Brazilian floods are inflicting billions in economic devastation

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(Bloomberg) –The floods and severe rainfall that ravaged Southern Brazil are hurting the nation’s powerhouse agricultural sector, with industries from auto manufacturing to banking and insurance also bracing for disruption. 

Heavy rains in Rio Grande do Sul, Brazil’s southernmost state, left entire cities under water and shut down its main airport indefinitely. More than 400 municipalities and 1.5 million people have been affected, according to the latest government data. About 164,000 residents have been displaced and 100 died as a result of the downpour, which started April 28. 

Initial estimates from Enki Research suggest an economic impact of at least $2.5 billion in the state. That preliminary number, based on research models and satellite data, is expected to grow as water levels are still high and more storms are expected for the region in coming days.

“That is physical damage to infrastructure and agriculture, along with business revenue losses not recovered within six months,” said Enki’s Chuck Watson. “More rain is forecast over the next week so unfortunately it will probably get worse.”

The first effects have already been seen in agriculture as the price of soybeans rose amid fears of “reduction in harvest and worsening in quality,” according to a report from XP Inc. President Luiz Inácio Lula da Silva said Tuesday the country may have to import rice and beans — Rio Grande do Sul accounts for around 60% of rice production, a staple in the nation’s diet. Meat production may also be impacted as the state is responsible for about 17% of the country’s pork production and 13% of its poultry, XP said. 

Agricultural services and inputs company Tres Tentos Agroindustrial SA is down more than 6% on concerns over the impact of the flooding on its operations. Rice producer Camil Alimentos SA was trailing the benchmark Ibovespa index earlier this week, with XP estimating that around 15% of the crops in the southern part of the state still needed to be harvested. Shares rebounded Wednesday after the company said it has been able to keep its supply of rice and beans steady despite logistical challenges. 

BRF SA also slid earlier this week after suspending activities at some of its units in the region, with analysts estimating that between 10% and 15% of its total capacity may be impacted. The stock jumped Wednesday after the company posted first quarter earnings. 

With large-scale losses expected in agribusiness, which accounts for a quarter of the Brazilian economy, banks will likely have to renegotiate debts for the sector, extending duration and offering lower interest rates, Bank of America analysts said in a report. Their biggest concern is Banrisul, the state bank formally known as Banco do Estado do Rio Grande do Sul SA, which has 85% of its loans tied to Southern Brazil, BofA said. 

Banrisul shares are down about 8.3% this week, trailing a broad index of Brazilian banks. In a statement Tuesday, the lender said it was fully operational and trying to support clients as best possible. The rains had no material impact on the bank’s properties, it said, adding that it couldn’t yet estimate the toll of the weather event on its business. 

Among financials, BofA also cited Banco ABC Brasil SA and brokerage XP Inc, with each around 20% of loan books exposed to the region, followed by Banco do Brasil SA, with 18%, Nubank — formally known as Nu Holdings Ltd — and Banco Bradesco SA with 15% each. 

The floods have also forced shutdowns in manufacturing. Gerdau SA halted operations at two units representing around 5% of the company’s total steel capacity and around 10% of Brazilian steel capacity, while General Motors suspended works at its factory in the state until Friday, extending a scheduled shutdown. 

Utilities are also expected to see losses: Eletrobras had a power station shut due to flooding, and CPFL Energia SA should take hits on its transmission and generation segments after a dam in one of its hydroelectric plants was damaged and facilities flooded. XP estimates that five days without power to the company’s 250,000 customers would cost it 15 million reais ($3 million) in revenue. 

Companies are still evaluating impacts. Gerdau said operations in the state remain halted until activities can be safely resumed, while Tres Tentos said its factories and stores are operating normally. Bradesco, BRF, ABC Brasil and Banco do Brasil declined to comment — the latter two due to quiet periods before earnings releases. Eletrobras, CPFL and Nubank didn’t immediately respond to requests for comment.