TheEconomicImpactoftheExtremeClimaticEventsin
ArgentinaThecaseofthesoybeanonthecorearea
Climateriskorinfrastructuredeficit?
ResearchprogramontheValuationoftheSocioeconomicVulnerabilitytotheClimateRisk
SchoolofEconomics
UniversidaddeBuenosAires
EstebanOttoThomasz
GonzaloRondinone
AnaSilviaVilker
MarianoEriz
Thecaseofthesoybeaninthecorearea
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The economic impact of the extreme climate events in Argentina: the case of the soybean in the core area Climate risk or infrastructure deficit? / Esteban Otto Thomasz, Gonzalo Rondinone, Ana Vilker, Mariano Eriz. – 1st ed. – City of Buenos Aires: Universidad de Buenos Aires. School of Economics, 2018.
El impacto económico de los eventos climáticos extremos en Argentina: el caso de la soja en la zona núcleo ¿riesgo climático o déficit de infraestructura? / Esteban Otto Thomasz… [et al.]. - 1a ed. - Ciudad Autónoma de Buenos Aires, 2017. 60 p.: 22 x 15 cm. ISBN 978-950-29-1661-3 FCE-UBA 1.Cambio Climático. I. Thomasz, Esteban Otto II. CDD 551.6
UniversidaddeBuenosAiresRector:ProfessorAlbertoBarbieri,PhDSchoolofEconomicsDean:ProfessorCesarH.Albornoz,PhDInstitutodeInvestigacionesenAdministración,ContabilidadyMatemática(IADCOM)Director:ProfessorMaríaT.Casparri,PhDSpecialProgramonSocioeconomicVulnerabilitytoClimateRiskDirector:EstebanOttoThomaszPhDAllrightsreserved.
TheeconomicimpactoftheextremeclimateeventsinArgentina
ResearchProgramontheValuationoftheSocio-EconomicVulnerabilitytoClimateRiskSchoolofEconomics,UniversidaddeBuenosAires
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Researchprogramonthevaluationofthesocioeconomicvulnerabilitytotheclimaterisk
Theobjectiveoftheresearchprogramonthevaluationofthesocioeconomicvulnerabilitytotheclimateriskistostudymodels,approaches,methodologies,andmetricstovaluetheeconomic costs and estimate the social vulnerability of the climatic risk events, such asdroughts,heatwaves,andotherclimatevariabilityeventswhichaffecttheassets,economicactivities,andthewelfareofspecificcommunities.
Currently, it is part of the Instituto de Investigaciones en Administración, Contabilidad yMétodos Cuantitativos para la Gestión (IADCOM) (Institute of Research in Administration,Accounting and QuantitativeMethods for Management) of the University of Buenos AireslocatedintheSchoolofEconomics.
The creation of the specific program in the school of economics is due to 11 years ofexperienceoninvestigatingthissubject,stemmingfromthePICTproject,intheyear2006,titled“Economic,financial,andactuarialimpactoftheclimatechangeinArgentina”locatedattheSchoolofEconomicsoftheUniversityofBuenosAires.Recently,researchersofthisstudy have made an extensive research (2015-2018) at the Massachusetts Institute ofTechnology,wheretheproject“StudyofSocio-EconomicImpactofClimateChangeRiskinDeveloping Countries” took place with main emphasis in the measurement of thesocioeconomicvulnerabilitytotheclimateriskinemergingmarkets.
Asaresultoftheseexchanges,fromthesenetworking,andfromtheknowledgegenerated,thisspecificprogramiscreated,whichhasasmissiontoprovideconsensualandrigorousmetricsofthesocioeconomicimpactoftheclimateriskinArgentina.
All right reserved.The content of thispublicationmaybe reproducedprovided that thesourceisquoted.Copiesforcommercialgainareprohibited.
FacultaddeCienciasEconómicas.UniversidaddeBuenosAiresAv.Córdoba2122(C1120AAQ)CityofBuenosAires.
RepublicofArgentinaURL:
http://www.economicas.uba.ar/institutos_y_centros/provul/
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Index
Content
EXECUTIVESUMMARY...............................................................................................................10
1. Importanceoftheproblem................................................................................................13
2. ImportanceoftheAgriculturalsectorinArgentina...........................................................14
3. Climateevents....................................................................................................................19
4. Whatismeantbyeconomicvaluation?.............................................................................21
4.1 Limitationsoftheassessmentmodels...........................................................................23
5. EconomicassessmentofextremeclimateeventsinArgentina.........................................26
5.1 Waterexcesses...............................................................................................................27
5.2 Theeconomiccostofdroughts......................................................................................31
5.3 Forecasts........................................................................................................................36
6. ClimateRisksandInfrastructure........................................................................................42
6.1 Howtoimplementtheadaptationinfrastructuretotheriskclimate?..........................43
7. Perspectivesforplanning...................................................................................................48
8. Summary............................................................................................................................50
9. Bibliography.......................................................................................................................52
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ABOUTTHEAUTHORS
Esteban Otto Thomasz has a Bachelor in Economy, Master inAdministrationandaPhdoftheUniversityofBuenosAires.Hehas a specialization in Urban and Regional Planning at theMassachusetts Institute of Technology and has takenpostgraduatecoursesonadaptation to theclimatechangeandthe water resources management at Harvard University.Currently, he holds the position of Director of the ResearchProgramintheValuationoftheSocio-economicvulnerabilitytothe Climate Risk at the University of Buenos Aires. He hasparticipatedinseveralprojectsasresearcherandconsultantonthetaxgovernancearea,macroeconomicrisk,andevaluationoftheclimateriskatpublicandprivatelevel.Inrecentyears,hehasspecializedintheeconomicvaluationoftheclimateriskatruralandurbanlevel.HehasbeenanadvisortothecityofMedford,Massachusetts in its climate risk adaptation plan and hasparticipatedontheBostonClimatePreparednessTaskforcefromthePlanningCounciloftheEstateofMassachusetts.HeisafullprofessoroftheSchoolofEconomicsoftheUniversityofBuenosAires,teachinggraduateandpostgraduatecourses.
Mariano Eriz is a consultant and researcher in appliedeconomics.Currently,heholdsthepositionofCoordinatorofthePricingandMarketAnalysisDepartmentoftheNationalMinistryof Production and consultant of the Ministry of the Interior,PublicWorksandHousing.Atpresent,he is co-directorof theResearch Program in the Valuation of the Socio-economicVulnerability to the Climate Risk of the University of BuenosAires.HewasavisitingresearcherattheMassachusettsInstituteofTechnology,specializingineconomicplanningandgeospatialanalysis.HeisresearcherandassociateprofessoroftheSchoolofEconomicsoftheUniversityofBuenosAiresandtheArgentineCatholic University. He has extensive experience in projects,withinthepublicandprivatesector,relatedtothemeasurementofthesocio-economicstructure,inthedesignoftheaggregationmeasurements regarding quantitative and qualitativeinformation.HehasparticipatedinprojectsfundedbytheInter-AmericanDevelopmentBank(IDB).
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GonzaloRondinonehasaBachelorinEconomicsandMasterinEconomicandFinancialRiskManagementoftheUniversidaddeBuenosAires.Heisaconsultantandresearcherwithexperienceintheapplicationanddevelopmentoffinancialinstrumentsforthe regional and local development. At the Universidad deBuenos Aires, he has participated inmacroeconomic risk andclimateriskresearchprojects.Asaconsultant,hehasworkedinthe design and execution of administration programs forproducers, elevators, and exporters. Currently, he is a visitingresearcher at the Massachusetts Institute of Technology,researching financial mechanisms of infrastructure foradaptationpoliciestotheclimaterisk.
AnaVilkerhasaBachelorinEconomics.Sheisaresearcherandassociate professor of the School of Economics of theUniversidaddeBuenosAires.Shehasbeenadirectorandhasworked as a researcher in several scientific and technicalprojectsfundedbytheUniversidaddeBuenosAiresinsubjectsrelatedtotheanalysisofthetoolsusedfortheagriculturalriskmanagement. She has elaborated the “Índice de Riesgo deprecios Agropecuario Argentino” –AAVIX- (ArgentinianAgricultural Volatility Index)”. She has also researched on thedeterminantsand financializationof thepriceof commodities.She has been part ofwork groups in State organisms such asNationalInvestmentCouncilandNationalInstituteofStatisticsandCensuses.Currently,sheiswritingherdoctoraldissertation,researchingonmethodologiesofeconomicmeasurementsoftheimpact of the climate variability in the agriculture sector inArgentina.
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ACKNOWLEDGEMENTSThisbriefdocumentrepresentsasummaryoftheyearsdedicatedtotheresearchanddevelopmentofpublicpolicies.Manyhavebeentheactorswhohavehelped,directlyorindirectly,totheformalizationofthislineofresearch.
