Financial risks of deforestation in Brazil’s Cerrado

This paper provides a detailed analysis of the financial and environmental implications of expanding agriculture into a Brazilian natural vegetation biome. It focuses specifically on deforestation for soy and maize farming and assesses whether such expansion would yield positive economic returns under potential climate change scenarios. The study explores the dynamics between economic viability and environmental preservation, underlining that while agricultural expansion could drive economic growth in certain scenarios, it also poses significant climate and ecological risks that would result in undermining profits for farmers.

The Cerrado, is a Brazilian biome located in the country’s central and midwestern region, that has seen rapid agricultural expansion, driven by favorable conditions such as deep soils and flat terrain, which support large-scale farming, especially for soybeans. The economic appeal of converting natural land into cropland is linked to global demand for grains and oilseeds, used for animal feed and biofuels. However, the conversion of native vegetation has also led to detrimental environmental impacts, including soil degradation, shortened rainy seasons and more erratic precipitation, which further threatens agricultural productivity.

The study aimed to quantify the economic feasibility of converting native vegetation into cropland, correlating it to the potential climate impacts it would have on the farming activity itself. This impact (shorter rainy seasons and soil degradation) could lead to certain micro-regions suffering from substantial economic risks, resulting from volatile or declining yields.

The authors utilized a multi-model approach, including climatic and yield scenarios, and also taking a wide array of factors in consideration when creating such models to make the simulations as realistic as possible in relation to the environmental and productivity impacts. The analysis included: climate variables: minimum, maximum and average temperatures, average rainfall, growing seasons, atmosphere carbon concentration, yields (real and model generated), crop biology, phenology and photosynthesis.

The simulations were run in a scenario where two crops were grown annually, a typical farming strategy in the region of Cerrado, where most farmers plant soybeans early in the summer and corn later in the summer.

For the financial part of the study, researchers used an economic model to calculate the Net Present Value (NPV) of the cash flow from investing in corn and soybeans on a cleared native vegetation area for 30 years. The simulation was estimated for a 10,000-hectare farm, cleared in 5 years at a rate of 20% per year (2000 ha land cleared/year).

This calculation included machinery costs and depreciation, clearing costs to convert native vegetation into cropland and regular costs for crop production (seeds, chemicals and others).

In the end, researchers created possible scenarios of outcomes, based on 3 Global Climate Models (GCMs) and 2 combinations of Shared Socioeconomic Pathways (SSPs) and Representative Concentration Pathway (RCP), in other words, the final possible outcomes have resulted from a combination of 3 climate scenarios (slightly sensitive, regularly sensitive and highly sensitive) and 2 economic scenarios (conservative and aggressive).

The findings indicate that farming expansion into the native vegetation is economically risky, and results can be very volatile over the years, with profitability heavily influenced by climate variability. The charts below represent the yield predictions from the year 2025 until 2060 for soybeans (top) and corn (bottom), each line is a different climate model (3 GCMs) and RCPs 2.6 and 8.5 are the combinations of economic scenarios with carbon concentrations, with 2.6 being the more conservative and 8.5 the more aggressive.