Colombian Beef Climate Transition Risk Analyst Brief - Navigating climate transition risks
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Navigating climate transition risks
Climate Transition Risk Analyst Brief
Colombian Beef
AN INITIATIVE OF SUPPORTED BY
Navigating climate transition risks
Climate Transition Risk
Analyst Brief
Colombian Beef
TABLE OF 03 Section I: Key Findings
CONTENTS 05 Section II: Industry Exposure to Climate Transitions
07 Section III: Financial Implications of Climate Transitions
10 Section IV: Climate Transition Opportunities
13 Section V: Recommendations
What we cover in this Brief:
1. How Colombian beef cattle actors are exposed to climate
transition risks. 2. How these risks can have material, yet
varying, impacts on different actors in the industry value chain.
3. How silvopastoral farms reduce vulnerability to transition
risks while also increasing market access and profitability.
FEBRUARY 2021
3
Section I
Key Findings
The Colombian beef industry is Modest, and Aggressive--each • Deforestation restrictions that
an important part of the country’s representing varying levels of drive up land competition and
economy and cultural heritage, yet global and Colombian ambition to land values.
suffers from low financial returns, address the climate crisis through • Emissions costs on forest to
suboptimal land use, and limited public policies, corporate actions, pasture conversion and cattle
quality standards relative to peers. and consumer dietary shifts. The production.
Under the spectre of slowing analysis draws from a preceding report,
demand growth, warming “Transition Scenarios for Tropical • Faced with these drivers,
temperatures and society’s Agriculture,”2 which projects changes in we project:
inevitable shift toward lower global commodity prices, agricultural
• Declining domestic production
carbon pathways, these challenges yields, emissions costs, and land use
as rising land and production
will only grow. competition under different global
costs spur conversion to higher
climate transition pathways.
margin agricultural uses. For
This report specifically examines
example, converting clear
how “climate transitions” are The topline results from our
pastures to palm oil cultivation
poised to materially influence analysis are:
Colombia’s beef industry1 in the currently provides 15 times
coming decades. These transitions • The industry’s high emissions higher margins.
range from government policies intensity, suboptimal land use, • Rising local beef prices (up to
to shifts in consumer demands, and association with deforestation 2.3 times higher in our Aggressive
and could disrupt the industry expose it to three climate scenario) and production
status quo. transition trends: costs even as demand growth
• Declining global and regional slows, leave the industry
We examine three climate growth in consumer demand vulnerable to import and
transitions pathways--Historical, for beef. product substitution.
Figure 1:
CLIMATE TRANSITION SWOT ANALYSIS: COLOMBIAN BEEF
Sustainable farming- especially silvopastoral systems New emissions costs: production, transportation, and land
clearing
Increasing productivity of existing ranches
Land use and deforestation restrictions
Land conversion to higher margin agriculture
Declining demand growth for beef products
Cultural and political support for cattle ranching Low production margins, especially among producers
Concentrated midstream and downstream market High transportation costs per unit
power can efficiently incentivize upstream change at
scale High cultural barriers to changing practices
COLOMBIAN
Source: Concordian. Note: This figu e does not consider social, labor, and community concerns, which are important threats and weaknesses for the Indonesian palm oil industry and may be
exacerbated by climate risks.
s.
Orbitas
4
Continued
Key Findings
• Large, carbon-intensive upstream with guidance from the Financial While greater ambition broadly
producers face the greatest risks Standard Boards’ (FSB) Task Force has more material consequences
of cost increases. Large commercial on Climate-related Financial for Colombia’s cattle producers,
breeders could face greenhouse gas Disclosures (TCFD). it also means the industry has
(GHG) emissions costs of • Predicate lending to, and a better shot at avoiding the
up to six times higher than investment in, beef producers much worse physical and
projected production costs on their adoption of sustainable economic impacts of warming
within 20 years. Smaller practices and sourcing from temperatures. The Colombian
producers are not likely to be sustainable suppliers, including by government, industry actors like
subject to emissions pricing. providing technical and FEDEGAN, and financiers like
capital assistance to small and FINAGRO have an important
• An influx of low cost imports medium ranchers. opportunity to scale up ISPS
could fundamentally alter • Further broaden silvopastoral deployment--including through more
industry supply chains, including investment programs, financial flexible and subsidized financing--
by cutting into the market power products, and technical which provide triple bottom line
of domestic midstream traders assistance to small- and medium- returns to both public and
and wholesalers. sized producers. private investment.
• Industry actors--such as Grupo
Nutresa (including El Corral), Grupo
Exito, Presto, and McDonald’s--can
This report specifically examines how
counteract these risks by adopting
sustainable strategies, particularly
intensive silvopastoral systems
(ISPS) (Figure 1):
• Conversion to ISPS can generate
“climate transitions” are poised to
internal rates of return (IRR) as
high as 32% to 37% on a ~$2,000/ materially influence Colombia’s beef
ha investment--a payback period
of just three to four years.3
• Under climate transitions, ISPS
industry in the coming decades.
relative benefits are even greater.
For an indicative average-sized
dual purpose farm, relative to
traditional techniques:
• Emissions and associated
costs are up to 44% lower for
industrial actors.
• Sustainably-certified price
premiums boost revenues by
up to 23%.
• New carbon sequestration
revenues--available to small
and commercial operations-
-are as high as $485 per
hectare.
• Given the industry’s material
exposure to climate transitions
alongside the significant
opportunities offered by sustainable
practices, we recommend that
investors and lenders:
• Request investees assess and
disclose climate transition
exposure and vulnerability inline
FEBRUARY 2021
5
Section II
Industry Exposure to Climate Transitions
KEY TAKEAWAYS Figure 2:
COLOMBIAN BEEF CATTLE VALUE CHAIN
Colombia’s domestically
focused beef industry is
dominated by small, extensive
upstream production with low
profit margins.
