/censo-agropecuario-2017>. 1,2 1 0,8 0,6 0,4 0,2 0 -0,2 -0,4 -0,6 -0,8 In expansion In transition Stagnated As can be seen in the above graph, the negative impact on the value of land prices caused by deforestation and land incorporation for agribusiness production is outweighed by the positive impact caused by other factors, such as access to infrastructure, technical guidance and Consolidated In crisis Brazil Source: original survey results. biophysical land characteristics. This may explain Brazil's persistent increase in land prices, even with constant deforestation and land incorporation. It also demonstrates the importance of investing in productivity factors, while simultaneously promoting an end to deforestation. Precipitation Education Distance from ports HOW DOES BRAZILIAN AGRIBUSINESS BENEFIT FROM DEFORESTATION? Deforestation 17#10CONCENTRATED BENEFITS Lower land prices favour producers who decide to expand agricultural and animal husbandry production by increasing the cultivated area. The data show that 93.5% (5,218) of Brazilian municipalities suffered a reduction in the price of their land due to deforestation. However, despite the general effect of land price depreciation, the highest values observed are concentrated in only a few municipalities and producers. FIGURE 4. GROUPS OF MUNICIPALITIES THAT REPRESENT 25% OF THE TOTAL EFFECT OF THE COUNTRY'S LAND DEPRECIATION, ORDERED IN RELATION TO THE DEVALUATION OBSERVED IN THE LAND STOCK IN 2017. GRAPH 4-12 MUNICIPALITIES WITH INCREASED DEVALUATION OF THE PRICE OF LAND STOCK DUE TO DEFORESTATION IN 2017 (IN R$ MILLIONS). The price per hectare of land in São Feliz do Xingu (in the northern state of Pará) — the municipality which demonstrated the highest rate of depreciation ― was US$ 491.2 in 2017. Without the deforestation that occurred in the years prior, the price would have reached US$ 1310 per hectare. São Félix do Xingu - PA -12000 -10000 Land devaluation (in R$ millions). Cáceres - MT Altamira PA Porto Velho - RO Cocalinho - MT Aripuanǎ - MT São Desidério - BA Brasnorte - MT São Félix do Araguaia - MT Poconé - MT Juara - MT Novo Repartimento - PA -8000 -6000 -4000 -2000 0 Source: original survey results. Figure 4 and Graph 5 show the municipalities ranked with respect to the observed depreciation in the value of their land stock in 2017, due to the deforestation that occurred between 2011 and 2014. The municipalities were aggregated into four groups that add up to 25% or 4 of the total value depreciation effect. Half (50%) of the country's total land devaluation was concentrated in only 61 municipalities (1.15%). These are municipalities concentrated in the "In expansion" (54%) and "In transition" (43%) classes, which registered 28% of the deforestation rate from 2006 to 2017, in relation to the deforestation rate across the total of municipalities where land value depreciated (G1 and G2 in Figure 4). The other half of the depreciation (G3 and G4 in Figure 4) was distributed across 5,157 municipalities, which are predominantly located in municipalities classified as "Consolidated" (45%) and "In transition" (30%). Group of municipalities Number of municipalities 12 49 G1 - maximum devaluation G2 G3 G4 minimum devaluation 240 4917 354 No devaluation Source: original survey results. If we look at properties (Graphic 5, on the next page), 50% of the land price depreciation caused by deforestation is concentrated in 109,852 (2.4%) establishments, which represent 17% of the total area. The effect is also concentrated in large and medium establishments, which are possibly those of commodity producers. HOW DOES BRAZILIAN AGRIBUSINESS BENEFIT FROM DEFORESTATION? 19#11G1 GRAPH 5. LAND DEPRECIATION BY NUMBER, TOTAL AREA AND SIZE OF THE AGRIBUSINESS ESTABLISHMENTS AND BY GROUPS OF MUNICIPALITIES REPRESENTING 25% OF THE TOTAL EFFECT Number 2,4% Area 17% 100% 90% 0,8% 1,6% 80% 8,2% 5,5% 70% 11,6% 60% 50% 40% 30% 89,5% 58,2% 24,7% 20% 10% 0% G1 G2 29 29 G2 G3 G4 Source: original survey results.. Size G3 G4 small medium large Establishment area classification: i) small (from 0 to less than 100 hectares); ii) medium-sized (from 100 to less than 500 hectares); iii) large (greater than 500 hectares) Source: original survey results. 21 HOW DOES BRAZILIAN AGRIBUSINESS BENEFIT FROM DEFORESTATION?