In the firstplace,acknowledge theauthoritiesof theSchoolofEconomics, for itscontinuousinstitutionalsupportonthegenerationofnewprojects.Mainly,toMrDeanCesarAlbornozandtheEmeritusProfessorMaríaTeresaCasparri.Also,theAssociate Professor Juan Ramón Garnica Hervas for its continuous guidance toinnovateintheinvestigation.
Inthesecondplace,totheDirectoroftheSpecialProgramforUrbanandRegionalStudiesattheMIT,BishSanyal,forprovidingusalltheelementstobaseourprojectattheMIT.TothefruitfuldiscussionswithDr.LindaShi,PhDoftheMITandcurrentassociateprofessoratCornelUniversity.
ToDr.KennethStrepeck,ResearchScientistoftheMITandcurrentDirectoroftheAdaptationProgramtotheClimateChangefromtheJointProgramontheScienceandPolicyofGlobalChange,foritspassionandcommitmentinthetrainingofyoungprofessionalsaswellasproclaimtheimportanceofstudyingthewaterresources.
To Dan Osgood, Lead Scientist, Financial Instruments Sector Team from theInternationalResearchInstitute forClimateandSocietyatColumbiaUniversity, forhisselflessopennesstodebateontheeconomicimpactsoftheclimateriskontheagricultural sector. To Paula Gonzales,Research Scientistdel National Center forAtmosphericScience(NCAS)atUniversityofReading,foritsguidanceonthecurrentstateoftheclimatesciencesandprovideuswiththematerialappliedtothesouthcone.ToAndresRaveloandRobertoZantovar,DirectorandResearcher,respectively,oftheCentrodeRelevamiento yEvaluacióndeRecursosAgrícolas yNaturales (UNC-CONICET)(CenterforStudyandAssessmentofAgriculturalandNaturalResources)fortheexchangeswecontinueddoingrelatedtotheagroeconomicimpactsofthewaterexcessesanddeficitsinArgentina.
ToGabriellaCarolini,AssistantProfessorofInternationalDevelopmentGroupattheMIT, for her valuable discussions on methodologies to measure the socialvulnerability.
To the actuary, Alejandra Muzzio, Researcher of the Research Program on theValuationoftheSocio-economicVulnerabilitytotheClimateRisk,forherhelpintheelaborationofthesimulationmodels.
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“Whiskey is for drinking; water is for fighting over.”
Mark Twain
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PROLOGUEThispublicationreflectsthecontinuumoftheresearchprojectthatbeganundermyguidanceintheyear2006,named“Economic,Financial,andActuarialImpactoftheClimateChangeinArgentina”.Fromthatmomenton,differentlinesofresearchwereinitiated,andessentialhumanresourceswereestablished.
Mainly,thisworksummarizesthemainissuesthatcanbeallocatedtotheclimateriskproblem,fromaneconomicsciencepointofview.Ingeneralterms,toaddresstheeconomicandsocialimpactmeasurementproblem.Inspecificdetails,toincludeinthestudies,thefollowingissues:impactandlossesvaluationmethodologies,theimpactonthepricingsystem,estimatingthe integratedproduction,estimatingofthe interest rates, etc. Elementswhich, at last, shall help for a better design andimplementationof fiscaland financial instruments tosubstantiate,ona technicalbasis,theinvestmentinadaptationmeasurestoclimaterisk.
Concurrently, it summarizes, shortly and naturally, the main elements of theeconomicvaluation,andatthesametime,itshowstheresultofseveralforecastsfortheArgentineagriculture.Itisaformoftransferringknowledgegeneratednotonlytotheacademicsectorbutalsotothepublicsector,companiesandtothesocietyingeneral.Theresultsshowedhereinputascaleofmagnitudetothemeasurementofthe impact of the extreme climate events in Argentina. Once quantified therelevance, the actors may proceed to search for solutions to mitigate risks andincreasethemutualbenefits.
Since the object of study is affected by agriculture,meteorology, social sciences,urbanplanning,andotherdisciplines, it is,especially important, thecontributionthis work makes. Stemming from the economic science and through themonetizationoftheclimateimpacts,itcanbemadeacomprehensiveanalysisoftheproblem.Thepoliciesofadaptationormitigationwhicharerecommendedshallbeexecuted inamultidisciplinaryway,but it is theworkof theeconomytomakeapragmatic quantification of the problem. The results showed herein fill a spacehardlyresearchedbytheeconomicscience.
ProfessorEméritusMaríaTeresaCasparri
DirectorIADCOM
UniversidaddeBuenosAires
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EXECUTIVESUMMARYMacroeconomicimpacts,valuationoftheagriculturalsector,andinfrastructurefinancing:Howtodesigna
financingsystemforadaptationunderuncertainevents?
Ø Macroeconomicrelevance:theagriculturalsectorrepresents10.4%oftheGross Domestic Product (GDP), grain harvest amounts approximately to USD27.000millionannually,andtheagroindustryexportsmakethe60%ofthetotalexports.
Ø Climate risk: the focus of this study is on the climate variability events,especiallydroughtsand floods.Thesehavesignificanteffects in theshort termandinmedium-term.Theadaptationmeasuresshouldbeprioritizedtoreducetheimpactoftheseevents.
Ø Economicvaluation:theeconomicvaluationcomprisesthemonetizationofthe impacts, where not only are intervening the physical quantities (directimpact) but also the pricing forecasts, indirect impact over the chain andvaluation of interest rates. In the meantime, the socio-economic assessmentimplies adding effects which are not readily monetizable like the socialvulnerabilityoftheaffectedpopulations.
Ø Lossesduetofloods:duringthecampaign2016/17,theforecastedlossesofdirect income due to floods of the soybean crops rises to USD 354.4 million,allocatedinthefollowingway:BuenosAiresUSD149million,CordobaUSD60.7million,LaPampaUSD96.7million,andSantaFeUSD47.1million.
Ø Lossesduetodroughts:duringthecampaigns2008/09and2011/12,theforecasted losses of direct income due to droughts of the soybean crop rises,respectively,toUSD4115.88millionandUSD2606.37million
Ø Forecasts: the current value for the direct loss of the soybean productionforecastedduetodroughtsrisestoanamountbetweenUSD22985andUSD3339million,dependingonthevaluationrateapplied.Thehigherthemacroeconomicrisk, thehigher theratewillbe,and the less the financialviability to invest inadaptationinfrastructure.
Ø Surveytotheproducers:the64%considerstheclimateeventsasthemajorriskoftheircrops.Fromthis,the58%arehighlyconcernedaboutthefloodsand39%aboutthedroughts.Thehigherdemandofpublicworksisplacedonroadsand hydraulic works. The 80% would be willing to be part of public privatepartnership(PPP)
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Ø Droughtsvs.Floods:itisseenthatthedroughtsgeneratehigherlossesthanthefloodswhenassessingthedirectlossesofthesoybeancrop.Additionally,itsgeographicextentiswider,andthescaleofthelossturnsitalmostintoaneventwith macroeconomic impacts. However, the indirect impact and the socialvulnerabilitymaybehigherduetothefloods.
Ø Financing:duetothehighinterestrates,thefinancingoftheinfrastructurefortheadaptation to theclimaterisk isunsustainable in financial terms.Thehighcostoffundingisoneofthemajorproblemsoftheinvestmentintheadaptationtoclimatephenomenaindevelopingcountries:itgeneratesthatfuturelossestohavesuchlimitedimportanceincurrentterms,attractingfeworzeroresourcestothesector.
Ø Conclusion:thelevelofinternationalprices,theexpansionoftheagriculturalfrontier,thevaluationofthecropsandalso,thevalueoftheland,producethateven facing the same climate eventswhich occurred in thepast, the economicimpact will be, substantially, higher. Due to more significant resources andshared risks, there is space to research on instruments of public-privateparticipationtofinanceadaptationinfrastructureprojects.Thecorrectforecastandmonetizationofthefuturelossesandalso,itsfinancialdiscountarecrucialelementsfortherightdistributionoftheriskbetweentheparties.
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INTRODUCTION
Theobjectiveofthisstudyistoprovideafirstestimationoftheincomelossesofthesoybeanproduction in Argentina due to the climate variability. To value the phenomenon inmonetaryterms,mayprovidevitalinformationtoplanandemphasize,correctly,adaptationstrategies for a problem which is becoming more intense and have more relevance incountrieswhichdependonagriculturalexports,asthecaseinArgentina.
This report is focused on being a tool for the diffusion of results and advances in theresearchtobeusedbyawiderangeofpeople.Itseekstocontributetotheenhancementofthe debate about the economic cost of the climate variability events, and, the financial-economicviability to invest inadaptation infrastructure;additionally, thedistributionofcostsandbenefitsbetweentheinvolvedparties.