The industry’s high emissions
intensity and suboptimal
land use exposes it to several
sources of climate transition
risks, including rising imports
and poultry substitution.
Source: Concordian based on Nelson et al 2015 (USDA Forest Carbon Markets and
Colombia produces 1.2% of the Communities Program)
world’s beef, almost exclusively
for domestic consumption. The
17th largest global and 4th largest Figure 3:
regional producer, Colombia produced COLOMBIA BOVINE CENSUS BY FARM SIZE
886,000 metric tons of beef in 2018:
a 42% increase over thirty years ago.4,5
Last year, 96% of Colombian
beef was consumed domestically and
4% was exported6 to several Middle
Eastern countries, Russia and Vietnam,
among others.7 Exports have grown
slowly and are limited by Colombia’s
quality and sanitation practices.
Imports--primarily from the U.S.
and Argentina-- are similarly limited
but growing, reaching 23 million USD
in 2019.8
The industry (Figure 2 illustrates
the value chain) is characterized
by extensive systems on unsuitable
land. The country has 34 million
hectares of pasture land--28% of
which is classified as unmanaged Source: ICA 2020
pasture--where 28 million cattle
graze9,10 on 655,661 sites.11 Only 15
million hectares of total land cover is
identified as suitable for cattle majority own less than 50 head.13 land claims (including by aggregating
ranching.12 Most production occurs Only 1% of producers run and buying campesino-developed
within extensive systems with low commercial-scale operations with farms en bloc) with minimal effort.
stocking rates and low productivity, more than 500 animals (Figure 3).14 For these wealthy ranchers, profitable
and is mainly based on grazing. Smaller ranches are often operated operations are not always the highest
by poor subsistence farmers-- priority. Smaller ranches are less
Upstream cattle production “campesinos”--with low access to productive and face 1.5 times (or more)
in Colombia is dominated by capital and low margins.15 Others higher costs per head.16
small producers: half have less are operated from afar by wealthy Midstream traders and
than 10 animals and the vast landowners as a means to secure wholesalers have significant
Orbitas6
Continued
Industry Exposure to Climate Transitions
market power. These middlemen
Figure 4: are paid immediately by downstream
MARKET SHARE OF COLOMBIAN BEEF PROCESSORS purchasers but take their time to
pay sellers. Some middlemen take
advantage of this dynamic to lend to
(and earn interest from) cattle sellers,
often earning more from these cash
and lending services than commodity
margins. Middlemen take animals to
(or buy from) one of 507 authorized
slaughterhouses,17 many of which
are close to major cities.18,19 From
there, the meat enters downstream
butchering or processing through
94 meat cutting and packing
establishments (Figure 2).20
Downstream sales are
dominated by local butchers selling
unprocessed beef. 80% of slaughtered
and deboned cattle are sold
Source: LaNota 2018. Notes: Aggregate market value used was 3,640 million USD reported by FEDEGAN, cited by Chain
unprocessed, mainly via local
Reaction Research butchers like Koller.21 20% is processed
and sold mainly via independent
retailers, and large supermarkets,
Figure 5:
primarily Grupo Exito.22 Beef
COUNTRIES WITH HIGHEST BEEF PRODUCTION EMISSIONS INTENSITY AMONG
processors Grupo Nutresa (17%
TOP 25 PRODUCERS
market share) and Minerva Foods
(4% market share) are the only
publicly-listed companies in the
value chain. Most processors have
less than 1% market share (Figure 4).23
Colombia’s small beef industry
is the world’s second most
emissions-intensive (Figure 5)24.
Around 43% of Colombia’s
greenhouse gas emissions are
related to agriculture, forestry and
land use change; almost 30% of
those emissions are related to
enteric fermentation from cattle,
and around 35% are related to
deforestation (particularly in Meta,
Source: FAO 2017
Notes: These emissions intensities are significantly higher than emissions intensity estimates used for specific ranches in Caquetá, and Guaviare).25,26,27,28
this paper; part of this discrepancy is due to the inclusion of land clearing in FAO statistics.
To meet Colombia’s domestic
climate goals, it will need to
reduce emissions from its cattle
Colombia‘s beef industry is the industry. Colombia’s contribution
to Paris Agreement is to reach 20%
world‘s second most emissions-intensive. below business as usual by 2030,
with another 10% in reductions
This will need to change for it to meet achievable with international support.
The cattle industry is its largest
its climate goals. source of agricultural GHG
FEBRUARY 20217
Continued
Industry Exposure to Climate Transitions
emissions. Therefore, in its low
Figure 6: CLIMATE TRANSITION RISKS FOR COLOMBIAN CATTLE INDUSTRY carbon growth strategy, the
government identifies livestock
intensification and addressing
TCFD Example or Potential pasture conversion as important
Risk Event
Risk Category Source emissions reduction strategies.29
Across the economy, Colombia
Policy & Legal Government restrictions on defores- The Supreme Court has passed has enacted a carbon tax, with
tation. laws to restrict deforestation in
Amazonia. an emissions trading system
planned, and Supreme Court has
Introduction of greenhouse gas (GHG) Colombia has committed to redu- passed laws to conserve Amazonian
taxes or pricing systems that cover ce its greenhouse gas emissions
agricultural producers. by 20% below BAU by 2030.
forests. These policies will impact
the cattle industry, either directly
or indirectly by affecting the
Technology New planting technologies enable Emerging agroforestry techniques
higher yields like intensive silvopastoral sys- market for inputs like fuel or
tems (ISPS) provide opportunities agricultural land.
to boost yields, diversify income,
and reduce emissions.
