April 6, 2018
A frustrated Brazilian swine sector
The domestic market is recovering but can it take advantage of America's trade war with China? Will quality control issues prevent a return to yesteryear's export-driven growth?
By Eric J. Brooks
An eFeedLink Hot Topic
Brazil's swine sector can't seem to shake off its decades-spanning slump. The country's beef, chicken, corn and soybeans dominate world markets but pork remains a weak laggard.
Superficially, the industry is having one of its better years. Domestic hog prices and rearing returns are healthy. After years of recessionary condition, domestic pork consumption is rising by 2.5% for a second consecutive year, to 3.014 million tonnes.
Two years of faster than expected consumption growth whittled down inventories. Hence, after expanding by only 0.7% in 2016 (to 3.725 million tonnes), a tighter balance between supply and demand is enabling this year's pork output to increase 2.3% (to 3.81 million tonnes), nearly keeping pace with consumption.
But this is a far cry from growth rates once taken for granted. From 2000 through 2007, production jumped at a 5.8% annual rate, going from two million tonnes to approximately three million tonnes seven years later. Since 2008, output has risen only 2.2% annually, less than half the previous pace.
Per capita consumption has grown impressively but is decelerating. Based on USDA statistics, after rising from 10kg in 2000 to 13kg in 2010, it only inched up to 14.4kg over the past eight years. That reflects how from 2010 through 2015, pork consumption inched up at a 1.9% pace before recovering over the last three years. This reflects the fact Brazil endured a recessionary decade, and there remains scope for another 10kg to 20kg increase in per capita pork consumption.
The good news is that consumption growth has picked up in recent years and held up relatively well under the circumstances. Hence, after rising at a 3.1% annual rate in the seven years up to 2007, pork consumption will have increased by 2.7% annually from 2007 through 2018 inclusive.
Brazilian pork's disappointing decade can be traced back to its trade fundamentals. Its share of the world pork market has fallen from 15.3% in 2005 to 9.7% this year.
Since being temporarily banned by the EU for food safety reasons during the late 2000s, Brazilian pork's trade fortune has been dogged by one setback after another. Following the EU ban, a surging real during the late 2000s and early 2010s put it at cost a disadvantage to higher quality US pork in many Asian markets.
Brazil made up for the loss of EU customers and slow Asian market penetration by aggressively boosting its exports to Russia from the late 2000s through 2011. That year, Russia cited sanitation and food safety reasons for temporarily banning almost all Brazilian pork, though its real reason was to protect domestic hog farmers. Coinciding with a similar protectionist ban from Ukraine's market, that kept Brazil's pork exports below their 2005 level through to 2015.
The Brazilian swine sector's fortunes finally started to turn around in the second half of 2014 –or so it seemed. Eager to avoid high domestic pork prices after banning US and EU pork, Russia allowed Brazilian pork back into its domestic market. Coinciding with Brazil's economic crisis and a 50% devaluation of its currency, Russia immediately became Brazilian pork's best customer.
Russia's blessing was timely in another way: Around this time, the Euro's fall in value caused exports of Spanish, Dutch and Danish pork to take Asian market share from both America and Brazil. Fortunately for Brazil, the re-opening of Russia's market more than compensated for this.
From a USDA estimated 126,477 tonnes in 2012, shipments to Russia jumped to 186,000 tonnes in 2014 and 236,527 tonnes in 2015.
China also approved a large number of Brazilian plants for export during this time, enabling its Asian export volumes to rise. From an immaterial 842 tonnes in 2014 and 5,225 tonnes in 2015, Brazilian pork exports to China reached 87,000 tonnes in 2016. From 73,000 tonnes in 2014, pork exports to China and Hong Kong jumped to 95,000 tonnes in 2015 and 203,375 tonnes in 2016. Going into 2017, 53% of Brazilian pork exports were being shipped to either Russia or China/Hong Kong.
With Russia's own economy hurting, exports to that country were flat near 236,000 tonnes in 2016. Last year, with Russia's economy reviving, it was hoped exports would reach 300,000 tonnes for 2017 and possibly 330,000 tonnes or more for 2018. It was also hoped that 2017 exports to China and Hong Kong could approach 300,000 tonnes –but all this was not to be.
Even though Brazil agreed to raise ractopamine-free pigs for its Russian pork exports, customs inspectors found traces of this banned additive in early Q4 2017. Russia temporarily banned all Brazilian exports, keeping its 2017 shipments to that country at 252,000 tonnes.
Earlier that year, the exposure of a scandal by which Brazilian inspectors were bribed into allowing tainted meat to be exported caused its pork to be temporarily banned from China. As a result, instead of rising above 250,000 tonnes, 2017 pork shipments to China and Hong Kong slumped back to 150,000 tonnes.
With over half of exports now going to either China or Russia, Brazil's pork trade cannot enjoy sustained growth without secure access to these fast-growing markets. Consequently, from 832,000 tonnes in 2016, exports slumped to 786,000 tonnes last year –just 3% higher than their 2005 secular peak of 761,000 tonnes.
Going forward, the USDA reports that while Russia has conditionally re-opened its market to Brazilian pork "After a technical visit of their veterinarians to Brazil… the Russian veterinary service wants to reduce the number of Brazilian slaughter plants that export to Russia which would have an impact on exports this year."
The good news is that with China slapping a 25% import tax on US pork, Brazil's looks set to exceed the USDA projected 180,000 tonnes projected to be shipped to China and Hong Kong. The USDA 800,000 tonne export forecast was made prior to the imposition of this import duty. Barring any further disruptions to Brazil's pork trade, the partial replacement of US pork imports with Brazilian supplies could push exports into the 850,000 tonne to 900,000 tonne range for the first time.
With a trade war between America and China underway, short-term uncertainty makes it difficult to project with confidence. China could opt to import more EU pork and only modestly increase its Brazilian purchases.
Over the longer run, two problems remain: First, early 2017's scandal of bribing customs officials to certify tainted pork and subsequent discovery of ractopamine in exports to Russia are large setbacks. Clearly, even twelve years after an EU ban brought it to the world's attention, quality control problems continue to cast a shadow over Brazilian pork's international reputation.
Second, with its economy recovering, Brazil's currency is set to rise in years to come. In a world where US, Canadian and EU pork all have reputations for higher quality, that could erode Brazilian pork's cost advantage. Moreover, with 80% of Brazilian pork output accounted for by integrators, large, easy-to-achieve cost savings from introducing scale economies are exhausted.
With these circumstances, boxing in Brazil's prospects and US pork facing a Chinese import tariff amid inelastic Canadian supplies, North and South America are poised to cede market share to European producers.
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