This report constitutes an executive summary of extensive research which attempts toanswerthefollowingquestion:howmuchdoesacountryloseduetovariabilityorclimateriskevents?Thissimplequestionprovesouttobeincrediblycomplicatedastoansweritaccurately,thesector,thescale,theterms,andlastly,thevaluationmethodologyhavetobedefined. It is worth noting that the approach taken is based on the financial-economicanalysis, so this questionwill be answered from a point that allows us tomonetize theimpacts to provide a basis to, technically, justify the viability to finance adaptationinvestments.
In the first section of this document, there is a summary of the problem. In the secondsection,theleadingfiguresoftheimpactontheagriculturalsectorinArgentinaareshown.Inthethirdsection,thebasicconceptguidelinesareintroducedtounderstandthedefinitionofclimateeventsanditseconomicvaluation.Inthefourthsection,theresults-preliminaryanddefinite-ofthelossesofincomeduetobothfloodsanddroughtsareoutlined.Inthefifthsection,theresultsofanexploratorysurveymadetoagriculturalproducersrelatedtotheirperceptionabouttheclimateriskandthestateoftheinfrastructureareshown.Finally,in the conclusions, some challenges are summarized for the economic and territorialplanninginthelightoftheanalyzedissue.
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1. Importanceoftheproblem
Therisksrelatedtotheclimatechangeareincreasingquicklyinvulnerablecommunitiesatanurbanandrurallevel,andespeciallyininformalsettlements.Thepossibledirectimpactsoftheclimatechangeandvariabilityincludeextremeprecipitations,rainandriverfloods,landslides,drought,morearid,andwatershortagewithbroadindirectimpactsinpeople,economies,andecosystems(Revietal,2014).
The Intergovernmental Panel on Climate Change –IPCC- [Grupo Intergubernamental deExpertossobreelCambioClimático]expectsthatindevelopingcountries,theclimatechangewill have critical short-term impacts due to extremeprecipitations anddroughts. Theseeventswillleadtochangesinthefoodproductionandnon-foodcropsareas,anditwillhavehugeimpactsregardingfoodsafetyandagriculturalincomes,mainly,affectingthewelfareoftheruralpopulations(IPCC,2015).
However, the adaptation and mitigation policies are still limited in middle-incomecountries.Limitedresourcesandtechnologyrestrictsthecapacityofadaptation,especially,indevelopingcountries.(Katesetal,2012;MoserandEkstrom,2010).
InthecaseofArgentina,therehasbeenamarkedincreaseofprecipitationsinmostofthesubtropicalregion,especiallysince1960,whichhasbenefitedtheagriculturalperformanceandtheexpansionofthefarmlandinthesemi-aridareas(Barros,2015).Thiseffect,withinothereconomicfactors,suchastheAsianmiracleandthegrowthoftechnology(Massot,2016),made the agricultural exports reach 55%of the total exports for the 2003-2016period.Thesoybean,soybeanoil,andthesoybeanflourcontributeto23%ofthetotalvalueexportedinthesameperiod.
Even though estimations have been carried out of the change of production of differentcropsbasedontheincreaseofC02emissionscenarios,showingpositivereactionsonthesoybeanperformance(Murgida,2014),thereisalackofstudieswhichconsidersthecurrentclimatevariabilitiessuchasdroughtsandfloodsatanationallevel.
In consequence, the objective of this project is to provide a first estimation of theeconomic losses of the agricultural production in Argentina due to climatevariabilities. These assessments are the first step inplanning infrastructure adaptationstrategies, which should be adopted, or not, by developing countries depending onagriculturalexportsasinthecaseofArgentina.
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2. ImportanceoftheAgriculturalsectorinArgentina
Theagriculturalsectorrepresentsthe10.4%oftheGDP,grainharvestrisestoUSD27,000millionannually,andtheagribusinessexportsarethe60%ofthetotalexports.
Theagriculturalsector(excludinghuntandforestry)andtheprocessingandfoodindustryrepresentthe10.4%oftheGDP(figure1).Thispercentagemaybesubstantiallyhigherifitisaddedtheservicesrelatedtothesupplychain,aslogistic,commercialservices,financialservices,consumptionofinputssuchasagrochemicalsandmachineproduction.
FigureNo1:EvolutionoftheagriculturalsectorparticipationintheGDP(2004-2014)
Source:CompiledonINDECdata
Regardingthegrossincomegenerated,thevalueofthesoybean,corn,andwheatharveston2016valuedatinternationalpricesrosetoUSD27,403million(figure2).Thisvalue,asa scale reference, represents, as of the date of this report, 54% of the Central Bank’sinternational reserves, reachingmore than 100% in 2014. The total generated between2004and2016rosetoUSD320,000million.
12,6% 12,9% 12,3% 12,2% 11,1% 10,9% 11,3% 10,5% 9,9% 10,2% 10,4%
0,0%
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FigureNo2:Evolutionofthegrossincomeofthesoy,corn,andwheat(1980-2016)–
(millionsofUSD)
Source:compiledonINDECdata
Regardingtheimpactsontheexternalsector,theprimarysectorandthemanufactureofagriculturalorigin(MAO)representedthe57%oftheexportedgoodsvaluebetween2004and2016(figure3).Mainly,the40%ofthetotalexportsweregeneratedbythegrainsector.
FigureNo3:EvolutionoftheimpactoftheprimaryproductsandMAOinitstotalexportedvalue(2000-2016)
Source:compiledonINDECdata
0
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27,403
35,063
12,6939,148
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57,6%50,1%
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FigureNo4:Evolutionofthegrainexports
Source:CompiledonINDECdata
Regardingthedirectfiscalimpact,theexporttaxtothecorn,wheatandsoyexportrosetoUSD6,572million in 2015 and the soybean complex toUSD4,717million in 2016 and,approximately,toUSD2,500millionasofthedateofthisreportin2017.Between2003and2016,thetotalgeneratedbytheexporttaxrosetoapproximatelyUSD70,000million.Onceagain,asareference,thetotalmadebyexporttaxbetween2003-2016represents1.3timestheCentralBank’sinternationalreservesasofthisdate.
Finally, it isworthnotingthehighlevelof industrializationofthesoybeanproductioninArgentinaregardingtherestoftheproducingcountries.InArgentina,duringtheyear2016,the82%ofthesoybeanproductionwascrushedintosoybeanoilandsoybeanmeal(figure5)whilethecompetitorcountriesarebelow50%.Asitisshowninthefollowingfigures,Argentinaistheworld’sprimaryexporterofsoybeanmealandoil,havingalowshareinbeans.Thisfactisimportantwhenassessingtheproductivechainsandthedeterminationoftheinternationalprices.
6,120
0
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10.000
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30.000
2000
2001
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US$million
23,232
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FigureNo5:SoybeanCrushing/Production2016
Source:CompiledonUSDAdata
FigureNo6:ArgentineShareoftheworldexportsofthesoybeancomplex
Source:CompiledonCOMTRADEdata
82%
43% 49%
41%
9%
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
Argentina Brasil USA Paraguay Uruguay
0%
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50%
60%
1996 1998 2000 2002 2004 2006 2008 2010 2012 2014 2016
Soybean SoybeanMeal SoybeanOil
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Inshort,theagriculturalsectorinArgentinacovers:
• ImpactataGDPlevel
• Impactataregionallevel
• Impactatanexternalsector
• Impactonpublicbudget
Forthisreason,itisessentialtostudytheeconomiccostoftheextremeclimateevents,suchasdroughtsandfloods,notonlyatlocallevelbutalsoatregionallevel,toopenthedebateonwhetherthecostsjustify,ornot,thefinancingofadaptationinfrastructure.Toservethatobjective, in the following section, the concepts of climate variability and economicvaluationaredefined,mainlyinrelationwithmodelsthatallowimpactmonetization.
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3. Climateevents
Thefocusofthisstudyisonclimatevariabilityorclimaterisk:droughtsandfloods.Thesehaveaneffectonthepresent.Itisnecessarytohaveadaptationmeasurestoreducethecostsofthoseevents.
Inthemeantime,theclimatechangeisreferredastothechangesinthetrendvalues of the variables in long-term, associated to the greenhouse gasemissions. The actions to reduce those emissions are named mitigationstrategies.
Inthefirstinstance,itisnecessarytoshowadifferentiationbetweentheseveraleventsofclimaticnaturetointroducearightdiagnosisoftheproblem.Inthissense,thereexistsasignificantdifferencebetweenthefollowing:
1. Climatechange2. Climatevariability3. Catastrophe4. Environmentalissues
The climate change is associated to the effects of the increase of the greenhouse gasemissions,whichwithin a long-termperiod, theywill generate trending changes on thetemperature,precipitationslevels,andsea-levelriseataglobalscale.