In addition to government
policy, domestic consumer
Market Declining demand for carbon intensive Both current trends and future
demand is poised to follow a
protein sources like beef. transition scenarios project in-
creasing consumer substitution of global trend toward beef
ruminant meats in favor of lower substitutes. Meat consumption
carbon protein sources.
in Colombia has grown in line
with GDP growth; but Colombians
Retailers or wholesalers require new Colombian Tropical Forest Alli-
environmental standards from their ance partners Grupo Exito and are increasingly shifting toward
suppliers Alqueria have committed to zero poultry consumption-- which
deforestation supply chains
has doubled since 2002. In 2019,
Grupo Nutresa, Minerva, Burger beef consumption in Colombia
King and other large beef actors
was 18.6 kilograms per person
have expressed interest in sustai-
nable beef sourcing. while poultry consumption was
35.6 kilograms per person.30
Corporate and consumer demand for Studies indicate that sustainable
sustainable palm oil grows beef can command a price pre-
mium in Colombian markets.
Land competition from lower carbon As security risks abate and land
Colombia‘s environmental
crops values rise, conversion cattle
ranchers may convert or sell land
to higher margin, lower carbon
policies will impact the
crops.
cattle industry both
Capital providers link financing to
improvements in greenhouse gas
FINAGRO provides specialized
financing for ISPS conversions. directly and indirectly via
emissions
input costs.
Reputation Shareholders or capital providers divest Seven major European invest-
or express concerns about environmen- ment firms have threatened to
tal commitments. divest from nearby Brazil’s beef
producers and grains traders over As ambition to address the
deforestation concerns.
climate crisis intensifies, these
Increased NGO and stakeholder con- NGOs play a highly active role trends will also intensify, creating
cern about issues such as deforestation in monitoring deforestation in material risk events for Colombian
or climate change increase scrutiny of Colombia, particularly around
producers, whether driven by
tropical commodity supply chains. Amazonia.
new climate and land use
policies, market purchasing
Source: Concordian and Reuters, June 2020. 31
shifts, or technology developments
as outlined in Figure 6.
Orbitas8
Section III
Financial Implications of Climate Transitions
KEY TAKEAWAYS Figure 7:
CLIMATE TRANSITION SCENARIO ASSUMPTIONS
Emissions costs and land use
restrictions would squeeze Historical Modest Aggressive
Ambition Ambition Ambition
already tight margins--
especially for large cattle
Warming Target 4+ 3 1.5
breeders--and impede (Degrees Celsius)
geographic expansion.
Global Carbon Price None $3 in 2030 $14 in 2030
Land Sector* $7 in 2040 $69 in 2040
Greater land competition and (2019 USD per ton CO2)
tighter margins are likely to
spur land sales and ranch Regional Carbon Price: None $1 in 2030 $10 in 2030
conversion to higher margin Land Sector* $7 in 2040 $64 in 2040
agricultural activities like (2019 USD per ton CO2)
palm oil.
Global Protected 352 352 2,707
Natural Areas** (Mha)
Colombian Land Deforestation No Deforestation No Deforestation
Development Restrictions allowed
A. CLIMATE TRANSITION SCENARIOS
To assess the effect of future climate Bioenergy Pathways 27 70 70
(EJ by 2100)
transitions on Colombian cattle ran-
ching, we evaluate three scenarios: Ruminant Meat No reduction No reduction No reduction
Historical Ambition (“Historical”), Consumption***
Modest Ambition (“Modest”), and
Maximum Price Premiums for None 10% 23%
Aggressive Ambition (“Aggressive”). Sustainable Beef****
As summarized in Figure 7, each tran-
sition scenario considers both global Source: Concordian and Vivid Economics, based on MAgPIE assumptions and REMIND carbon price modeling results from
and corresponding local pathways--in- the report “Transition Scenarios for Tropical Agriculture.” Notes: *Carbon prices presented are averages in 2019 USD; this
report’s financial analysis uses regional GHG prices. GHG emissions prices reflect land sector GHG prices, rather than ener-
cluding consumer trends--to achieve gy or economy-wide GHG prices which may be higher. **Global Protected Natural Areas are defined by the International
Union for the Conservation of Nature (IUCN). The Historical and Modest Scenarios protect IUCN Categories I and II while
global warming temperature targets.32 the Aggressive Scenario protects IUCN Categories I to VI, both designated and proposed. ***Ruminant meat fadeout – this
Specifically, we assume the following is a gradual decrease in the role of ruminant meats (beef, lamb, mutton and goat) as a protein source. Fadeout scenarios
replace ruminant meat with less carbon intensive protein sources, including poultry, fish, eggs, and alternative meats.
Colombian actions in line with global **** Price premiums are based on Charry et al 2019.34
pathways:
• Historical: The Historical scenario
assumes limited global and local
• Aggressive: The Aggressive scenario pricing trends reflect underlying
ambition to address the climate
crisis. In Colombia, we project a amplifies the Modest scenario, with assumptions in each scenario.
pathway that reflects the status quo higher GHG pricing, significant local In the Historical and Modest
in which agricultural emissions are demand for certified-sustainable scenarios producers see limited
neither regulated nor taxed and in beef, as well as significant declines cost increases and production rises
which deforestation restrictions are in global and regional ruminant meat to meet growing demand, thereby
not enforced. consumption. moderating price increases. In the
Aggressive scenario, emissions
• Modest: In this scenario, the Our models broadly project rising pricing and area protections raise
world pursues modest GHG beef prices while production and production costs, leading to
pricing33 alongside investment in demand growth slow with greater production declines and higher prices
bioenergy pathways, among other climate ambition (Figure 8, on even in the face of declining demand.
factors. In Colombia, we assume next page). Over the next 15 years,
very modest GHG pricing, increased global and regional beef prices and After 2035, regional (Central and
consumer interest in certified- production under the Historical and South American) beef prices under
sustainable beef, as well Modest scenarios track each other the Aggressive scenario spike
as deforestation restrictions that closely, while the Aggressive scenario’s much higher while production falls
cover industrial cattle producers. results diverge immediately. These faster than global trends. By 2040,
FEBRUARY 20219
Continued
Financial Implications of Climate Transitions
Aggressive regional beef prices are Emissions costs will squeeze within 10 years (Figure 9, next page).
