Category: Brazil

Risk Management in Brazilian Agriculture: Instruments, Public Policy, and Perspectives

Risk Management in Brazilian Agriculture: Instruments, Public Policy, and Perspectives

By Priscila Z. Souza and Juliano J. Assunção

Rural producers face a wide range of adverse events that expose them to potentially heavy losses. In agriculture, both natural risks – such as droughts, floods, pests, diseases, and fires – and market risks – such as price variation – are frequent. While the modernization of the agricultural sector leads to commodity specialization and the adoption of technologies with higher expected returns, it may also result in a larger production variance, creating more uncertainty and increasing producers’ exposure to risk (See Dercon and Christiaensen, 2011). Modernization has accelerated in Brazil in recent years, raising the importance of risk management instruments. 

Brazil has a large potential for improving risk mitigation opportunities for its producers, which will be even more essential in the face of climate change. Improving risk management practices and public policies could accelerate the process of modernization and sustainability in Brazilian agricultural production. Government incentives require a design crafted to meet producers’ needs. In this report, Climate Policy Initiative/Pontifical Catholic University of Rio de Janeiro (CPI/PUC-Rio) researchers analyze the current risk management instruments and public policies and discuss pathways for improving their impact on Brazilian agriculture.

This report discusses the strengths and shortcomings of the main public policies regarding agricultural risk management, highlights the potential for rural insurance growth, and outlines steps for the future. It brings together data from SUSEP, the Ministry of Agriculture (Ministério da Agricultura, Pecuária e Abastecimento – MAPA), the Central Bank of Brazil, and other relevant sources. The empirical analysis aims to provide a better understanding of the current state and recent trends of agricultural risk management in Brazil and to identify how to better tailor public policies.

In Brazil, the modernization of agriculture in the past decades has led to the conversion of pasture to cropland, reducing deforestation pressure associated with the expansion of agricultural land. The continuation of this process requires additional investments in intensification and productivity, particularly in pastureland, so that increases in livestock production do not require area expansion. Simultaneously, the conversion of pastures to cropland significantly alters a business’ risk profile, since crops are more susceptible to climate variations. Livestock farming is generally more resilient in the face of the unforeseen events that often impact rural activities. Specialization of cultures, adoption of new technologies, and sustainable production methods lead to higher expected returns but may cause greater uncertainty in results. Thus, to encourage producers to adopt such practices, their exposure to risk needs to be addressed. That is why the modernization of the agricultural sector enhances the importance of better opportunities for producers to manage their risks.

Market failures in rural insurance have broad consequences leading to underinvestment, less efficient agricultural production, and adverse land use impacts. Producers with inadequate risk management tools often make poor production decisions, such as avoiding crop specialization or the adoption of new technologies that can subsequently increase their exposure to risk. That is, producers will often avoid engaging in activities that have higher expected profits but more uncertainty in returns as a way to self-insure against both natural and price risks. This behavior has negative effects on agricultural productivity and land use, with important consequences for forests and the environment. 

In Brazil, rural insurance and other tools for agriculture risk management is scarce and difficult to access in many regions (see Box 1 for an overview of Brazil’s risk management instruments). In 2018, almost 60% of the country’s municipalities had no rural insurance contracts (for crop, livestock, or forest), according to the Superintendence for Private Insurance (Superintendência de Seguros Privados – SUSEP). Moreover, few crops in Brazil are insured, and soy is most frequently covered (32% of crop insurance contracts in SUSEP). Nevertheless, the Brazilian rural insurance market recently experienced significant growth. The rural insurance premium increased from R$88.2 million in 2006 to R$2 billion in 2018, corresponding (adjusted for inflation) to a twelve-fold increase (SUSEP). Life insurance for rural producers makes up 20% percent of all rural insurance premiums, though this type of insurance does not have a direct impact on production choices.

Only a few companies dominate Brazil’ rural insurance market. In the 2019/20 agricultural year, one company represented 52.3% percent of the market and only 14 insurers total were present during that year, according to data from SUSEP. Public policy should provide incentives to reduce market concentration, increase competition among firms, and, consequently, increase the variety of risk management instruments available to rural producers.

The remainder of this report proceeds as follows. Following this Executive Summary, Box 1 gives a brief description of Brazil’s risk management instruments. The main recommendations for improving Brazil,s agricultural risk management policies are highlighted next. Section 1 starts the analysis of risk management instruments in Brazil, exploring the data from SUSEP. Section 2 discusses the four main public policies for Brazilian producers: PSR, PROAGRO, Garantia-Safra, and PGPM. Section 3 describes the Agricultural Climate Risk Zoning (Zoneamento Agrícola de Risco Climático – ZARC). Section 4 presents the Brazilian reinsurance market and the Rural Insurance Stability Fund (FESR). Section 5 reviews the economic literature on how risk management instruments impact agricultural activity and land use in Brazil and other developing countries. Section 6 makes an international comparison of insurance coverage and policies. Finally, Section 7 discusses the pathways ahead and suggestions to improve Brazil’s risk management instruments and public policies.

This article was posted on Climate Policy Initiative.
Cover photo from Pikist.
Salvador, Brazil: How to Decrease Gender Inequality in the Context of Covid-19

Salvador, Brazil: How to Decrease Gender Inequality in the Context of Covid-19

Coronavirus Speaker Series: Sharing Knowledge to Respond with Resilience is a weekly session organised by the Global Resilient Cities Network and the World Bank as a knowledge sharing session for cities in response to the rapidly evolving COVID-19 situation.

