10 October 2011

8 minute read

Executive Summary

The outlook for the Brazilian economy in 2012 is for continued economic growth, but at a lower rate than previous years. Business in general is suffering with one of the highest interest rates in the world, valuation of the currency and rising inflation. However, domestic demand remains strong due to higher consumer purchasing power, mostly from the new Brazilian middle-class, which is supporting consumption for goods in general, including animal proteins. Despite the uncertainties regarding the world economy, mostly due to the so-called rich world struggle with the debt crisis, Brazilian beef exporters are optimistic that world demand for beef will increase in 2012. On the other side, pork exporters are not optimistic about exports next year due to the uncertainties regarding the Russian market and are counting on firm domestic demand and stable feed costs to maintain their profitability.

Post revised production and export estimates for Brazilian beef and pork for 2011 to reflect new estimates made by trade sources. These estimates call for a drop in beef production and a small increase in pork production than those previously estimated. In general, domestic demand for both meats is supporting the industry this year, since exports for beef and pork are estimated to decline this year.

Cattle

Production

After several years of intense cow culling, the Brazilian beef industry is still facing lower availability of finished cattle for slaughter, as currently reflect by the high price of finished cattle at R$ 100 (US$ 64) per arroba (33 pounds). The outlook for 2012 calls for an increase of 3 per cent in cattle inventories mostly due to government financing support for cattle herd rebuilding, genetic improvements and pasture improvement.

The recently announced Crop and Livestock Plan for the 2011-12 marketing year (Oct 1, 2011-September 30, 2012) provides a total of R$ 107.2 billion (US$ 67 billion) at subsidized interest rates allocated for commercial and export-oriented agriculture, including R$ 750,000 (US$ 480,000), per cattle producer for pasture renovation and herd rebuilding through genetic improvement. The programme requires a five-year payment with 18 months grace period. In addition, large beef packers are also increasing financing for their cattle suppliers, similar to the chicken and pork production integration system. In addition, cattle producers can benefit from the Low Carbon Agriculture programme (ABC), with subsidized interest rate of 5.5 per cent, per year, to implement the so-called integration of crop-livestock-forest programme (iLPF). Although at its initial stage, this programme offers a sustainable opportunity for renovation of poor pastures in Brazil, estimated at 90 million hectares, with a significant long term impact on beef production.

Trade

The elimination of a special dollar rate for imports of foods and agricultural products in Venezuela at the end of 2010 made Brazilian cattle less competitive in that market. In addition, continued problems with delinquent payments for Brazilian cattle producers combined with the high price of Brazilian cattle will likely contribute to a decline of more than 50 per cent of Brazilian cattle exports to Venezuela in 2011. However, cattle traders in Brazil expect a rebound in cattle exports to Venezuela in 2012 as local producers are unable to supply the local market despite protectionist measures from the Government of Venezuela to preserve local producers from competition. The state of Para in the Amazon region is the main source of live cattle for exports, mostly to Venezuela. Brazilian beef packers and exporters continue to criticize exports of live cattle specially now during a period of lower availability of cattle for slaughter. The hides and skins industry also supports beef exporters’ complaints about live cattle exports.

Beef and Veal

Production

Post forecasts beef production to increase at around 2 per cent in 2012 due to the following factors: a) Higher cattle availability due to investments in herd rebuilding and feedlot; b) an increase of five per cent in beef exports, and b) continued growth in domestic demand supported by higher consumer purchasing power. Mega beef processors in Brazil are implementing "partnerships" with select groups of cattle growers to increase feedlot, thus supplying their needs for finished cattle along the year and avoiding shortfalls due to the "dry season" period, mostly in the center-west regions of the country when pastures are not sufficient to increase cattle weight.

Post revised downward its 2011 beef production because of a major drop in beef exports, combined with a shortage of finished cattle for slaughter. However, increased domestic consumption helped the sector from a further decline in production, as consumer purchasing power remained constant.