Theclimatevariabilityisacurrentphenomenonandit linkedtotheshort/medium-termchangesintheclimatologicalvariationsvalues,butwithoutthisbeingatrendchangeperse. For example, the annual level ofprecipitationsof a regionmay stay constant, but itsdistribution within the year may change (for example, they can concentrate in shorterperiods).Inthiscase,thereisavariabilitychangebutnotatrendingchange.
Catastrophes are defined as extreme climate variability events, and usually, they causedamage to thenatural,humanandeconomicsystems.Ageneralexampleofcatastrophiceventsisthefloodsduetoheavyprecipitations,overflowingrivers,hurricanes,hightides,etc.Mostly,theseeventstakeplaceinaveryshortperiod,withhighintensity,andasmallcapacitytopredictthem.
Lastly, the environmental issueshavenot been, strictly, linked to climate impact, but tocontamination and the relationship between the population, economic activity, andenvironment.
Eventhoughthefourdimensionsaretightlyinterconnected,itisnecessarytodifferentiatethemtochooseaneconomicvaluationmodeltoplanfocusedadaptationpolicies.
Attheurbanlevel,thehistoricalemphasishasbeenmadeonthestudyofenvironmentalissues, such as contamination, wastemanagement, access to green areas, etc. However,duringthelastyears,duetotheinternationalagendaonclimatechange,mitigationpolicies
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havebeenenforced, regarding thecreationofan inventoryofgasemissions,or toapplyreductionpoliciesof thoseemissions.Lessemphasishasbeenmadeonextremeclimatevariability events (heat waves, flash flooding) or catastrophes (floods, hurricane-forcewinds).Nonetheless,theeventsrecordedduringthelastdecadeworldwidehaspromptedthefocusonadaptationpolicies,especiallyregardingthefloodcontrolandthehightideincoastalregions.
In the agricultural sector, the primary emphasis has beenmade on the study of climatechangeimpact,withlimitedresearchoftheareasfocusedontheclimatevariabilityimpact(forexample,thelossesestimationsduetothechangesinthefrequencyandintensityoftheprecipitationlevels).
In the case of Argentina, there are some studies on the climate change impact in theagriculturalsector.Notwithstanding,thoseestimationshavelimitedusewhenjustifying,inmonetaryterms,thefundingadaptationprojects.
Inthissense,itisnecessarytoestablishincidents,termsandvalueassessmenttodefinethenature of the event and consequently, the kind of policy to be applied. Overall, a firstclassificationofthetypeofpoliciesaremitigation,adaptationandlossanddamage:
• Mitigation:constitutesasetofpoliciesfocusedonresolvingthecause,whichinthecase study is the reduction of greenhouse gas emissions. It implies thetransformationofaproductionapparatuswhichreducesthegasemissions.
• Adaptation:asetofmeasurestofacetheproblemandreducethesocialimpactandtheproductivechain,duetotheexistenceoftheeventandincaseofnotbeingabletomitigateit.
• Loss and damage: arises from cases in which the adaptation measures are notfeasible,anditshallproceedtorelocatethosedamaged,asfairlyaspossible.
Thestudyshowninthisreportisrelatedtotheeconomiccostoftheclimatevariabilityorriskevents,toprovideamonetizedestimationtoscaletheissueataregionalandnationallevel.Inthisway,itcanbedecidedwhetheritisalocalormacroeconomic,privateorpublicproblemandtoprovide,fromafinancialstandpoint,guidelinestojustifythefeasibilityoftheinvestmentsinadaptation.However,itisnecessarytodefinewhatismeantbyeconomicvaluation,asubjectoutlinedinthefollowingparagraph.
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4. Whatismeantbyeconomicvaluation?
“Quantities+Prices+ProductiveChains+Rateinterests”
Theeconomicvaluationcomprisesthemonetizationoftheimpacts,wherenotonly are intervening the physical quantities (direct impact) but also thepricingforecasts,productivechains(indirectimpact),andvaluationinterestrates.Meanwhile,thesocio-economicvaluationimpliesaddingeffectswhichare not easily monetizable like the social vulnerability of the affectedpopulations.
Oneofthemainfeaturesoftheeconomicvaluationisthemonetizationoftheimpacts.Inotherwords, besides estimating the effects on the quantities (basically, the damages orproductionlossmeasuredinphysicalvolumes),theimpactonthepricingsystemshouldbeassessedtomakevalueestimations,thatistosay:money.
The forecasting of prices is one of themost complex tasks because to isolate the pricesensitivityofaproductoranactivitysectortoclimateeventsresultsinadifficulttask.Inthis sense, most of the studies are limited to estimating the effects of the producedquantities.
Atthesametime,anotheressentialelementisthevaluationoftheindirecteffects,inotherwords,theimpactontheproductivechain:transport,commerceorallotheractivitiesthatformthesupplychain.Estimatingtheindirecteffectsalsoprovesouttobeahighlycomplextask, which implies researching the system of national accounts and the input-outputmatrix.
Regarding the direct and indirect impacts, it can also be estimated the fiscal effects,providinginformationontheimpactintheprivateincomeandthepublicbudget.Thiswillallow us to answer the question whether if the economic impact is only private or itcomprisesthepublicsector.
However,forthesepurposes,itcanbemadeafirstimportantdifferentiation:
• Marketsinwhichtheinternalproductionistheone,whichdeterminestheprices.This is the case, for example, of the soybean production in the United States ofAmerica.Thestocks,whichmayvarydependingontheclimatevariability,aretheones that fix the international price. Consequently, a loss of productionmay becompensatedbyariseoftheprice,beingable,inextremecases,ofnotalteringtheproducer’s income. In this case, there would not exist a direct economic effect.However, the loss of the quantities produced causes indirect effects through theproductivechain:lesslogisticservices,lesstransformationinderivativesproducts,fewerstorageservices,lesscommercialservices,etc.
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• Markets where the price is fixed exogenously, that is to say: where the localproducers do not have an impact on its determination. In this case, besides theindirect effects caused by the low produced quantities, there is a loss of directincomefortheprimaryproducers(thelowproductionisnotcompensatedbytheriseofprices).ThisisthecaseofthesoybeanproductioninArgentinaundernormalconditionsofthemarket,inotherwords,assumingthereisnorecordofhugeshockson the main producers (mainly, United States of America and in second place,Brazil).
• Also,acomplicatedtaskistoestimatewhenthesevereclimateimpactonthequalityof the product that is reflected in the price but not in a low of the quantitiesproduced,
FigureN7:Percentagedistributionoftheworldwideproductionofsoybean.
Source:CompiledonUSDAdata.
Moreover,astheclimateeffectsareovertime,andgenerally,theclimatevariabilityeventsarereflectedduringlongperiodsoftime,tostandardizethemonetarylosses,itisnecessarytofixavaluationinterestrate.Estimatingtheinterestrate(usuallyknownasdiscountrate)comprisesaspecificstudyareawithinfinance,anditisdifficulttoassessitforparticularactivitiesinemergingcountries,giventhelimitationsoftheinternalmarketandtheimpactofthemacroeconomicrisk.
Lastly, another highly significant dimension relates to the impacts on the socialvulnerability.Therecanexistevents that, at first,donotcause impactson theproducedvalueofeconomicactivity,oraswellasindamagesonthefixedassets,butwhichcancausedamagestothesocialvulnerabilityoftheaffectedgroups.Theseimpacts,althoughdifficulttomonetize,isanessentialpartoftheeconomicassessmentofclimaterisk.Theimpactscanbeobservableasevacuationcostsorhighercostsduetoacatastrophe,aswellas,complexonessuchaseffectsonmentalandphysicalhealth.
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4.1 Limitationsoftheassessmentmodels
Thestudyof theeconomic impactsof theclimateeventshasbeendriven,mainly,bytheinternational agenda related to the climate change. As it is a phenomenon that will bereflectedonthelongterm,theforecastoftheimpactsismadeonsuchalongtimeframethatitrequiresthepresumptionofcountlessvariablesandontheotherhand,thelevelofcertaintyoftheestimationsmayresultlow.
Inthecaseoftheagriculturalsector,theclimateimpactshavebeendeeplyanalyzedfromanagronomystandpoint,sincetheclimateistheprimaryinputforthisactivity.However,theestimationsare,ingeneral,strictlyfocusedonalimitedgeographicarea,andingeneral,theylackappropriatepriceforecasttoestimatetheeconomicimpact.
Withinthemainlimitationsoftheeconomicassessmentofclimatechangeimpacts,itcanbementioned:
• Forecastperiodsextremely long for theplanningofpublicpolicies indevelopingcountries,whichregisterdeepinstabilitiesintheshort-term.
