May 28, 2014
Brazilian beef: Mature, rebounding, with an overhanging productivity question
Exports are near record levels and poised to overtake India within a few years but boosting cattle productivity is essential for long-term success.
By Eric J. BROOKS
An eFeedLink Hop Topic
After seeing cattle inventories, beef production and exports rise by 27%, 38% and 731% respectively from 1995 to 2010, the years since the EU's late 2000s on its beef exports has seen Brazil adjust to its role as a mature, but trade constrained beef exporter.
Following an FMD outbreak, the EU's trade ban blocked it from its largest export market at the time. Coinciding with a global recession, a high currency value, rising Indian beef exports and the return of America to the world market, the country's beef trade endured a succession of difficult years. Beef export shipments bottomed out at 1.34 million tonnes in 2011, 38.9% below their all-time high.
The beef export leader of the mid 2000s has yet to recover its top ranking, or even transcend the record 2.19 million it exported in 2007. Nevertheless, after being banned from the EU in the late 2000ss and facing competition from India, things are looking up, but not without a fair share of both supply and demand side challenges.
After bottoming out in 2011, the last two years has seen feed prices fall sharply and beef prices rise strongly. April cattle contracts were at approximately BRL 133/15kg, approximately 23% higher than the BRL108/15kg they were priced in October.
Over the past two years, improving profit margins stimulated cattle inventories to increase. They were up 2.9%, from 197.55 million head in 2012 to 203.27 million head in 2013. Another 2.7% rise in cattle numbers was expected this year but with late 2013 and early 2014's dry spell constraining pastureland productivity, the USDA scaled this back to a 2.3% increase and 2014 inventories of 207.96 million head.
Output rising, diversified export rebound
Helped by rising cattle productivity, this led to a 4% rise in beef production to 9.675 million tonnes and a 21.3% rise in exports in 2013, to 1.85 million tonnes. Booming exports were mostly due to the Brazilian real's devaluation coinciding with historically low US cattle numbers, which made the latter unable to take advantage of the world market's China driven increase in demand for beef imports.
For 2014, this year's smaller rise in cattle numbers will make production increase by only 2.5%, to 9.92 million tonnes. But with the Brazilian real 17% lower in value than in mid 2013 and the stalled domestic economy only consuming 1.8% more beef, exports are on track to rise a healthy but slower 9.8% this year. At 2.03 million tonnes, they will still be a shade below the 2.19 million tonnes of beef it shipped back in 2007.
In 2007, 64% or approximately 1.38 million of the 2.19 million tonnes of beef exported by Brazil went to the EU. When the EU banned the beef of most Brazilian meat processors, the impact was devastating.
With exports to the EU plunging 57% to barely 600,000 tonnes two years later, the world economy was coming out of a recession and the growth of other markets could not possibly make up the difference. Since then, Brazil has endured bans of varying length on its beef from Russia and other major markets, such that it has taken the industry six long years to regain its previous export volume.
Moreover, its export base is now far more secure via diversification: From 64% of exports in 2007, in 2013, the EU now only accounted for 119,640 tonnes or 9.3% of total shipments. Russia, its largest customer, bought 303,615 tonnes and accounted for 23.5% of its exports. Its second to fifth largest export destinations all bought anywhere from 119,000 to 217,367 tonnes, none of them making up more than 16.8% of total exports.
Despite some market losses in Southeast Asia to cheaper Indian beef, this means that any one country's export ban cannot devastate Brazil's beef cattle sector the way the EU did five years ago. It also means that fast growing markets ranging from Russia to Hong Kong are becoming major export destinations: The only large market that remains closed to Brazilian beef is China, though quite a bit gets re-exported to that country via Hong Kong.
Regional breeds, production models
Much like its southern hemisphere competitor Australia, Brazilian beef cattle farming is segmented by regions and species. In the country's tropical northern and central western states, heat-resistant Bos Indicus type cattle, mostly of the Zebu Nellore breed dominate. Meat from this region and species is pastureland grass-fed and mostly consumed domestically, with just a small amount exported to the high-end, niche world market segment for omega 3 fat-enriched "grass-fed beef."
By comparison, southern Brazilian states such as Santa Caterina, Paraná or Rio Grande del Sul have cooler temperatures. Sharing this part of the country's land resources with dairy farms, Bos Taurus species such as Aberdeen Angus and Red Hereford Angus the main breeds. With their higher meat quality and greater reproductive efficiency, meat from these breeds dominate the high end of Brazil's domestic market and make up most of the country's beef exports.
The differences between north and south also extend to the cattle sector's business models and feeding methods. Unlike America where most pastureland is public, in Brazil, pastureland is privately owned. Although individual landholdings are larger in the north, the sector is far more consolidated and technologically advanced in Brazil's southern states.
Southern Brazil is where most of the country's cattle feedlots are based. Currently responsible for approximately 10% of Brazilian beef production, the role of feedlots is destined to increase. High plant crop prices are causing acres to be shifted from cattle pastureland to soy cultivation in Brazil's north and to oranges and sugarcane in the south.
With Brazil's pastureland acreage, greater cattle productivity will have to be achieved via two means. First, the number of cattle cultivated per acre and the proportion finished in feedlots will have to rise. The combination of falling feed prices and competition from plant crops is already causing the latter to happen, with the USDA projecting that the number of cattle raised in feedlots will rise by 10% in 2014.
Even so, the feedlot model, while it can grow leading western breeds, has cost limitations, while the northern regions' pastureland based Nellore cattle produce significantly less meat per animal, and of lower quality.
Brazil has 135% more head of cattle than the United States but produces 13% less beef than US farmers. Boosting productivity is obviously critical to Brazil reaching its long-term potential as a beef exporter, especially when US cattle inventories finally recover.
With Brazilian farm wages rising far faster than those of the US, higher cattle productivity will also be needed to compete against America's more efficient beef exporters when its currency recovers. Everyone knows that this will require a merging of the meat quality genetics of southern breeds like Angus with the heat resistance of northern Nellore cattle.
With per capita beef consumption above 39kg, future domestic consumption increases will probably only track its population growth of approximately 2%. Although it is now a large, mature supplier, with the world market showing its greatest growth potential in decades, Brazil's is poised overtake India as the leading beef exporter within one or two years. Indeed, if China's market is ever opened to Brazil's beef, that would create a major competitive threat to leading exporters such as Australia and Canada.
Nevertheless, beyond this bright medium term forecast, Brazilian beef's ability to compete in global markets will depend on its success on boosting the animal performance of its plentiful, but less efficient northern beef cattle herds.
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