The government's R$1.3 billion bill related to Super El Niño and a map of who wins and loses in the market.

The federal government announced on Wednesday, July 29th, the release of R$ 1.3 billion from the budget specifically to combat the potential effects of El Niño – a climatic phenomenon marked by the abnormal warming of the waters of the Equatorial Pacific, which is expected to hit the country hard in the second half of the year.

The prospect of a "super El Niño," an even stronger version of the climate phenomenon, predicted for September, has heightened government concern about reduced rainfall in parts of the North, Northeast, and Central-West regions, and the increased risk of forest fires in the Amazon, Cerrado, and Caatinga biomes.

Most of the funds, around R$ 1 billion, will be allocated to actions in the areas of food supply, food security, health, and hydrological monitoring.

The remaining R$ 337 million was already known since last week and corresponds to the extraordinary credit opened by provisional measure (MP) for the Ministry of the Environment to finance actions to prevent and combat forest fires, in addition to strengthening environmental oversight.

A report published earlier this week by NeoFeed showed that Brazil still lacks consistent long-term public policies to address extreme weather events , such as El Niño.

A report released by the Federal Audit Court (TCU), cited in the news article, shows that, since 2012, the federal government has spent about three times more on response and recovery actions – after floods and landslides, equivalent to R$ 21.5 billion – than on measures to prevent them (R$ 6.8 billion).

Adding up all the budgets, the current federal administration allocates approximately R$ 20 billion per year to actions related to climate change. However, a World Bank report released in February states that annual losses from natural disasters in Brazil alone total R$ 19.5 billion.

In announcing the release of R$ 1.3 billion, the Minister of the Civil House, Miriam Belchior, said that the government will have to buy 301,000 tons of rice and 180,000 tons of corn to cope with a possible shortage of these products.

"With these rains, there is a risk of crop failure in Rio Grande do Sul," the minister stated. Furthermore, the government has brought forward the distribution of 160,000 basic food baskets and increased the total number of baskets destined for indigenous peoples, quilombola communities, riverside communities, and other vulnerable groups to 350,000.

In a comprehensive report released on Wednesday, the 29th, in which it assesses the potential consequences of El Niño, XP warns that food inflation should accelerate from the fourth quarter onwards, as climate disruptions affect agricultural production.

On the economic activity side, the impact on growth should be more limited. According to XP, higher food prices may delay the disinflation process and keep monetary conditions tighter for longer.

Geographic exposure

The 35-page investment bank report analyzes the effects of El Niño on various sectors, such as agriculture, food & beverages, utilities , transportation, and retail. All are exposed, creating both risks and investment opportunities, depending on geographic exposure and business model.

In the public utilities sector, for example, the bank sees potentially positive effects: "Above-average rainfall over the Southern/Paraná basin replenishes Itaipu, and the reservoirs in the Southeast and Midwest, with about 70% of their storage capacity, tend to put downward pressure on the PLD," says the report, referring to the Price of Settlement of Differences, the price of energy in the short-term market of the Brazilian electricity sector.

On the other hand, the study warns that the implications for food inflation in Brazil are significant, but should not be overestimated.

In this respect, XP analysts make two reservations. Firstly, the magnitude of the impact will depend on macroeconomic boundary conditions — the trajectory of the exchange rate, diesel and fertilizer prices, as well as the domestic economic activity cycle.

"In past episodes, these factors have often dominated the climate effect; if the exchange rate remains at its current level, the net impact on food may be significantly less than simply extrapolating from climate statistics," the report says.

Another caveat concerns the price reversal predicted by the models after the El Niño peak, which, according to the study, rarely materializes cleanly in the aggregate: "In 3 out of 4 historical episodes, food inflation at home continued to rise in the quarters following the El Niño peak."

On the economic activity side, El Niño tends to impact the GDP results of the agricultural sector. According to XP analysts, the expectation of high intensity of the climatic phenomenon should reduce the productivity of Brazil's main crops – an estimate in line with the federal government's forecast.

"According to our calculations, the average productivity of agricultural crops could decline by about 3% compared to a scenario without climate anomalies," says the study. "As a result, the GDP of the agricultural sector would contract by between 1% and 2% in 2027," estimates XP.

Food inflation, incidentally, is expected to have the most direct impact of El Niño on retail. "Smaller harvests should reduce supply, while more expensive inputs should put even more pressure on agricultural commodities, with the fastest pass-through appearing in fresh produce and items more exposed to fertilizers and oil, such as meats, dairy products, baked goods, and edible oils," says the study.

"A milder winter in the South, on the other hand, favors clothing, while the more humid and warm South/Southeast increases the demand for pharmacies driven by dengue fever," the report continues, referring to the retail sector.

In the transportation sector, XP analysts see Rumo and Hidrovias do Brasil as the companies most exposed to the effects related to El Niño, given their significant exposure to grain transportation and the potential implications for the 2026/27 soybean and corn harvests.

For Hidrovias do Brasil, El Niño could have negative implications. "In the Northern Operations, the lower rainfall volume could affect navigation conditions on the Tapajós River in the fourth quarter, potentially putting pressure on volumes and margins," says an excerpt from the report.

In the Southern Operations, the report continues, recent El Niño years have shown lower drafts in the Paraguay-Paraná waterway: "This creates potential navigability risks for HBSA's iron ore operations, which are the main exposure in the region."

For Rumo, the expectation is the opposite. "We see the company as a likely beneficiary, since drier conditions in the North could restrict one of its main competing grain export corridors," the study predicts. "This could support a better price environment, due to lower logistical capacity and higher volumes, especially with the ramp-up of its first terminal in Lucas do Rio Verde."