Daniela Ribeiro Guarieiro, Deputy Chief Resilience Officer, Municipality of Salvador (Brazil)

Daniela currently holds the position of Resilience Manager at the Municipality of Salvador, having participated actively in the development and implementation of Salvador’s Resilience Strategy, and actively participates in the Global Network of Resilient Cities. She is currently involved with the elaboration of the Climate Change Mitigation and Adaptation Plan of Salvador, Circular Economy initiatives in the city, and the resilient challenge to empower women entrepreneurship. She has an MSc in Public and Urban Policies from the University of Glasgow, UK, and a specialisation in Urban Economics and Public Management at PUC-SP, Brazil.

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Cover photo of Salvador, Brazil from Wikimedia Commons.
This presentation was originally posted on the Medium.
Visitor pressure: How climate change could stall Brazil’s tourism growth

Visitor pressure: How climate change could stall Brazil’s tourism growth

By Mathieu Gasowski

In the past two years, Brazil has played host to two of the world’s biggest sporting events: the FIFA World Cup in 2014 and the Olympic Games this year. They have put Brazil in the spotlight and really drew in the crowds. An estimated 3.2 billion viewers tuned in to watch the World Cup, and visitor numbers over June and July – when the tournament was held – were 3 times higher than for the same period a year earlier. Brazil’s tourism industry has been growing steadily over the last eight years, but as climate change and its impacts put increasing pressure on the country’s tourism assets the question is: for how long can such growth be maintained?

Although not the world’s favourite holiday destination (Brazil ranked 43rd on the ‘tourism arrivals medals table’ in 2014), in 2015 tourism’s contribution to the Brazilian economy was US$ 7.4billion – 10% of GDP (according to the World Travel and Tourism Council). The country’s 6.4 million visitors in that year came for many reasons; the white sandy beaches, the carnivals in Rio de Janeiro and Sao Paulo, and the ecological diversity all played their part. But most of the major tourist areas are now under threat from climate change.

The great cities of Sao Paulo and Rio de Janeiro are two of the country’s biggest draws: both will face considerable challenges from climate change. Rio is a coastal city, boasting long beautiful beaches among its main assets. But a rise in sea levels may mean that some of these will be lost. By the end of the century, the sea level is expected rise by up to 70 cm on average. Even half of that rise will cause significant problems of erosion and flooding along Brazil’s extensive coastline. In some areas the effects of such changes are already visible: man-made erosion barriers have replaced beaches on some stretches of the coast.

Image: Beachside flood and erosion protection at Boa Viagem Beach, Recife, Pernambuco, Brazil. Photo by A. Júnior (CC by 2.0)

Fragile infrastructure

Rising sea levels are also a threat to coastal property, including tourist infrastructure like beachside hotels and restaurants. Coastal storms, heavy rains and associated flooding may damage buildings or access roads cutting off access to tourists.

Brazil’s cities – like most in rapidly developing countries – have fragile infrastructure systems that are very vulnerable to climate impacts. Rio’s sewerage system, for example, is prone to flooding causing unpleasant sanitary conditions for tourists. Severe damage to such systems could also increase the risk of diseases spreading through its densely packed population. A case like this would greatly discourage tourism as the quality of water and health could decrease significantly.

For the Brazilian people, climate change is not an abstract concept. Its impacts are already being felt. Following extremely heavy rainfall in 2011, landslides and floods killed approximately 900 people in the Rio de Janeiro state. In contrast, during the 2014 drought in South-Eastern Brazil, near Sao Paulo: water shortages left the most financially powerful area in Brazil with diminished water supplies for over six months.

In the case of the drought, the part played by climate change remains debatable –  there is a clear link to Amazon rainforest deforestation as the trees affect the amount of moisture in the air that determines the rains in southern Brazil. However, increased global temperatures may amplify such droughts in the future. Water scarcity could cause significant problems for the tourism sector, which demands high levels of water for use in hotels.

Vector-borne diseases

Another threat to the tourism industry comes in the form of the spread of diseases and viruses. Climate change can facilitate the spread of such diseases by increasing the amount of disease-carrying insects (or vectors), increasing the number of standing pools of water, or reducing the quality of drinking water amongst other things.

Image: Mosquitos carry the Zika virus that is prevalent in Brazil. Photo by James Gathany, CDC – Centers for Disease Control and Prevention’s Public Health Image Library (PHIL). Public Domain.

The current outbreak of the Zika virus in Brazil gives a clear indication of the impact that such health concerns can have. Zika has become a major worry for visitors to Brazil where it has affected preparations for the Rio Olympics. A recent Reuters/Ipsos poll found that 41 per cent of people say they are less likely to travel to affected regions due to the Zika outbreak. For Brazil’s tourism industry this could have serious consequences. The World Bank estimates that affected countries could take a combined US$64 billion hit in their tourism industries if the trend continues.

In the short term, the vibrancy and diversity of Brazil should keep the tourists flocking to its beaches. But Brazil’s tourism industry is facing a host of climate-related pressures that could hit visitor numbers if no action is taken to adapt. Acknowledging these risks and planning for them, will give the country’s tourism industry the best chance for continued prosperity and growth.

Cover image: Ipanema Beach, Rio de Janeiro, Brazil. Credit: Mike Vondran