1.6 times higher, and global beef already tight margins. Charging Within 20 years, emissions costs
prices are 2.3 times higher, relative emissions costs directly to small rise to over 6 times the projected
to the Historical scenario. Notably, ranchers may not be administratively production costs. Smaller breeders,
regional price increases may be or politically feasible. But larger, while more emissions-intensive than
moderated by future imports in the commercial breeders, finishers, and larger breeders, are not likely to be
absence of import restrictions. dual purpose farms will likely face subject to GHG pricing policies and their
significant operational emissions costs. associated costs.
B. IMPACTS ON PRODUCERS Traders and wholesalers will also face
higher transportation costs (Colombia’s Producers and processors can’t easily
Climate transitions will incentivize rural-urban transportation routes pass these costs downstream and
emissions-intensive and inefficient are already notoriously inefficient) still compete with higher margin
producers to leave the market. as diesel and other fossil fuels face crops and cheaper international
Depending on the level of climate carbon taxes or pricing. substitutes. Colombian beef prices are
ambition and the nature of policy currently low but profits are low relative
mechanisms,35 commercial Cattle breeders will be particularly to both beef imports and common
operators in Colombia’s beef value hard hit due to their emissions domestic agricultural crops. Palm oil,
chain could face: intensity. Cattle breeders achieve for example, is 15 times more profitable
• Higher production and transportation comparatively high margins among than beef cattle per hectare (Figure 10
costs related to GHG emissions. beef producers, but are also some next page). Meanwhile, beef imports are
• New GHG emissions costs on of the most emissions-intensive cheaper due in part to their relatively
converting forests to pasture. within the beef value chain. Under an cheaper transportation costs. For exam-
• Laws preventing deforestation or Aggressive climate transition, large ple, FEDEGAN states that it is cheaper
other area protections, and breeders (over 250 head) could see to send a container from Shanghai
• Land competition from higher margin emissions costs rise to the same to Cartagena than from Bogotá to
agricultural uses. level as projected production costs Cartagena. Subject to trade policies, if
Colombia continues to produce high
emissions- and transportation-intensive
beef, it will likely face an influx of lower-
cost imports.
Figure 8:
PROJECTED BEEF PRICES AND PRODUCTION UNDER HISTORICAL,
C. GROWTH CONSTRAINTS
MODEST AND AGGRESSIVE SCENARIOS
Land use restrictions alongside GHG
Global Regional pricing spur increases in net forest
areas, reducing the potential for legal
and economically feasible cattle ex-
pansion. If the Colombian government
were to restrict deforestation alongsi-
de even the Modest scenario’s carbon
price, we project forest cover gains of
1.3 million hectares by 2030 and 2.6
million hectares by 2040 (Figure 11, next
page). The zero deforestation restric-
tion alongside the “Modest” carbon
price reduces total available commer-
cial cattle-suitable land38 (i.e., contigu-
ous tracts of over 200 hectares)39 from
13.7 million hectares (Historical) to 11.9
million hectares of land by 2040. For
smaller operators (i.e., land tracts less
than 50 hectares), expansion potential
shows little variation relative to that for
commercial operators, though zero de-
Source: Concordian, based on modeling results from the report “Transition Scenarios for Tropical Agriculture.”
forestation policy enforcement may be
more lax for small scale operations.
Orbitas10
Continued
Financial Implications of Climate Transitions
Figure 9: Figure 10:
ANNUALIZED PRODUCTION PROFITABILITY BY AGRICULTURAL ACTIVITY IN COLOMBIA
AND EMISSIONS COSTS FOR
LARGE BREEDERS
A. Historical Ambition
B. Modest Ambition
Source: FEDEGAN, 2015
Figure 11:
FOREST COVER EXPANSION: MODEST AMBITION SCENARIO
2020 to 2030 2020 to 2040
B. Aggressive Ambition
Source: Concordian using data from Gonzalez et. al
2019.36 Notes: See technical annex for methods, data
sources, and caveat37s related to these projections.
These projections reflect a “steady state,”i.e., they do
not reflect projected cash flows or income over time;
rather they provide a snapshot in each year of relative
production and emissions-related costs based on the
prevailing GHG prices for the land sector in that time
step. Emissions costs are based on an estimated emis-
sions intensity for larger breeders (251-500 head) of 37.3
kg CO2eq per kg of live weight gain (LWG).
• Projected production costs also assume increases in
factor costs including labor, energy, and equipment;
they do not consider increases in fertilizer nor land
costs; we assume fertilizer-related cost increases Source: Authors. Forest cover projections at 5.5 km x 5.5 km spatial resolution are based on the OSIRIS model.37 Plotted
are driven by emissions costs within the farm gate values indicate the percentage of the grid cell area that has experienced an increase in forest cover over the 10- or 20-
rather than fertilizer prices. year time period; changes11
Continued
Financial Implications of Climate Transitions
Even in scenarios where deforestation
Figure 12: is permitted, GHG pricing could
REGIONAL LAND VALUES make forest-to-pasture conversion
prohibitively expensive. As security
risks abated following the peace deal
with the Revolutionary Armed Forces
of Colombia (FARC), cattle ranching
proliferated on previously forested
lands in Amazonia as a means to
secure land ownership. Under climate
transitions, clearing forest to establish
a cattle ranching operation would result
in $584 (Modest) to $5,840 (Aggressive)
in upfront GHG emissions costs
per hectare by 2030.41 At the current
average net income of US$38 per
hectare for a dual purpose farm, it
would take 15 years (on a cash basis,
i.e., no interest considered) to recover
this upfront cost in even the Modest
scenario. Within 20 years, these
Source: Concordian, based on modeling results from the report “Transition Scenarios for Tropical Agriculture.”
clearing-related emissions costs
Figure 13: rise to $4,088 (Modest) and $37,000
CATTLE SUITABILITY MAP AND MAJOR CATTLE FARMING REGIONS (Aggressive) per hectare.