• Ahighuncertaintyrelatedtotheanalyzedvariables.• Alargenumberofassumptions.• Technical problems of assessment for fixing future prices and estimating the
discountrateonextremelylong-termperiods.• Lackofdatabaseofprimaryinformation.
Meanwhile,withinthelimitationsoftheagroeconomicapproachtoreplythequestionofthiswork,itcanbesummarizedintothefollowing:
• Adifficultextrapolationtomoreextensivegeographicalareas,duetothenecessityof a great quantity of information, which is limited or inexistent in developingcountriesortheperipheralregionsofthemainagriculturalareasineachcountry.
• A necessity to have climate forecasts which are reflectedwithin an informationsystemcompatiblewitheconomicinformation.
ItisworthnotingthatmostofthestudiesappliedtoArgentinaaremainlyfocusedontheeffectsofquantitiesproducedoronthebenefitsofthefarmersbutstudyingthecaseonalimitedgeographicarea.
At the same time, the estimation cases on the value added (GDP) correspond to futureforecastsofclimatechangeandnottoclimatevariabilityscenarios,andtherecordedlossesofpasteventsarenotvalued.
Given those limitations, it is necessary to count with an assessment model ofeconomiclossesataregionalandnationallevel,assessingthecostofthepasteventsforecasted in the medium-term period, which allows a better substantiation toenforceadaptationpolicies.
On theotherhand,due to the recurrenceofwaterexcesses inArgentinaduring the lastyears,itwasencouragedtoestimateeconomiclosses.However,itcanbeobservedthelackofimplementationofastandardizedanddulytestedmodelthat,duringthepassingoftime,
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it can turn into a reference to appraise the level of economic losses. In this sense, theestimationsintroducedinthefollowingsectionconstitutethefirststepintothegoal,beingakeytheinterventionoftheacademicsectorandtheresearchonthemakingofrelevantbutrigorousmodels.
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“All models are wrong; some are useful.”
George Box
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5. EconomicassessmentofextremeclimateeventsinArgentina
Ourproposalof“intermediateapproach”isfocusedonmakingaconsensualmodelthathasabroadgeographicscopeandthatitcanbeturnedquicklyintoincome losses estimations within a medium-term time frame. Thisinformation is critical to justify the financial-economic viability of theadaptationinvestments.
The primary objective of this section is to provide estimations of income losses due tovariabilityeventsintheArgentineagriculturalsectorbasedonarigorousmethodologybut,atthesametime,standardizedandreplicabletoanextendedgeographicalarea.
The study is focused on the soybean case, for its relevance in economic terms, for theprovincesofBuenosAires,Córdoba,SantaFe,andEntreRíos.
Regardingtheclimateeventanalyzed,a firstapproachof theeconomic lossesduetothefloodsrecordedin2017(“campaign2016/17”)ismade,tolaterresearchdeeplythepasteventsofdroughts,mainlyintheyears2009and2012,duetoitsseverity.
Thestudyfocusesontheassessmentofpastevents,mainlyduetotwomotives.Inthefirstplace,therecannotbefoundestimationsentirelyconsensualatdepartmentleveloftheincomelossesgeneratedintherecentpast.Inthesecondplace,giventhattheeventshavealreadytakenplace,itisnotnecessarytoappealtoforecastoftheclimatevariabilitiesnorprices.Inthisway,itcanbeprovidedwithaspecificreferenceoftheorderofthescaleoftheeconomiclosses(monetized)necessarytoreplytothequestionwhetherifitisalocalormacroeconomic,publicorprivateproblem.Consequently,whetheritisjustifiedtheinvestmentonadaptationmeasures,andeventually,whichoneshouldbethesetofactorsinvolved.
Ourproposalof“intermediateapproach”isfocusedonmakingaconsensualmodelthathasabroadgeographicscopeandthatitcanbeturnedquicklyintoincomelossesestimationswithinamedium-termtimeframe.Thisinformationiscriticaltojustifytheviabilityoftheadaptationinvestments.
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5.1 Waterexcesses
Duringthecampaign2016/17,theforecastedlossesofdirectincomeduetothe floods of the soybean crop rises to USD 354.4million, allocated in thefollowingway:BuenosAiresUSD149million,CordobaUSD60.7million,LaPampaUSD96.7million,andSantaFeUSD47.1million.
Theeconomiccostofthewaterexcessresultscomplicatedtoestimate.Mainly,becausethefloodedareaandtheleveloftheflooddependongeographic,topographicaspects,andthekindofsoilwhichgeneratestheeventtohaveanimpactatalocallevel,butnotnecessarilyatastatelevel.Onlyextremewaterexcessescreatechangesontherelevantvariablesatastatelevelbecausethewaterexcessmaycausethedestructionofthecropswithinanareainsideofafarm,butontheotherhand,produceextraordinarycropyieldsinnearbyareasthatduetogeographicalaspects,theyarenotflooded.
Fromtheanalysisofthehistoricalinformationatastatelevel,itcannotbeobservedextremeprecipitationonthecropyieldswhichareaproductofwaterexcessesincontrasttoeventsofthemoderateandseveredroughts,asitwillbeseenfurtheron.
Although there are affected people at local level, the added economic assessment iscomplicateddueto,ononehand,theexistenceofcompensationsandontheotherside,thehiddencosts.Thecompensationsaregivenduetothedestructionofthecropsorthefailuretoharvestitinthewhollyfloodedareas,withthegenerationofexceptionalcropyieldsinother areas.Regarding thehidden costs, themoreprolonged transport timesdue to theimpossibilityofusingthetraditionalroadsgiventhattheyareflooded,themachineryorinfrastructuredamage,andtheimpactonsocialvulnerability,areexternalaspectstotheagroeconomicinformationandtheyaredifficulttoforecasttoanaddedlevel. It isworthnoting that evenmoderate events which increase the humidity of the crops may carryadditionalcosts, forexample,drying,whichcouldhavebeenavoidediftheclimateeventhadnottakenplace.
In short, the critical points of the water excesses may be summarized in the followingconcepts:
§ Lossesatalocallevel§ Therecanbecompensationsatastatelevel,andanaddedlossmaynotbegenerated.§ Hiddencosts
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Followingtheclarifications,itisshownbelowapreliminaryforecastofthedirectlossesduetowaterexcessesforthecampaign2016/17.
Estimationoflossesduetowaterexcessesin2017
TheinformationattheheadofthecentraldelegationsofthestatesofBuenosAires,Cordoba,EntreRios,SantaFe,andLaPampaisreviewed,accordingtotheoneforecastedbytheMinistryofAgroindustryforthecampaign2016/17.Thegroupofdelegationsarereflectedintable1(thecaseofEntreRiosisnotlistedasthereisnorecordofsignificantlosses).
Table1:Delegations
BuenosAires Córdoba LaPampa SantaFeBahíaBlanca,
Bolívar,Bragado,Gral.Madariaga,Junín,LaPlata,Lincoln,Pehuajó,Pergamino,Pigué,Salliqueló,Tandil,TresArroyos,25de
Mayo.
Laboulaye,MarcosJuárez,RíoCuarto,SanFrancisco,Villa
María
GeneralPicoSantaRosa
Avellaneda,CañadadeGómez,Casilda,Rafaela,Venado
Tuerto
Forthegroupofthedepartmentslistedherein,thefollowingmethodologywasapplied:
• Thelostareawascalculated,inotherwords,thedifferencebetweenthesownareaandtheharvestedarea.
• Thehistoricalaveragelossofeachdepartmentwascalculated.• Thelossoftheanalyzedcampaignwasnetfromthehistoricalaverage.• Inthecaseswherethecurrentlossexceedsthehistoricalloss,thewaterexcesslevel
wasanalyzedthroughthePalmerDroughtIndex(usingtheinformationgivenbytheCentrodeRelevamientoyEvaluacióndeRecursosAgrícolasyNaturales(CREAN)[CenterforStudyandAssessmentofAgriculturalandNaturalResources].
• Incaseswherewaterexcessesareobservable,thelosswasassessed.Forthis,itwasappliedtothenetarealost,thetrendingperformanceofthedepartment1.
• Thelossinquantitiesismonetizedbytheinternationalpriceofthesoybeanfromthecurrentyear.
1AccordingtothemodelandstudydevisedbyThomaszetal(2017).
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The added values by state, considering only the departments with loss due to waterexcesses,aresummarizedinthefollowingtable:
Table2:DirectlossesforeachsoybeancopCampaign2016/17,inUSdollars
BuenosAires 149,805,937
Córdoba 60,745,762
LaPampa 96,709,046
SantaFe 47,144,064
Total 354,404,810
Source:Compiled
Asitcanbeseen,thestateofBuenosAiresregistersdirecteconomiclossesequaltoUSD149million,CórdobaUSD60.7million,LaPampaUSD9.7millionySantaFeUSD47.1million.Intotal,theincomelossforthereviewedareaamounttoUSD354.4million.