Consumption

Beef consumption is estimated to increase in 2012 because of the rising domestic demand for animal proteins. Domestic demand for beef is supported by an estimated 33 million people who since 2003 have risen to the ranks of the so-called “new middle class” or above. Today, 105 million Brazilians out of a total population of 195 million are categorized as members of this group.

Trade

Post forecasts beef exports to rebound by 5 per cent in 2012 as Brazilian beef exporters estimated a recovery in their major markets, such as Russia, Egypt, Hong Kong and Iran. Brazilian exporters believe that consumers in these countries will not suffer from the impact of the debt crisis in Europe and the United States and will be able to maintain their purchasing power. They also expect a continued recovery, although at a slower pace, in the European beef market as more Brazilian cattle farms are enrolled in its traceability programme. Currently, the total number of farms enrolled is estimated at 2,200 as compared to 15,500 in 2008, according to a recent release by the trade association. In addition, they also expect a recovery in processed beef exports to the United States after a major decline in 2010-11 because of the Ivermectin residue issue.

Post revised beef exports in 2011 to reflect new estimates made by our trade sources. The drop in 2011 beef exports is due to several factors, such as: the political crisis in the middle-east countries, particularly Egypt, the valuation of the Brazilian currency, and more recently the Russian ban, although beef was the least affected compared to pork and poultry. Trade sources also mentioned the impact of the Ivermectin issue with the United States, which had a long term effect by reducing exports of processed beef by more than 50 per cent. The value of exports in 2011, however, is expected to increase by over 30 per cent despite the complaints valuation of the Brazilian currency which affects export profitability.

Swine

Production

Post forecasts pig production to increase by only one per cent in 2012 supported mostly by the demand from the domestic market. Our forecast reflects current concerns of swine producers with the uncertainties regarding the Russian market. The price of live hogs already declined by an average 20 per cent in August 2011 and several producers are being forced out of business due to their higher concentration of slaughter destined to the Russian market.

Swine producers are also asking the government in the most important producing states to exempt their energy costs from the state sales tax as a mean to alleviate their current problems derived from the halt of exports to the Russian market and higher costs of inputs this year. Swine producers also have requested the government to extend their debts regarding their loans for production credit during 2010/2011.

Pork

Production

Post forecasts pork production to increase by two per cent in 2012. The increase in production is mostly supported by domestic demand for pork, since there is a current pessimism among pork exporters that exports will continue to drop next year. According to a recent release by the trade association, the sector is concerned about the negative impact of the current Russia delisting of Brazilian plants in the most important producing states of South’s Brazil. According to the association, contrary to beef and poultry, the pork industry was mostly affected by the Russian delisting of Brazilian processors. Their expectations are that the Russians will drag on with the relisting of plants for an undetermined period of time. The pork council continues with a strong public campaign to increase consumption of pork in the domestic market and believes that the price of major pork cuts will be more competitive next year in relation to other types of meats.

Consumption

The Brazilian Association of Swine Producers (ABCS) entered into an agreement with the number one supermarket chain in Brazil to promote at the national level the largest marketing campaign ever conducted in Brazil to increase consumption of fresh pork. The new marketing campaign follows the success of the 2008 pilot campaign "Swine Meat: A New Look", which contributed to increase the consumption of fresh pork in Brazil as compared to a high concentration of consumption among processed products.

As of August 2011, retail pork prices are competitive with beef because of lower pork exports in July due to the Russian ban, which helps to foster pork consumption among the new Brazilian middle class.

Trade

Post forecasts pork exports to drop by one per cent in 2012. Our forecast is based on the recent increase of Brazilian plant delisted by the Russians and the difficulties the Brazilian government have to resolve the issue. In addition, there are some uncertainties also in other markets, such as Argentina, as producers from that country stopped access of the Brazilian product in the border, although this act did not prevent an increase in imports from Brazil in 2011. However, exporters in Brazil are concerned with an election year in Argentina in 2012 and expect constraints ahead.

Brazilian pork exports in 2011 are estimated to decline by 6 per cent due to the severity of the delisting of Brazilian pork slaughter plants by Russian officials.

Further Reading

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