Greater land competition and
Caribbean
Region tighter margins will spur land
sales and conversion to higher
Middle
Magdalena Valley margin agricultural activities. In
the Aggressive scenario where
deforestation is restricted, regional
land values are projected to nearly
double within 20 years (Figure 12)
as a result of both emissions pricing
and area protections. Given both
Orinoquia
and Caquetá cattle ranching’s currently thin
profit margins and suboptimal land
use (Figure 13), we expect climate
Source: Concordian, on left, combining IDEAM 2012 land use map42 and SIPRA 2020 suitability map43 to show overlap of
transitions to incentivize the conversion
existing pastures and cattle-suitable land. SIPRA defines suitability based on a number of factors including biophysical of inefficient, emissions-intensive
suitability, socio-economic considerations, and ecological considerations. For these maps we defined “Unsuitable” as any
areas with low or no suitability as defined by SIPRA. Administrative boundaries are from GADM,44 The map on the right pasture lands either back into forests,
shows the locations of cattle herds, with values indicating heads of cattle in 2019 from ICA 2020.45 For more details, see
Technical Annex. and/or into higher margin agricultural
activities such as palm oil, sugar
Figure 14: cane, or coffee.
CATTLE SUITABILITY MAP
AND MAJOR CATTLE FARMING 63% of the country’s existing
REGIONS pasture overlaps with land that is
biophysically suitable for palm--a
crop which provides 15 times higher
margins (Figure 14). The impact of
this conversion on midstream beef
processing, trading, and wholesaling will
Source: Concordian, combining a land use
map from IDEAM 201246 and an oil palm largely depend on trade restrictions--
biophysical suitability map from Pirker et
al. 2016.47 Administrative boundaries are
without restrictions, lower cost, lower-
from GADM.48 See Technical Annex for more emissions imports are likely to flood the
information
market and moderate domestic price
increases.
Orbitas12
Section IV
Climate Transition Opportunities
One study found that
KEY TAKEAWAY
Colombian consumers may BOX 1:
Sustainable farming be willing to pay a 23% price SILVOPASTORAL
techniques like intensive FARMING EXPLAINED
silvopastoral systems protect premium for eco-friendly
against future cost increases beef; 25% for animal welfare Silvopastoral farming is an
and price volatility by agroforestry approach that
reducing emissions, increasing
friendly-beef; and 10% for integrates trees, bushes, pasture
productivity, diversifying beef labels that addressed and livestock in a mutually-
beneficial way. Depending on its
income sources, and expanding environmental impacts. execution, this technique can
market access.
provide ecosystem services,
boost dairy and beef productivity,
The relative profitability of
and diversify producers’
sustainable approaches would
incomes. In Colombia, ISPS
Embracing a “local and sustainable” be even higher under climate typically combines live fences,
beef label can counteract slowing transitions, bolstered by emissions trees, fodder crops, and plants
demand... Such an approach would cost savings, sequestration that keep soil fertile with
play into the cultural heritage of payments, and potential price cattle pastures. Compared to
ranching in Colombia while also premiums. As shown in Figure 16, pastures with no trees, ISPS
creating a premium product that average methane emissions per systems store more carbon,
produced kilogram of meat are 44% improve soil properties, enhance
justifies higher prices. One study
lower in ISPS relative to traditional environmental resilience, reduce
found that Colombian consumers runoff, and promote greater
may be willing to pay a 23% price techniques, resulting in relative
biodiversity. ISPS systems
premium for eco-friendly beef; 25% savings. In addition, ISPS’ carbon
provide more nutrient-dense
for animal welfare friendly-beef; and sequestration could generate
and diverse fodder for livestock
10% for beef labels that addressed revenues of up to $485 per hectare
which boosts meat and milk
environmental impacts. A maximum in 2040 under the Aggressive scenario. productivity. Greater fodder
price premium of 50% could be Sustainable techniques also reduce density also enables producers
achieved by addressing multiple dependence on, and thus costs to stock more cattle per hectare,
related to, fertilizer and weed killers, enabling more efficient land use.
consumer concerns.49
cutting operational costs by an Though ISPS systems allow for
estimated 70%.56 denser production by providing
… while sustainable techniques
an improved diet, they also lower
like intensive silvopastoral systems greenhouse gas emissions per
(ISPS) boost profitability and
diversify income sources. Sustainable
Under climate transitions, animal, and by providing shade
they improve cattle welfare
farming techniques range from converting to silvopasture and reduce health risks from
simple investments in fences and becomes substantially more overheating, ticks, and anxiety
dispersed trees, to highly productive from lack of concealment.53 ISPS
ISPS, which carefully combine trees, profitable farming also improves economic
pasture, and livestock (Box 1). The outcomes for producers by
increasing milk and beef
dry Caribbean region of Colombia The profitability of ISPS conversion
productivity and adding additional
is particularly promising for private substantially rises relative to sources of revenue, such as
investment in ISPS.50 Here, one ISPS traditional techniques. Figure 16 timber sales, while reducing the
conversion generated 6 times higher illustrates the relative cost, productivity, need for costly inputs such as
income and reversed net losses and price premium benefits achievable fertilizer and weed killers.