Inthemeantime,regardingtherelativeproductionvalueofeachstate,thelossesareofthe2%inSantaFe,4%inCordoba,4.4%inBuenosAires,and32.6%inLaPampa.
Table3:Directlossesforsoybeancrop
Campaign2016/17,inpercentagefortheforecastedproductionvalueBuenosAires 4.4%
Córdoba 4.0%
LaPampa 32.6%
SantaFe 2.0%
Total 4.6%
Source:Compiled
Asitcanbeseen,thestateofLaPamparegisters,byfar,themoresignificantrelativeloss.Thisisconsistentwiththewaterexcesslevelrecordedintheregion,whichcanbeobservedin the following table, where themapping of the Palmer Index,made by the Centro deRelevamientoyEvaluacióndeRecursosAgrícolasyNaturales(thedarkgreencolorimpliesextremewaterexcesses)isshown.
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Table4:PalmerIndex(PDSI)
January2017
February2017
March2017
Source:CentrodeRelevamientoyEvaluacióndeRecursosAgrícolasyNaturales2
2http://www.crean.unc.edu.ar/files/secciones/monitoreo/pdi_2017/ult_2017.html
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5.2 Theeconomiccostofdroughts
Duringthecampaign2008/09,theestimatedlossesofdirectincomeduetothedroughtofthesoybeancroprisestoUSD4,115.88million,distributedinthefollowingway:BuenosAiresUSD2,478million,CórdobaUSD679million,EntreRíosUSD403million,andSantaFeUSD554million.
During the campaign 2011/12, the loss was USD 2,606.37million: BuenosAires USD 293.17 million, Santa Fe USD 574.82 million, and Córdoba USD1,738.37million.
Althoughinrecentyears,thewaterexcesseshavebeenthemainevent,theArgentineagrohasnotbeenforeigntosevereandextremedroughtepisodesinthelastyears.Infact,thedroughtsaretheonlyeventsinwhichthereisadramaticandgeneraldropofthecropyieldsatadepartmentlevel.Thissituationisnotobservedinothercases,asinthewaterexcesseswheretheeffectisseeninthelossoftheareainspecificcasesratherthaninthedropofcropyields.Thisiscaused,mainly,becausethegeographicalandtopologicalaspectsdonothaveahugeimpactondroughtsasinfloods.
TheforecastscorrespondtothelossofincomeindollarsrecordedatthedepartmentlevelforthestateofBuenosAires,Cordoba,SantaFe,andEntreRios.Thenumberofdepartmentanalyzed,inwhichtheproductionofsoybeanisrecorded,arethefollowing:
• BuenosAires:99departments• Córdoba:17departments• SantaFe:18departments• EntreRíos:17departments
Themodelofeconomicassessmentanalyzestheevolutionofcropyields,sown,harvested,and production area since 1970. Even though there are other cases of droughts, it wasfocusedonthemainepisodesrecordedinthelastyears.Inviewofthecollectedinformation,thestudyisbasedonthedroughtepisodesof2009and2012.Theestimatesofthedirecteconomiclossesarereflectedinthefollowingtables:
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FigureNo8:Incomelossbystateduetodroughtofthesoybeancrop,campaign2008/09InmillionsofUSdollarsandintotalpercentage
Source:owncompilation
Asitcanbeseen,theeconomiclossofthedroughtinthecampaign2008/09rosetoUSD4,115.88million.Atastatelevel,thelosswasUSD2,478.4inBuenosAires(60%ofthetotal),USD554.36millioninSantaFe,USD679,49millioninCórdoba(17%ofthetotal),andUSD403.62millioninEntreRíos(10%ofthetotal).
FigureNo9:Incomelossbystateduetodroughtofthesoybeancrop,campaign2001/12InmillionsofUSdollarsandintotalpercentage
Inmillion
Source:owncompilation
2.478,40
554,36 679,49403,62
0,00
500,00
1.000,00
1.500,00
2.000,00
2.500,00
3.000,00
B U E NO S A I R E S
S A N T A F E C O R DO B A E N T R E R I O S
2009
BuenosAires60%
SantaFe13%
Cordoba17%
EntreRios10%
2009
293,17
574,82
1.738,37
0,000,00
200,00400,00600,00800,00
1.000,001.200,001.400,001.600,001.800,002.000,00
B U E NO S A I R E S
S A N T A F E C O R DO B A E N T R E R I O S
2012
BuenosAires11%
SantaFe22%
Cordoba
67%
2012
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At the same time, in the droughts of the campaign 2011/12, the total loss rose to USD2,606.37million.Atastatelevel,thelosswasUSD293.17millioninBuenosAires(11%ofthetotal),USD574.82millioninSantaFe,andUSD1,738.37millioninCórdoba(67%ofthetotal).
Asafirstconclusion,itcanbeinferredthatthedroughtcauseshigherdirectincomelossesthan thewaterexcesses,which itseffect is focusedonamore limitedgeographicalarea.However,it isworthnotingthatthewaterexcessesmaygenerateotherkindsofadverseimpact,forexampleonthesocialvulnerabilityoroninfrastructuredamage,whichhasnotbeenassessedinthisestimation.
In the following figures, the level of absolute and relative loss at a department level ismapped.
Inthefirstmap,itisreflectedthescaleofthetotalloss,whichbyaproductionvolumeissue,thehigherlosseswillbeseenindepartmentswherethereisahigherproductionvolume.Duetothis,inthesecondmap,itisreflectedthescaleofrelativeloss,inotherwords:inapercentageoftheproductionvolumeofeachdepartment.
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FigureNo10:Geographicaldistributionforeachdepartmentofthelossduetothedroughtofthesoybeancrop,campaign2008/09
Absolute2009
Relative2009
As it canbe seen, inabsolute terms, thehigher lossdue to thedrought in the campaign2008/09,isrecordedinthecoreareaofthestatesofBuenosAiresandCórdoba.Meanwhile,inrelativeterms,inotherwords:regardingtheproductionvolumeofeachdepartment,theareasmostaffectedwerethesouthoftheProvinceofBuenosAires,thenorthofSantaFe,andaconsiderablepartoftheProvinceofEntreRíos.
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FigureNo11:Geographicaldistributionforeachdepartmentofthelossduetothedroughtofthesoybeancrop,campaign2011/12
Absolute2012
Relative2012
Regarding the geographical distribution of the losses due to the drought 2011/12, inabsoluteterms,itcanbeobservedthatthesignificantlosseswereinthesouthofCórdoba,southofSantaFe,andnortheastofthestateofBuenosAires.Astorelativeterms,themostdamagedareawasinthenorthofSantaFeandCórdoba.
Apartfromthelevelsofpastlosses,thequestioniswhatwillbethemagnitudeofthefutureloss.Thisisthecrucialquestionsincethecurrentvalueoftheincomelossiswhatmay justify, or not, the financial-economic viability of the investment in adaptationinfrastructure.Thissubjectwillbedevelopedinthefollowingchapter.
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5.3 Forecasts
ThecurrentvalueofthedirectlossofsoybeanproductionforecastedduetodroughtsrisestoanamountofUSD22,985andUSD3,339million,dependingonwhichvaluationrate isapplied.Thehigherthemacroeconomicrisk, thehigher the rate will be and the less the financial feasibility to invest inadaptationinfrastructure.
Theforecastimpliestomakecountlessmodelsandprojections:futurecropareas,yields,climateevents,behavioralchangesoftheagriculturalproducers,internationalprices,andinterestrates.
Forthisworkandduetothehighcomplexityofthistask,whichdoesnotguaranteeaccurateresults, a pragmatic solution is provided. The same frequency and intensity of the pastepisodesare repeated, forecasting themto the futurewith thecurrent levelof thesownarea,keepingthelasttrendoftheyieldsandapplyingthepreviousdataoftheinternationalprice.Forexample,inthefigureNo.12,differentsimulationsofcropyieldsfortheprovincesanalyzedinthisworkareprovided.
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FigureNo12:Simulationsofcropyields-Averagetimeframeof40years%-
StateofSantaFe
StateofCórdoba
StateofEntreRíos
StateofBuenosAires
Source:owncompilation
Takingasastartingpoint,thesownareain2016andreplicatingthebehaviorofthehistoryofcropyields,withinaforecasttimeframeof40years,thenominalvalueoftheloss,inotherwords: itdoesnotcontemplate the timevalueof themoney,and it rises toUSD22,985million.
