How much could the price of rice rise with the rains in RS?

Bradesco released the report “Climate Disaster in Rio Grande do Sul: A preliminary assessment of economic impacts”. In addition to the human dimension, the bank highlights that the 2024 flood will have economic consequences with national implications. Among the concerns is the rise in food prices, especially the price of rice, with a strong impact on Brazilians’ pockets.

In this sense, Bradesco assesses that the effects on inflation can be assessed from two perspectives. First, product shortages in the region tend to generate a local price shock.

“We still don’t know how the IBGE indicators will be affected by the collection. The capital of Rio Grande do Sul has a weight of 8.6% in the national IPCA. Recovering what happened to prices due to the shortages caused by the 2018 truck drivers’ strike, there was a significant, but temporary, increase in food and fuel prices.”

“The most affected prices were gasoline, produce and milk. If Porto Alegre experiences a similar event, the impact on inflation in the city could reach 0.7 pp, and the impact on the national IPCA would be in the order of 0.06 pp, which will probably be reversed in the following months.”

However, the bank comments, the nature of the shock caused by the flood is different, affecting supply and demand, which could limit pressure on prices.

“The indirect impacts on food prices in the rest of the country may be more relevant. The main concern at this moment is the price of rice, given the state’s representation in national production and the importance of the product in the Brazilian basket.”

Another climate disaster

So, Bradesco points out that a reference to think about the possible impacts on cereal prices is the subtropical cyclone that hit Rio Grande do Sul in May 2008.

“At that time, prices rose by around 40% wholesale and 20% in IPCA in one month. The appreciation of the cereal that year was also influenced by international prices, in a context of lower production and export embargoes imposed by several countries.”

At the same time, the institution notes, there is also some concern about soybean prices.

“There has already been a drop in grain production this year in Brazil and possible losses in Rio Grande do Sul would result in a lower supply in the domestic market, leading to some pressure on premiums in the second half of the year.”

“Thus, at first glance, it seems reasonable to consider a potential impact of 0.2 pp on inflation this year, an estimate that considers a 5% increase in the price of soybeans and a shock of close to 20% for wholesale rice.”

Agricultural losses

Similarly, reiterating the humanitarian tragedy, Bradesco indicates in the same report that agriculture will be one of the activities most impacted by the event.

After all, in the bank’s accounts, the sector accounts for 15% of the state’s GDP, which represents 12.6% of the Brazilian agricultural GDP. Rice, soy, wheat and meat are the main products produced.

“The state is in the summer harvest period, with around 70% of the soybeans and 80% of the rice having already been harvested. Assuming that half of what is still in the field has been lost, we are talking about 800 thousand tons of rice and 3.2 million tons of soybeans less in Brazilian production.”

“In other words, 7.5% of rice production in Brazil and 2.2% of soybeans could be compromised. These appear to be conservative estimates as there is no way of knowing the impact of the portion already harvested during the processing phase.”

While in the case of wheat, says Bradesco, planting has just begun. Therefore, in the bank’s view, there is still time for planting to be carried out within the ideal window (which runs until July).

“However, soil damage and losses for soybean producers may reduce planting intentions and grain productivity this year. Conab already estimated a reduction in wheat area, but forecasts may be revised downwards in the next harvest surveys.”

Crop runoff

Furthermore, Bradesco continues in the report, the state accounted for 12% of pig slaughters and 9.5% of chicken slaughters in 2023.

“(Soon) With part of production impacted by the floods, we will have another negative impact, especially for pigs, which have a longer cycle. Considering such impacts, the Agricultural GDP in Brazil could decline by 3.5% (our previous estimate was a drop of 3.0%).”

“Finally, losses in agribusiness can be increased by logistics, which affects both the flow of the harvest and prevents the arrival of inputs. This appears to be an important problem for the dairy and meat sectors, for example.”