to 8 times the profit in absolute under each transition scenario for an
terms.51 This implies a 32-37% IRR illustrative dual purpose farm (based on Source: Chará, Julian, Ernesto Reyes,
and a payback period of just 3-4 years Pablo Peri, Joachim Otte, Fritz Schneider,
Figure 16’s data) that is subject to GHG
and Eduardo Arce, “Silvopastoral
on $2,000-$4,000 of initial capital emissions pricing. In the Aggressive Systems and their Contribution to
investment depending on the mix of scenario, ISPS profits per hectare are Improved Resource Use and Sustainable
trees and shrubs used.52 Profit gains are up to 8 times and 13 times higher Development Goals: Evidence from Latin
America” FAO, CIPAV, and Agri Benchmark,
driven by greater productivity (Figure 15 than conventional systems by 2030
2019, http://www.fao.org/3/ca2792en/
shows statistics for a dual-purpose and 2040, respectively. Notably, these ca2792en.pdf.
farm) and new sources of revenue results may be less relevant to large
from timber or fruit sales. scale operations that have higher
FEBRUARY 202113
Continued
Expansion Challenges Under Climate Transitions
Figure 15:
PRODUCTION AND EMISSIONS:
AVERAGE-SIZED DUAL-PURPOSE CATTLE PRODUCTION SYSTEMS57
Measure Conventional “Improved ISPS- With
Extensive Pastures” - No Trees
Pastures Trees
Animal Load (large animals 0.5 1 3
per ha)
Weight Gain (kg per animal, 0.37 0.5 0.75
per day)
Weight Gain (kg per hectare) 0.185 0.5 2.25
Average Methane Emissions 15.5 38 105
(kg per hectare per year)
Annual Meat Production - live 67.5 182.5 821.3
weight (kg per ha per year)
Methane Emissions per tonne 229.5 208.2 127.9
of meat (kg per ton)
No reduction No reduction No reduction
Fattening Days 514 380 253
Source: Broom et al 201354, using CIPAV data and Murgueitio et al 2008;55 FEDEGAN.
carrying capacities and productivity; ISPS requires technical knowledge,
for these types of operators, upfront capital, and time. Many
alternative sustainable farming ranchers in Colombia are resistant
techniques like industrial-scale to giving up the extensive ranching
intercropping may make better sense. traditions of recent generations.
Additionally, not all ranches are ideal
Smaller ranchers also struggle to
candidates for conversion to ISPS.
access capital without clear land titles.
Finally, many ranchers do not have the
Despite clear financial benefits
even in today’s market, only 2 to patience either to wait for returns or to
3 million hectares of land utilize invest more resources in their ranches
silvopastoral systems.58 The World when losses are already piling up.
Bank/GEF, FINAGRO, FEDEGAN, FAO,
and many others, have introduced
several sustainable cattle ranching Uptake of silvopasture has
pilot and scaling programs. Many of
these programs support favorable,
been slow because of lack of
subsidized, financing instruments. But capacity, cultural resistance to
uptake of these financing options, and
the adoption of silvopastoral systems
new techniques and unclear
generally, have been slow. Instituting land titles.
Orbitas0014
Continued
Expansion Challenges Under Climate Transitions
Figure 16:
ANNUAL REVENUES AND COSTS: DUAL PURPOSE ISPS VERSUS TRADITIONAL SYSTEMS
A. Historical Ambition Scenario: No ISPS Price Premium
Traditional ISPS Legend
$5,000 $5,000 GHG costs
Interest costs
$4,000 $4,000
Costs of Production
USD 2019/ha
USD 2019/ha
Revenues Sequestration
$3,000 $3,000
Revenues Timber
$2,000 $2,000 Revenues Meat
$1,000 $1,000
0 0
2020 2025 2030 2035 2040 2020 2025 2030 2035 2040
B. Modest Ambition Scenario: Up to 10% ISPS Price Premium
Traditional ISPS Legend
$5,000 $5,000 GHG costs
Interest costs
$4,000 $4,000
Costs of Production
USD 2019/ha
USD 2019/ha
Revenues Sequestration
$3,000 $3,000
Revenues Timber
$2,000 $2,000 Revenues Meat
$1,000 $1,000
0 0
2020 2025 2030 2035 2040 2020 2025 2030 2035 2040
C. Aggressive Ambition Scenario: Up to 23% Price Premium
Traditional ISPS Legend
$5,000 $5,000 GHG costs
Interest costs
$4,000 $4,000
Costs of Production
USD 2019/ha
USD 2019/ha
Revenues Sequestration
$3,000 $3,000
Revenues Timber
$2,000 $2,000 Revenues Meat
$1,000 $1,000
0 0
2020 2025 2030 2035 2040 2020 2025 2030 2035 2040
Source: Concordian, based on data from FEDEGAN, Broom et al 2013, Nelson and Durschinger 2015, Charry et al 2019, and Cardona et al. 2012. See technical annex for additional details regar-
ding calculations and data sources.
Notes:
• This chart only includes methane emissions, largely related to enteric fermentation due to data constraints.
• This chart’s intention is to give an indication of the cost differences for ISPS versus traditional systems. Not all producers will face these costs. The calculation makes several simplistic
assumptions as outlined in the Technical Annex.
• This figure’s underlying data assumes an average-sized dual purpose farm that is subject to emissions pricing, using land sector GHG prices.
