April 24, 2015
Dented consumption, trade prospects for Brazilian beef
Recession, flat consumption and dimming trade forecast overwhelm a cheapening currency's cost advantages.
By Eric J. BROOKS
An eFeedLink Hot Topic
Once a booming BRIC economy, worsening economic conditions are forcing Brazil's beef cattle farmers to become export oriented. The only problem is that exports never equaled their late 2000s peak, an idyllic period that ended when the EU, citing sanitary protocol problems, banned Brazil's beef from its market. Moreover, as was the case with pork exports (which also never exceeded their late 2000s peak), efforts at trade diversification have been upended by everything from trade disputes to falling oil prices.
Done in by the domestic market
Another emerging problem for Brazil is its once buoyant domestic market. Unlike China where 6% economic growth is considered a bad year, this year will see Brazil's economy either stay flat or contract. The recession is coinciding with high levels of consumer indebtedness, increased taxation rates and higher unemployment, all of which are resulting in falling personal incomes. As a result, instead of rising a USDA estimated 2% to 8.06 million tonnes, domestic beef consumption is now expected to stay flat at 7.9 million tonnes. Unlike those days when per capita beef consumption was low and economic growth was high, this will be the third consecutive year where domestic consumption stays with 20,000 tonnes of 7.9 million tonnes.
With 80% of its beef consumed in Brazil itself, at least the trade picture is brighter, though not as much as was originally anticipated. With its falling currency cheapening Brazilian beef by 34% relative to it US competition, 31% relative to Indian beef, and by 10% less against Australian and Canadian supplies, there are certainly market share gains to be made. The USDA initially forecasted Brazilian beef exports to rise a whopping 17.1%, to 2.235 million tonnes.
Exports less than was expected
Moreover, Russia's boycotting of US and European meat should have been an export bonanza for Brazil, and in some ways, it was. The Russian government quickly approved over one hundred Brazilian beef processing plants for export, including some that supply highly processed, value added products. A third of Brazil's 2014 beef exports, amounting to some 600,000 tonnes, were absorbed by Russia alone.
Unfortunately, Russia's late 2014 economic collapse and steep currency devaluation greatly diminished its capacity to import beef. Russian 2014 beef imports of 919,000 tonnes were initially scaled back to 825,000 tonnes for 2015. A late year oil price crash and Russia's subsequent economic implosion forced this forecast's downward revision to 750,000 tonnes.
The bad news is that Russia's economic disaster has reduced Brazilian beef exports by approximately 220,000 tonnes or a tenth. The good news is that with Brazil's currency-cheapened beef gaining market share at India, Australia and America's expense, exports should still rise by a far more subdued, but still healthy 5%, from 1.909 to 2.005 million tonnes.
Export potential in MENA, Southeast Asia
Moreover, while Russia may perform even worse than expected, the trade outlook also carries considerable upside potential, particularly over the long term. In the second half of last year, Brazil resolved a trade spat that had caused its beef to be banned from China in 2012.
Despite the lifting of China's trade ban, without a meat processing sanitation protocol, beef exports have not yet resumed. This however, may soon change. Describing negotiations as "well advanced", the USDA expects that by sometime in May, China will approve a higher number of beef processing plants approved for export than it did before the ban was imposed three years ago.
Similarly, Malaysia and Singapore are also expected to expand the number of Brazilian beef processing plants approved for export by the end of this year. After being banned on account of a BSE outbreak, efforts are being made for a resumption of shipments to Japan and Saudi Arabia. That would follow the recent re-allowance of its beef into Iraq and South Africa.
More than before, fast growing Middle Eastern and North African (MENA) markets represent an exceptional opportunity for Brazil's beef exporters. With the real falling against the rupee by a third since August, Brazilian beef now undercuts its Indian competition in many MENA markets.
With its beef suddenly costing a lot less, Brazil also has potential to compete against India in Southeast Asia. Towards this end, Brazil is currently negotiating market access agreements with Thailand, Myanmar, Indonesia and Taiwan.
On one hand, by making its taste indistinguishable from buffalo meat, long-stewing dishes Southeast Asian dishes such as curries and rendangs commoditize Brazilian beef. On the other hand, for the first time ever, Brazilian beef can now undercut its Indian competition's price.
With the drought-shriveled US and Australian herds at least a few years away from ramping up output, Brazil has about three years to capture much of China, MENA and Southeast Asia's growing demand for red meat.
Unfortunately, with its domestic market now growing more slowly than that of the United States and
exports accounting for only a fifth of output, 2015 will see demand for Brazilian beef will increase by about 0.1%. As the accompanying chart shows, that will make it a third consecutive year that output is rising faster than consumption and exports.
Consequently, unless Brazil's economy shows greater resilience than has been anticipated, the USDA's projected 1% output increase to 9.82 million tonnes could turn out to be too optimistic.
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