In the following figure, an example of nominal losses at the department level of theprovincesofEntreRíos,Córdoba,BuenosAires,andSantaFeisprovided.
1,5
2,0
2,5
3,0
3,5
4,0
4,5
5,0
1 3 5 7 9 11 13 15 17 19 21 23 25 27 29 31 33 35 37 39 41 431,0
1,5
2,0
2,5
3,0
3,5
4,0
4,5
5,0
1 3 5 7 9 11 13 15 17 19 21 23 25 27 29 31
2,0
2,2
2,4
2,6
2,8
3,0
3,2
3,4
3,6
1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 191,0
1,5
2,0
2,5
3,0
3,5
4,0
4,5
1 3 5 7 9 11 13 15 17 19 21 23 25 27 29 31 33 35 37
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FigureNo13:Totallossforecastedduetodroughts- 40years’timeframe,0%discountrate-
StateofEntreRíos
StateofCórdoba
StateofBuenosAires
StateofSantaFe
Source:owncompilation
EventhoughtheappliedfocusintherenownedSternreport(2001)wastovaluethelossinnominalvalues,thatistosaywitha0%discountrate;itdoesnotprovetobethemostviableapproach,especiallyinemergingcountrieswithasignificantmacroeconomicrisk.Forthispurpose,thesamelosseventisvaluedundertwoforecastsofinterestrateshereunder:
• Applying the risk-free rate, the current value of the loss rises to USD 11,414million.
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• Finally,iftheintertemporallossesarediscountedtothecurrentleveloftheaveragerisk rateof theArgentinemarket, thepresent valueof the lossdescends toUSD3,339million.
FigureNo14:currentvalueoftheforecastedlossesduetodroughtsaccordingtothreediscountscenarios.
Source:owncompilation
Infinancial-economicterms,investmentinadaptationinfrastructure,whichitscostislessthanthecurrentlossvaluewouldbeprofitable,economically.However,asitcanbeseen,thecurrentvalueofthelossdoesnotdependonlyonthecomplexityoftheclimateforecastand its impact, but also on the interest rate, which represents the cost of the project,’sfinancing.Due to thehigher rates that theemergingcountrieshave, the fundingofadaptationinfrastructuretotheriskclimateresultsnon-viableinfinancialterms.
This is one of themost critical issues of the investment on adaptation to climatephenomenainemergingcountries:thehighcostofthefinancingcausesfuturelossestohaveasmallrelevanceinpresentterms,allocatingfewornoneresourcestothesector.Eventhoughthebenefitsofthisinfrastructureprojectaregeneratedinlong-term,theuncertaintyoftheclimateprojectionsbecomesanadditionalproblem.
Irrespectiveofthevalueoftheforecastedloss,itwillbedistributedinthefollowingwayintheanalyzedstates:BuenosAires41%,Córdoba33%,SantaFe20%,andEntreRíos6%.
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FigureNo15:Statespercentagedistributionoftheeconomiclossesforecastedduetodroughtsinthesoybeanproduction
Source:owncompilation
Giventheimpactoftheextremeclimateepisodesbeingstraightlylinkedtotheadaptationinfrastructure, in the followingparagraph,apreliminaryandexploratoryanalysisontheperceptions that the agricultural producers have regarding climate events andinfrastructureisintroduced.
BuenosAires41%
SantaFe20%
Cordoba33%
EntreRios6%
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“…Visionmaydrivegreatprojectsbut
FINANCINGisthefuelthatpowersthem…”
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6. ClimateRisksandInfrastructure
Surveytothefarmers:the64%considersclimateeventsasthesignificantrisktotheircrops.Fromthis,the58%arehighlyconcernedaboutfloodsand39%aboutdroughts.Thehigherdemandofpublicworksisforroadsandhydraulicworks. Within the hydraulic works, the 78% considers more critical thecontainment of floods. The 80% would be willing to be part of publicinvestmentsplans(PPP)
Throughoutthisdocument,ithasbeenemphasizedthecomplexityoftheestimationofaneconomic valuation of extreme climate events. The available tools for adaptation andmitigationarenotexemptfromahighdegreeofdiscrepancy.Theyrequirethecoordinationofmultipleindividualswithdifferentincentivesandvarioustimeframes.However,thereisa general agreement that the investment in infrastructure whether in existingimprovementsornewprojects, isnotedontheavailabletoolsset.Inthisparagraph,it isintended to reply to the critical point in which there is no general agreement, how toimplementadaptationinfrastructuretotheclimaterisks?
Usually, this kind of infrastructure projects shows unique features, which differentiatesthemfromtraditionalinvestments.Amongstthem,itcanbehighlightedthedifficultiesinmaking the future cash flows due to the high uncertainty, intertemporal problems oftransferring thecost-benefit throughgenerationsof thegrowingrisk, long-termprojectswithlimitedusesandgenerally,irreversible(Colgan2016,Stern2015,PPIAF2016).Giventhisissue,thepublicandprivatesectorarerequiredtoparticipateintheseprojects.Withinthisframework,itisvitaltoidentifythesectorialprioritiescorrectlyintheplanningprocessaswellastoguaranteetheincreaseofsocialbenefits.
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6.1 Howtoimplementtheadaptationinfrastructuretotheriskclimate?
Toanswerthisquestion,afirstexploratorystudywasmadetryingtosearchforanapproachthelookandperceptionoftheagriculturalsectorregardinginfrastructure.50agriculturalproducerswereinterviewedintheProvincesofBuenosAires,Córdoba,SantaFe,EntreRíos,andSalta.Themain issuesaffecting the crops, thedeterminantsof the investments, andfinancialmechanismsofinfrastructurewereenquired.Fromthesetofthequestionsmade,thefollowingquestionswereselectedtoexhibitthiswork:
• Question1:whichhasbeenthemainriskyourproductionhasfacedinthelast5years?• Question 2: Identify the main climate issue, which represented a risk for your
production.• Question3:Statetheimportanceyougivetothefollowingalternatives:roads,energy
supply,hydraulicworks,telecommunications,irrigationsystems.• Question4:whichadaptationworktotheclimateriskseemsmoreimportant?• Question5:inwhichadaptationmeasuretoclimateriskwouldyouinvestin,privately,
ifyouhavelong-termfinancing?• Question 6: Would you participate in a private-public participation framework to
finance,inasharedmanner,theadaptationworkstotheclimaterisk?
Theresultsareshownhereunder.
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Question1:Whichhasbeenthemainriskyourproductionhasfacedinthelast5years?
Source:owncompilation
Asitcanbeseeninthefigures,thereisahighincidenceoftheclimateissuesasthemainriskoftheproductionabovetheeconomicfactors,astheAccesstofinancing,taxpressure,orthecostincrease.
Question2:
Identifythemainclimateissuewhichrepresentedariskforyourproduction.
Source:owncompilation
Itisalsoemphasizedtheimportancegiventothedroughtaswellasthefloodsjustifying,inthisway,thein-depthstudyofbothevents.Regarding the public infrastructure situation, most people believe there is a deficitregarding the provision for their agriculture production. It was inquired about the
Accesstofinancing…
Climateissues64%Deficiton
externalinfrastructure
6%
Costincrease12%
Taxpressure14%
Floods39%
Other3%
Extremedroughts
58%
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importanceofthefollowingalternativestoinfrastructure:roads,energysupply,hydraulicworks,telecommunications,anddevelopmentofirrigationsystems.
Question3:Statetheimportanceyougivetothefollowingalternatives:roads,energy
supply,hydraulicworks,telecommunications,irrigationsystems.
Source:owncompilation
Itisespeciallyinterestingtonotethatthealternativeofroadsisoneofthemostimportantfollowed by hydraulic works. Even within the context of the floods phenomenon, theoptionofroadsbeingregisteredasoneofthemostimportantshowsanecessity.Itisworthnoting that the rural roadsmay become impassable, evenwithout an extreme event offlooding.Thismakesitimpossibletoaccessthefarmoritsexit,ifthemachineryhadalreadyentered, delaying the harvesting due to the impassable roads. It is worth noting, forexample, one of the answers “… the way up to the nearest road from my field is of 7kilometers.Whenitrainsintensely,itbecomesimpassable…”.
Inrespectofwhichgovernmentlevelshouldoverseetherunningoftheimplementationoftheinfrastructureworks,the58%chosethenationalgovernment,the36%theprovincialgovernment, and only the 6% the municipal. Once again, a clear majority answered,affirmatively,whether they considered a priority the public investment regarding otheradaptationworks to climate risk even considering its high cost. Later, theywere asked
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whichadaptationworkwasconsideredthemostimportant,isitthecontainmentoffloodsasafirstchoice.
Question4:whichadaptationworktotheclimateriskseemsmoreimportant?
