The impacts of the tragedy in Rio Grande do Sul on food production and prices

The storms and resulting floods in Rio Grande do Sul have already led 446 of the state's 497 municipalities to declare a state of public calamity as of Tuesday (14). Images of entire cities submerged, of people and animals stranded, but also of volunteers working on rescues and humanitarian aid convoys arriving in the affected regions, took over the news and social media.

Even after two weeks, the floods are still persistent and there is still no forecast for when the situation will return to normal. Therefore, there is still no real understanding of the extent of the damage and the demand for recovery that the state — and the country — will face soon. As this state is of great importance in Brazilian agricultural production, some chains within this sector are particularly affected, which should result in higher prices on the market for some products.

Relevance of the state for economic activity and agricultural production

Rio Grande do Sul (RS) is the 4th most important state in the country in terms of economic activity. According to figures from the IBGE, in 2021 (most recent data), the state's gross domestic product (GDP) was R$581 billion (in current values), which represented 6,5% of the national GDP in the year.

The economy of RS is heavily influenced by agriculture: 12,6% of the state's GDP comes from agriculture. According to data from Conab, RS is a leader in important products such as rice (71% of national production), wheat, canola, oats and grapes (47%). The state also has a long tradition in livestock production, being the third largest producer of pigs (20%), and also standing out in the production of chicken and milk, according to data from IBGE.

Table 1. Agricultural production in Rio Grande do Sul (selected products, volume in tons and percentage representation in national production)

Main crops affected

Rice: Since rice is an important staple food for Brazilians, there is great concern about its availability. The state accounts for around 70% of the 10 million tons that the country produces annually. Due to the effects of El Niño, this season's harvest was behind in relation to previous years, but industry entities indicate that around 80% of the harvest had already been harvested. Therefore, the federal government is studying the possibility of importing an additional 1,5 million tons of rice, mainly from Mercosur countries such as Paraguay, Uruguay and Argentina — Brazil already regularly imports around 1 million tons of the product annually to meet domestic demand.

However, there is still no real dimension of the losses of harvested and processed (stored) products, in addition to the logistical difficulties with the flow of stored production. Therefore, this demand for imports may be even greater.

Rice is a product that has been showing great price variability and an upward trend in recent years. According to IBGE data, the accumulated monthly variation in 12 months for rice was 76% in 2020, -17% in 2021, 6% in 2022 and, finally, 25% in 2023 – values ​​relatively higher than the general price index (see graph below). Until April, in the accumulated 12 months, the price index for rice was 9%.

This large price variability is a reflection of climate issues and a gradual reduction in overall production in Brazil: production in the state recently experienced three consecutive droughts, caused by the La Niña climate phenomenon. After this long period of drought, 2024 was marked by heavy rains and floods, also affecting local food and rice production.

Soy: The harvest is underway and, according to Conab, 60% of the area has already been harvested (compared to 70% last year), in the state that is traditionally the last to plant and the last to harvest the oilseed in the country. The areas with the largest quantity to be harvested are those on the border — it is estimated that, at the state level, 7 million tons are yet to be harvested. In addition to losses with what is below the ground (some estimate that the loss will be 50% of what is yet to be harvested), excess moisture should affect the acidity of the soybean oil.

Corn: More than 80% of the crop (summer harvest) had already been harvested. In the case of losses in the soybean and corn crops, the national impact is mitigated because production in Rio Grande do Sul is a small portion of the total national production.

Poultry and pigs: Many production units were affected. In the first two weeks, at least 10 large industrial units were paralyzed and had difficulty operating due to the lack of electricity and logistical difficulties in delivering fuel to generators, according to information from ABPA.

Dairy and beef cattle farming: The production problem is aggravated by the perishability and need for refrigeration of dairy and meat products. The logistical issue is also important: in addition to the difficulty in collecting raw milk from rural units due to road obstructions, the supply of feed and inputs is compromised.

Below, we highlight the IBGE's monitoring of price indexes, both for the general index and for selected products that the state has great importance in producing. It can be seen that important products in the basic food basket, such as rice, dairy products and chicken, were already experiencing relatively higher price growth than the general price growth of products that make up the IBGE basket. With the impact on production and production flow observed by the problems in Rio Grande do Sul, the pressure on the price of these products increases, influencing the general indexes.

Source: IBGE (2024)

Overall economic impact

The disruption in the state's agricultural production chains is expected to have an impact on the price of products in the aforementioned chains, influencing the general price index. So far, market analyses indicate an average impact of up to 0,10 percentage points on the IPCA, driven mainly by the expected increase in the price of rice due to losses. However, as already analyzed, this impact still seems underestimated, as it does not take into account the losses of products in stock and the logistical difficulties in distributing production. Greater liberalization for the import of food products related to chains that may have a greater supply imbalance may ease this process and reduce part of the pressure for price increases.

The losses are also expected to impact the country's Gross Domestic Product, but there is still little information on this extent. In any case, there is pressure for greater government spending, which will certainly contribute to a larger public deficit this year.

It is also important to consider the impact on rural producers in the region for future harvests. With losses and direct effects of the floods, producers in Rio Grande do Sul will certainly have problems with regard to their capacity to invest in production in the coming seasons, which could lead to a resistance effect in terms of an imbalance between supply and demand for food products. In this sense, producer associations have already demanded support such as incentives, lines of financing and extension of debt terms.

Among the main measures adopted so far by the federal government to support and prevent the state's production shutdown is a Provisional Measure (MP) worth R$12,5 billion, which includes actions related to credit lines (FGI, FGO, Pronampe and Pronaf/Pronampe) and initiatives to support food security (Food Acquisition Program and basic food baskets), in addition to extra installments of unemployment insurance, services for primary and specialized health and epidemiological surveillance, pharmaceutical assistance and temporary hiring of professionals.

Are you already following our official channels? Click and follow our whatsapp channel, follow us on LinkedIn and sign up to receive our biweekly Newsletter. Stay up to date with research and knowledge on global agribusiness issues.