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The catastrophe in RS is expected to impact inflation and GDP

The floods damaged crops not yet harvested, but more importantly disrupted production and distribution chains. Rice, soybeans, chicken and milk are some of the most affected products. Rio Grande do Sul is traditionally known as one of the largest producers of Brazilian agribusiness, and the effects of historic floods in the state have raised immediate concerns for the sector. The impact on rice, soybean and wheat harvests is expected to be felt on inflation across Brazil, which is also expected to occur in the case of milk and other products. Furthermore, industrial activity in Rio Grande do Sul has also been heavily affected: nine out of 10 companies in the state are located in flood-hit cities, according to a survey by the Federation of Industries of the State of Rio Grande do Sul (Fiergs). This scenario should have repercussions on Brazil’s economic activity as a whole.

In addition to its large presence in the diet of Brazilians, rice attracts attention for the strong domestic component of state production. Rio Grande do Sul is responsible for more than 70% of Brazilian food production, which, last year, represented just 1.4% of Gaucho exports, according to data from Comex, a system for consultation and data extraction on Brazilian foreign trade. Although 80% of the rice had already been harvested, in recent days Brazil has moved to import the grain, while supermarkets across the country have limited purchases, fearing shortages due to damage to stocks and the distribution chain.

The Center for Advanced Studies in Applied Economics at the University of São Paulo (Cepea) has identified impacts on other relevant elements in the common Brazilian diet: milk and chicken. In both cases, the affected infrastructure, including processing damage, must be responsible for some shortage, reaching the end consumer with increased prices. In the case of chicken, farms are already reporting difficulties in receiving food for the animals due to problems on the roads.

“The initial injury to the Brazilian economy is the temporary effects in 2024 of increased upward pressure on food and manufacturing inflation, as well as some moderation in the national GDP growth rate,” underlines Rabobank, in a report signed by analysts Maurício Une and Renan Alves.

In the latest Focus report, market analysts consulted by the Central Bank expect the broad index of consumer prices (HICP) to rise by 3.76% in 2024, a small increase from 3.72% the previous week. Since the middle of last year, analysts have highlighted the inflationary risks linked to the El Niño phenomenon. Until the rains in Rio Grande do Sul, some estimates have even reduced inflation forecasts, which have reversed in recent days.

Big impact on supply chains

Ana Luiza Lodi, grain analyst at StoneX, says the impacts are expected to affect not just plantations, but supply chains as a whole, recalling losses in silos and industries that use soy, such as animal protein – not to mention roads, highways and bridges. In the case of soybeans, an export of 23 million tonnes was expected before the floods, which was later reduced to 20 million. The so-called soybean complex, which also includes bran, is Brazil’s largest export product, with China as the main buyer.

Furthermore, a possible loss of quality of part of the harvest is reported, which in some cases could make export impossible. In 2023, the product was responsible for 18% of the state’s international sales, which represented an inflow of $4.1 billion for Rio Grande do Sul.

For wheat, a decline in agricultural production of 6.9% is expected, which will also be affected by the effects of rainfall in Santa Catarina as well. On the other hand, for corn the losses tend not to be so significant, since a significant part has already been harvested. With rain still forecast for the next few days, Lodi says it is difficult to estimate the timeframe for normalization in Rio Grande do Sul. According to the Technical Extension and Rural Extension Company (Emater-RS), 76% of soybeans are 83%. of corn planted in the state had already been harvested before the floods.

In recent years, the state’s producers had already suffered from climatic phenomena. However, in previous harvests, unlike this year, there was severe drought in the south of the country, driven by La Niña, which, unlike El Niño, tends to cause drier periods in this part of South America.

Another point to take into consideration is the loss of tractors, trucks and other agricultural machinery which could hinder the planting of some crops, such as wheat. Even in areas where the water has already receded, the soil remains dug up and it is still too early to know the sowing conditions of the next crops.

Despite the backdrop of constant planting problems, Lodi doesn’t believe there is much incentive for producers to stop investing in the business or to change the use of the land. The analyst recalls that soybeans are very important for the State, with a ready-made supply chain, which makes it difficult to replace production.

Impact on the industry

According to the state government, of the 497 municipalities in Rio Grande do Sul, at least 447 (about 90%) were affected by the floods. This represents, according to Fiergs, 94.3% of all state economic activity. “The most affected locations include the main industrial hubs of Rio Grande do Sul, impacting significant segments of the state’s economy,” Fiergs interim president Arildo Bennech Oliveira said in a statement.

The tragedy led to the closure of factories in several sectors, from car manufacturers to household appliances. Companies turned off their machines and granted collective holidays or granted leaves of absence to employees, as in the case of Tramontina and the local General Motors factory. The issue has also reached neighbors, with Fiat suspending its industrial activity in Córdoba, Argentina, due to a lack of inputs from southern Brazil.

Risks for the financial system

According to the minutes of the latest meeting of the Central Bank’s Monetary Policy Council (Copom), the consequences of the tragedy will continue to be monitored to define monetary policy.

The catastrophe comes at a time when there is discussion around the world about the need for central banks to take climate change into account, as increasingly recurring extreme events affect much of their scope of activity. In addition to influencing inflation, in tragedies like the RS, bank runs, with a large volume of simultaneous withdrawals, can generate stress, which poses risks to the financial system with a cascading effect.

Oxford Economics believes flooding in the RS will pose a significant headwind to growth in the coming months. In a report, the consultancy recalls that the federal government has announced a fiscal expansion package equal to 0.5% of GDP, but still sees risks of negative impact on its Brazilian GDP growth projection of 1.2% this year, which is already lower than other projections.

Initially, the package announced by the federal government for the reconstruction of Rio Grande do Sul amounted to R$52 billion. In turn, a number of government members have said in recent days that the issue should not change the country’s fiscal trajectory. This would keep the spending out of the 2024 budget limit, raising doubts about the effect on public finances.

Source: Terra

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