Source:owncompilation
As it can be seen, a clear majority chose the works linked to the floods containment.However, it isworthnoting that thisquestionmaybebiaseddueto thecurrentcontext.Despitethis,itishighlightedthefactthatthe20%answeredtheirrigationsystems,linkedtothedroughts.
Subsequently, itwasconsulted,mainly,onwhichadaptationmeasure to theclimateriskwould they invest privately, in case of having a long-term, stable an in right conditionsfinancing.Itisinterestingtoseethatfromtheprivatesector’spointofview;theanswersvarymore.Inthiscase,41%wouldinvest,privately,inthecontainmentoffloodswhilethe78%believesthisworktobethemostimportantatapubliclevel.Attheprivatelevel,thereappearaproductivediversificationandirrigationsystemsasfeasiblealternatives, iftheyhadtheappropriatefinancing.
Irrigationsystem20% Earlyfrost
2%
Floodscontainment
78%
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Question5:Inwhichadaptationmeasuretoclimateriskwouldyouinvestin,privately,if
youhavealong-termfinancing?
Source:owncompilation
Finally, it was consulted on the viability and interest in participation in private-publicpartnerships(PPP).Thiskindofstructureconstitutesanalternativetofinancingwhichisbecoming more relevant in developing countries where the climate vulnerabilities areincreasing,anditisnecessarytheparticipationofalltheactorstofinanceandimplementadaptationstrategies.Inthiskindofprojectswhentheyturnoutsuccessful,theclimateriskisnotallocatedtoonlyonepartbutdistributed.ThePPPprojectsalsoallow,incasetheyarecorrectlydesigned,theincentivestobepreciselyalignedtoreachmutualbenefits.
Asitcanbeseeninthefollowingfigure,itcanbethoughtaboutjointprojectsbetweentheprivatesectorandthepublicsectorsince80%answeredthattheywouldparticipateinaPPPframework.
Question6:Wouldyouparticipateinaprivate-publicparticipationframeworktofinance,inasharedmanner,theadaptationworkstotheclimaterisk?
Source:owncompilation
Productivediversifactio
n32%
Containmentoffloods41%
Irrigationsystems27%
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7. Perspectivesforplanning
Howtofinanceinfrastructureunderuncertainevents?Adaptationtoclimateriskcanbeunderstoodasoneofthemostsignificantchallengesintheoryandpractice of planning. It implies dealing with long-term scenarios, a highuncertaintyregardingthemagnitudeandthetimingofthecrystallizationofevents,greateconomicimpactsandhighcostsofinvestments.
Thescienceshowsthedynamicandnatureoftheclimateepisodesisexceptionallycomplexandconsequently,hardtopredict,asdifferentmodelsmaygeneratefrommixedresultstoopposingones.Thereisarelativeconsensusabouttheincreaseoftheclimatevariabilityofspecific events and the average increase of temperature. However, its particulardistributionandmomentumarehighlyuncertain.
Consequently, a question is raised as to how to plan adaptation measures before anunpredictablenaturalphenomenonandentirelyexogenousforthemid-termhumanaction.Evenmore,theseinvestmentsimplygeneratingresourcesthatcompetewithotherpoliciesobjectivewithaccurateandcurrentimpacts,asineducation,health,andsecurity.Withinthisframework,thequestionarisesasforhowtomakecostlypolicydecisionsbasedonaforecast of events (for example, adroughtor floodsmap) for a long-term time frame inwhichitsestimationsmayshowahighlevelofuncertainty.
Inthissense,theadaptationtotheclimateriskmaybeunderstoodasoneofthemostsignificantchallengesinthetheoryandpracticeofmodernpublicpolicies.Itimpliesdealing with long-term scenarios, a high uncertainty regarding the magnitude and thetiming of the crystallization of events, great economic impacts and high costs ofinvestments.Additionally,theinvestmentsinadaptationtoattendfutureeventscompetewith other policies, which must attend current issues, and at the same time, thoseinvestmentsmayaffectthebehaviorofthestakeholders,alteringtheeconomicactivities,insurancecosts,andassetsvaluation.
Irrespectiveof the fact that the climate sciencewill keepevolvingandwill providenewanswersinthefuture,planningspecialists,currently,facetheproblemwithmultiplepoints of view. Following an incremental approach, apply flexible strategies, andcombinetheinvestmentsinadaptationwithinvestmentsinadaptationwithcurrenteconomicdevelopmentrequirements,increasingtheco-benefits.However,thisfocushas its limits in huge infrastructure projects of a long-life cycle, as well as in socialvulnerabilityproblemsinpopulationsofhighrisk,which,ultimately,shouldberelocated.
Ingeneralterms,progressshouldbemadewithanewdesignofvaluationofprojects.Thisoneshouldconsiderthehighuncertaintyoftheclimateforecasts,theholisticeffectoftheevents, the currentand future levelof the socio-economicvulnerability, the toleranceofvarioussectorsandactivities,andtherelationshipvulnerability/costofdifferentactions.
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Therightvaluationofthesocio-economicimpactsandthedesignofplansofprivate-publicparticipationare fundamental to financeadaptationstrategieswithinan implementationcontextwithinanimplementationcontextofpublicpoliciesbasedonthedata-drivenpolicy-makingparadigm.
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8. Summary
Macroeconomic impacts, the valorization of the agricultural sector andprivate-public financing: the extreme climate episodes may generatemacroeconomic impacts in theArgentine economy. This is not only due tohigher frequency and intensity of the climate events but also due to thevalorization of the agricultural production, given the increase of theinternational prices, the rise in the productivity, and expansion of theagriculturalfrontier.
Duetothesharedrisks,thereisspacetoexploreinstrumentsofprivate-publicparticipationtofinanceadaptationinfrastructureprojects.Therightforecastandmonetizationofthefuturelossesanditsfinancialdiscountaresignificantelementsforthecorrectdistributionoftheriskbetweentheparties.
This document tried to provide a summary and a first approach to the problem of theeconomicvaluationofextremeclimateeventsintheagriculturalsectorinArgentina.
Inthefirstplace,thedefinitionofclimatechangeandclimatevariabilitywasdifferentiated,emphasizingonthesecondphenomenonforamid-termtimeframe.Inthesecondplace,theproblem and the limitations to the economic valuation were laid out. Regarding this, amethodologywasappliedwhichallowedbeingappliedtoavastgeographicalareatogivethefirststepatthescaleoftheissueandreplytothequerywhethertheeconomicimpactsareamacroeconomic,regionalorlocal.
Droughtsgeneratemoresignificantlossesthanthefloodswhenevaluatingthedirectlossesofthesoybeancrop.Also,itsgeographicalextensionismuchmoresignificant,andthescaleofthelossturnsitintoalmostaneventwithmacroeconomicimpacts.
Meanwhile,thefloodscausealossproblemmuchmorefocusedonageographicalextensionmuchsmaller.However,althoughthedirectlossislow,thisevenmaycauseothereconomicimpacts, which were not valuated in this work3, could turn into observable andunobservableAlso,whileinthepastthefloodswerealocalproblem,inthelastcampaign(2016/17),itbecamealmostregionalproblem.
Eventhoughcurrently,theArgentinesituationismarkedbythefloods,itisimportanttoremember that in the last decade, there were two extreme droughts with significanteconomic losses. This fact affirms the perception of the producers, where the majorityansweredasthemainconcernthewaterexcesses(58%),the39%chosethedroughts.Thecentralquestioniswhicheventwilltakeplacefrequentlyinthefuture.
3Theindirecteffectsandthehiddencostsshallbecontemplatedinasecondphaseofestimation.
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Theresultsofthesoybeanexhibitedhereinmustbeconsideredastheminimum,notonlyfornotincludingothercropslikecorn,wheat,livestockanddairybusinessbutalsofornotestimatingtheindirectcosts.
However,duetothehighweightofthesoybeanindustry,theresultsarerobustenoughtoobtainthescaleofthephenomenon.
Withinthisframework,wefindthatthescaleofthelossmagnitudeduetoextremeclimateevents deserves the research of adaptation measures to the climate risk. The higherinternationalprices,aftertheAsianMiracleamongotherfactors,hasincreasedthecostofeventssignificantly.Inthisway,thedifferentrangesoftheavailablefinancialinstrumentsfor the financing of infrastructure must be researched. Especially, the private-publicpartnerships (PPP) constitute, provided that they are well-planned, a risk distributionmechanismbetweentheparties.
Theexpansionof theagricultural frontier, thevalorizationof thecrops,andthereby, thevalue of the soil, probably, has not been followed by an increase of the infrastructureassociated to the sector. In thisway, although the climate variable causes the dominantshock,theriseinthescaleandvalorizationofthesectorgeneratethelossesmeasuredineconomictermstobesignificantlyhigherthaninthepast.
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