#12WHEN WILL BRAZILIAN AGRIBUSINESS DISENTANGLE ITSELF FROM DEFORESTATION? This study uses an innovative approach to demonstrate that by devaluing land prices in 93.5% of Brazilian municipalities, deforestation benefits only those producers who have the conditions to increase their cultivated area. It also demonstrates that this is to the detriment of those producers who are unable to increase their cultivated area, due to financial, management, scale, labour force or land supply limitations. If you are a producer that increased your area of cultivation over the 2006- 2017 period, deforestation was a subsidy for your land acquisition, even if you did not cut down a single tree. However, if we look more closely, benefits obtained by producers who expanded their areas are largely concentrated in 1% of municipalities and 2.4% of establishments. A very small portion of the total number of municipalities and agricultural producers actually benefited in any real way. Producers who bet on the intensification strategy, instead of expanding their cultivated area to increase production, now have one more piece of evidence for the harmful effects of deforestation. Of course, this is on top of deforestation's well-known negative impact on climate change, and on the image of Brazilian producers among consumers who demand environmental compliance. Given this study's evidence that any profit derived from deforestation is concentrated among a small portion of producers, coupled with the well-established consensus that it is no longer necessary to deforest in order to produce, we must examine why Brazilian agribusiness, in large part, does not take a stand against those who, in order to expand their production capacity, choose to increase their cultivated area through deforestation. In practice, a silent tolerance of illegal deforestation continues to pervade, as does the defence of legal deforestation. Sector leaders have failed to mobilise the full force of their political weight to lobby the federal government and parliamentarians - especially the Frente Parlamentar da Agropecuária - on a number of issues: demanding effective actions for combatting illegal deforestation and land grabbing in the Amazon and Cerrado, halting the dismantling of environmental legislation, and putting an end to the routine land title regularisation acts that effectively reward those who deforest. Furthermore, in order to disentangle agribusiness from deforestation, concrete measures are needed to ensure the traceability of suppliers' production chains, the compulsory registration and geo- referencing of properties, and the regulation and official monitoring of this data. Only with reliable official information about those who deforest will investors be able to properly direct resources towards companies and producers who are truly committed to environmental preservation. Likewise, with this information at their disposal, consumers can make better-informed choices and citizens will know how and where public resources are actually being channeled (subsidised credit, debt amnesty, tax exemption, etc.). 6 See statement (in Portuguese) by the Minister for Agriculture, Livestock and Supply (MAPA), Tereza Cristina, on 23/01/2020, recorded by Folha de S. Paulo newspaper at <https://www1.folha.uol.com.br/ambiente/2020/01/nao-precisamos- desmatar-para-comer-basta-aumentar-a-produtividade-diz-tereza-cristina.shtml> accessed on 25/01/2022. 7 The Brazilian Farming Parliamentary Front. HOW DOES BRAZILIAN AGRIBUSINESS BENEFIT FROM DEFORESTATION? 23#13instituto (Escolhas) Title: How does Brazilian agribusiness benefit from deforestation? Lead organisation: Escolhas Institute Year: 2022 ISBN Number: ISBN n° 978-65-86405-29-3 How to cite: Escolhas Institute. How does Brazilian agribusiness benefit from deforestation? Executive Summary. São Paulo, 2022. Editorial coordination: Jaqueline Ferreira and Cinthia Sento Sé Text editing: Jaqueline Ferreira, Cinthia Sento Sé, Caroline Caldas and Vitória Leão Translation from Portuguese: Ellen Heyward Graphic design: Brazz Design Cover design: Eric Isselee, Zentilia, Ruslan Lytvyn, maksimee/Shutterstock See the full study in Portuguese at: https://www.escolhas.org/biblioteca/estudos-instituto-escolhas/ www.escolhas.org Follow the Escolhas Institute: O in. CC BY NC Licença Creative Commons This work is licensed under the following Creative Commons License: Attribution-NonCommercial 4.0 International (CC BY- NC 4.0).