Weathering the Storm: how supply chains adapt to extreme climate events

This paper examines the causal impact of extreme climate events—intense rains, floods, and flash floods—on the supply chain. We map the Brazilian supply network in a unique and comprehensive way using proprietary granular data on over 1.7 billion inter-firm payments composed of fast payments (Pix), boletos (invoices), and wire transfers (TEDs). Our analysis reveals that supply shocks follow extreme climate events, with outside-the-affected-area customers reducing payments to affected suppliers by up to 8% in the immediate aftermath, compared to unaffected ones within the same industry. We document significant heterogeneities across sectors, with some affected suppliers in agriculture experiencing reductions in payments nearing 20%, five times greater than the average. Leveraging granular data on borrower-lender credit relationships from banking institutions in Brazil, we find affected firms experience increased indebtedness post-disaster, especially in credit types related to immediate liquidity needs. We observe a remarkable ability of the supply chain to adapt to these shocks: outsidethe- affected-area firms are often able to replace affected partners with low friction. However, some sectors, such as construction, face substantial difficulties. In this industry, consumers exhibit a substitution friction of approximately 10 p.p. This demonstrates how indirect effects can amplify the direct impacts of extreme climate events on the supply chain. While overall resilience is crucial for maintaining operability, directly affected firms are likely to experience a permanent loss of market share as unaffected firm counterparts shift their economic transactions away from them, leading to harmful consequences in areas affected by extreme climate events. Our research may support policymakers in designing strategies to aid affected firms in restoring market share and mitigating frictions in sectors less prone to partner replacement.