Analyst Brief / DECEMBER 202015
Section V
Recommendations
Sustainable farming represents Financiers:
a clear opportunity for Colombia’s Commercial-scale investors and
beef industry to boost returns banks must tie investment and BOX 2:
while also mitigating vulnerability lending to: CORPORATE
to climate transition risks. But • Sustainable practices that allow SUSTAINABILITY
scaling up these approaches for market differentiation and STRATEGIES
requires significant upfront thus, reduce repayment losses
Colombian beef value chain
capital--up to $17.5 billion to under climate transition pathways. actors are increasingly
convert 14 million hectares by • Disclosure of climate transition recognizing the importance of
some estimates59--alongside risks and how these risks will sustainability:
sustained technical assistance be mitigated. • Grupo Nutresa--the country’s
and outreach. The Colombian largest beef processor--
Policymakers: has identified silvopastoral
government has a unique
systems as an important
opportunity to align industry ISPS and other sustainable cattle sustainability strategy.60
incentives and environmental ranching techniques provide a • Minerva--Colombia’s second
goals through carbon pricing, triple bottom line win, reducing largest beef processor--has
land use restrictions, and other Colombia’s emissions, maintaining made a public commitment to
climate regulations. livelihoods, and increasing the deforestation-free cattle in its
industry’s economic value. A strong supply chains.61,62
• Nestle--the third-largest
carbon price on a wide range of buyer of milk in Colombia--
Scaling up sustainable farming emissions-intensive sectors could has a Dairy Development Plan
provide the scale of revenues
in Colombia requires up to $17.5 necessary for policymakers to
that promotes silvopastoral
management to improve the
billion in capital investment. provide much needed technical quality and quantity of milk.63
assistance, grants, subsidized • Grupo Exito--the country’s
largest supermarket retailer--
As such, our research underscores financing, and public guarantees
has expressed interest in more
the following recommendations: that leverage further private sustainable supply chains.64
investment. • Cargill, McDonald’s, Restaurant
Brands International (the
Producers:
parent company of Burger
Large corporate producers and
buyers should immediately
The Colombian government King), the WWF, Mesa
Ganadería Sostenible
institute, and allocate capital to has a unique opportunity Colombia, and Minerva Foods,
among others, are part of
supporting, sustainable livestock to align industry incentives the Global Roundtable on
purchasing policies (see Box 2 for
context). This will require adjusting and environmental goals Sustainable Beef (GRSB).65
corporate policies, educating through carbon pricing, Nevertheless, as most of these
suppliers, and providing direct corporate strategies lack
education and technical assistance
land use restrictions, and measurable capital and/or
to poorer farmers. other climate regulations. corporate policy commitments
to sustainable practices, they
are unlikely to result in the
meaningful shifts companies
must make to effectively address
climate transition risks.
Orbitas16 Report References (1) While this report focuses only on beef, https://www.ica.gov.co/areas/pecuaria/servi- sation.pdf. (23) “Colombia Informe Sectorial the country’s dairy industry--including large cios/epidemiologia-veterinaria/censos-2016/ Standard 2019: Sector productos cárnicos companies like Alquería, Colanta, Alpina, censo-2018. Note: Updated this from the (res y cerdo),” La Nota, 2019, https://lanota. Coolechera, and Parmalat--faces similar 2017 census information. (12) IGAC [Instituto com/index.php/CONFIDENCIAS/ranking- exposure to climate transitions since much Geografico Agustin Codazzi], „Colombia, un 2018-lideres-productos-carnicos-de-colom- of the industry’s upstream production is país con una diversidad de suelos ignorada y bia.html. Note: Other downstream channels dual purpose. (2) This report, accompanying desperdiciada,” October 2019, https://igac.gov. include fast food Chains like El Corral (over Technical Guidance, and other reports within co/es/noticias/colombia-un-pais-con-una-di- 200 locations, owned by Grupo Nutresa); the Orbitas climate transition series are versidad-de-suelos-ignorada-y-desperdiciada. Presto (160 locations); McDonalds (80 loca- available at http://orbitas.finance. (3) Not all (13) Nelson, Nora and Leslie Durschinger,. tions); and smaller chains like Burger King; ISPS conversions would provide this rate of „Supporting Zero-Deforestation Cattle in The Chef Burger Company; Sierra Nevada; return. The marginal benefits of conversion Colombia,“ USAID-supported Forest Carbon, Home Burger; El Rodeo; and La Pampa. to ISPS will depend on multiple biophysical Markets and Communities Program, February (24) Food and Agriculture Organization of the factors, access and cost of capital, as well 2015, http://www.terraglobalcapital.com/sites/ United Nations, FAOSTAT Statistical Database, as the ranches baseline productivity. Data default/files/Colombia%20Zero%20Deforesa- http://www.fao.org/faostat/en/#data. (25) based on Nelson, Nora and Leslie Durschin- tion.pdf. (14) ICA [Instituto Colombiano Agro- 95% of Colombia’s livestock-related emis- ger,. „Supporting Zero-Deforestation Cattle in pecuario], “Censo Pecuario año 2020,” Censo sions inventory is related to cattle; owing to Colombia,“ USAID-supported Forest Carbon, Pecuario Nacional, 2019, https://www.ica.gov. its deforestation for pastures (45%), enteric Markets and Communities Program, Februa- co/areas/pecuaria/servicios/epidemiologia- fermentation (32%), animal urine and manure ry 2015, http://www.terraglobalcapital.com/ veterinaria/censos-2016/censo-2018. (20%), and manure management (4%). sites/default/files/Colombia%20Zero%20 (15) World Bank, “Business Case: Mainstrea- (26) IDEAM, PNUD, MADS, DNP, CANCILLERIA, Deforesation.pdf. (4) Ritchie, Hannah and Max ming Sustainable Cattle Ranching Project,” “Inventario nacional de gases de efecto inver- Roser „Meat and Dairy Production“, Our World September 2019, http://documents1.world- nadero (GEI) de Colombia,” 3ra Comunicacion In Data (based on FAOStat 2018 data), 2019, bank.org/curated/en/324381569396107123/ Nacional de Cambio Climatico, 2015, http:// https://ourworldindata.org/meat-production. pdf/Mainstreaming-Sustainable-Cattle-Ran- documentacion.ideam.gov.co/openbiblio/ (5) Regionally, Colombia is the fourth largest ching-Project-Business-Case.pdf. (16) Based bvirtual/023421/cartilla_INGEI.pdf. (27) Tapa- beef producer after Brazil, Argentina, and on interviews with cattle breeders and indus- sco, Jeimar, Jean Fracois Le Coq, Alejandro Mexico; but its beef exports are significantly try experts and data from FEDEGAN’s eco- Ruden, Juan Sebastian Rivas, and Javier Ortiz, smaller than these three countries. Source: nomic research office (https://www.fedegan. „The livestock sector in Colombia: Toward a Williams, Gary and David Anderson, “The Latin org.co/estadisticas/costos-produccion). (17) program to facilitate large-scale adoption of American Livestock Industry: Growth and Though not a focus of this report, it is worth mitigation and adaptation practices,“ Frontiers Challenges,” Choices, Agricultural and Applied noting that there exists a significant amount in Sustainable Food Systems 3 (2019): 61. Economics Association, 2019, https://www. of illegal cattle ranching and slaughtering https://www.frontiersin.org/articles/10.3389/ choicesmagazine.org/choices-magazine/sub- activities in Colombia. (18) Instituto Nacional fsufs.2019.00061/full#B12. (28) Tapasco, mitted-articles/the-latin-american-livestock- de Vigilancia de Medicamentos y Alimentos, Jeimar, Jean Fracois Le Coq, Alejandro Ru- industry-growth-and-challenges. (6) DANE „Plantas de Beneficio Animal,“ Invima, https:// den, Juan Sebastian Rivas, and Javier Ortiz, [Departamento Nacional de Estadística], “IV paginaweb.invima.gov.co/plantas-de-bene- „The livestock sector in Colombia: Toward a trimestre de 2019,” Encuesta de Sacrificio de ficio-animal.html#preguntas-frecuentes. program to facilitate large-scale adoption of Ganado, 2019, https://www.dane.gov.co/index. (19) de Wilde, Joeri, Tim Steinweg, and Matt mitigation and adaptation practices,“ Frontiers php/estadisticas-por-tema/agropecuario/ Piotrowski, „Deforestation Risk in Colombia: in Sustainable Food Systems 3 (2019): 61. encuesta-de-sacrificio-de-ganado/encuesta- Beef and Dairy Sectors May Expose Inves- https://www.frontiersin.org/articles/10.3389/ de-sacrificio-de-ganado-esag-historicos. (7) tors“, Chain Reaction Research, 2018, https:// fsufs.2019.00061/full#B12. (29) Tapasco, TRASE finance (8) United Nations, UN Com- chainreactionresearch.com/wp-content/up- Jeimar, Jean Fracois Le Coq, Alejandro Ru- trade Database, https://comtrade.un.org/data/. loads/2018/12/Deforestation-Colombia-1.pdf. den, Juan Sebastian Rivas, and Javier Ortiz, Note: These figures are from both 1. Meat of (20) Instituto Nacional de Vigilancia de „The livestock sector in Colombia: Toward a bovine animals; fresh or chilled and 2. Meat Medicamentos y Alimentos, „Plantas de program to facilitate large-scale adoption of of bovine animals; frozen (9) ICA [Instituto Beneficio Animal,“ Invima, https://paginaweb. mitigation and adaptation practices,“ Frontiers Colombiano Agropecuario], “Censo Pecuario invima.gov.co/plantas-de-beneficio-animal. in Sustainable Food Systems 3 (2019): 61. año 2020,” Censo Pecuario Nacional, 2019, html#preguntas-frecuentes. (21) Nelson, Nora https://www.frontiersin.org/articles/10.3389/ https://www.ica.gov.co/areas/pecuaria/servi- and Leslie Durschinger,. „Supporting Zero-De- fsufs.2019.00061/full#B12. (30) FEDEGAN [Fe- cios/epidemiologia-veterinaria/censos-2016/ forestation Cattle in Colombia,“ USAID-sup- deracion Colombiana de Ganaderos]. “Consu- censo-2018. Note: Updated this from the 2017 ported Forest Carbon, Markets and Commu- mo aparente per capita anual (origen formal),” census information. (10) DANE [Departamen- nities Program, February 2015, http://www. 2019, https://www.fedegan.org.co/estadisticas/ to Nacional de Estadística], “Censo Nacional terraglobalcapital.com/sites/default/files/ consumo-0. (31) https://www.nasdaq.com/ Agropecuario 2014” Bogotá: Departamento Colombia%20Zero%20Deforesation.pdf. articles/exclusive-european-investors-threa- Administrativo Nacional de Estadística, 2014, (22) Nelson, Nora and Leslie Durschinger,. ten-brazil-divestment-over-deforestati- https://www.dane.gov.co/index.php/esta- „Supporting Zero-Deforestation Cattle in on-2020-06-19 (32) Please visit http://orbitas. disticas-por-tema/agropecuario/censo-na- Colombia,“ USAID-supported Forest Carbon, finance for detailed information regarding our cional-agropecuario-2014.(11) ICA [Instituto Markets and Communities Program, February detailed global scenario modeling results, our Colombiano Agropecuario], “Censo Pecuario 2015, http://www.terraglobalcapital.com/sites/ overall methodology, and a summary of all of año 2020,” Censo Pecuario Nacional, 2019, default/files/Colombia%20Zero%20Defore- our industry reports. FEBRUARY 2021
17
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