October 7, 2011
Is Brazilian beef's long slump over?
Recessions, trade barriers, political coups and an expensive currency have kept Brazil's beef output and exports flat for nearly five years. While a recovery is finally in sight, the industry is becoming more domestically oriented.
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by Eric J. BROOKS
Hampered by a high currency and a sharp contraction in key export markets, Brazil's beef industry is having a relatively disappointing year. At 9.03 million tonnes, the USDA sees Brazil's beef and veal production slipping by 0.9% from 2010's total and staying 2.9% below its 2007 peak of 9.3 million tonnes.
Going forward, next year's expected 2% output increase would be fine for fully developed beef producers such as America or Australia but is relatively weak for an emerging market export powerhouse such as Brazil. The reason for this deceleration lies not in Brazil's relatively buoyant domestic consumption but in its beef industry's foreign clients.
As the accompanying chart shows, domestic demand remains strong but overall production has flattened out. This is because exports have fallen for four consecutive years, with this year's expected 1.37 million tonnes of shipments down by 37.4% from its 2007 peak of 2.19 million tonnes. Moreover, this tailing off of foreign sales occurred amid a steady surge in US beef exports, such that America is close to unseating Brazil from its position as the global number one beef exporter.
MENA takes over from EU, then disappoints
This four-year slump started in 2007-08, when an EU recession coincided with a full EU ban on Brazilian beef exports, due to food and farm safety reasons. By the time the ban was lifted, a global recession had taken hold, causing both EU and overall shipments to continue slumping.
Recovery was made slower by the fact that individual Brazilian farms had to reapply for EU export accreditation. However, this EU ban's gradual lifting also coincided with once-banned US beef's re-entry into key EU and Asian markets such as Korea and Japan. While the number of farms qualified to export Brazil's beef to the EU is now high, by the time the ban was lifted, slack EU beef demand, the rising Brazilian real and lower cost US beef had taken its toll.
Brazil responded to this situation by diverting a large proportion of its beef exports to the Middle East North Africa (MENA) region. Even without its EU market problems, this shift was not totally unexpected. Many MENA countries are oil-rich, overpopulated to be self-sufficient in beef and suffer from tense political relations with top exporters such as the United States. In such a situation, Brazilian beef exports make for a perfect fit. Beef exports to Iran, for example, have risen by 300 times over the past ten years.
Indeed, rapid growth in MENA markets took up much of the slack created by Brazilian beef exports to the European Union. By 2010, with the EU gradually recovering and MENA beef demand never impacted by the global recession, it looked like Brazil's beef export outlook was finally improving -And it was at that time that Middle Eastern and North African countries started enduring a year and a half of successive 'Arab Spring' style political coups.
Accounting for 37.2% of Brazil's January to June beef exports, the MENA region's political turmoil directly cut foreign beef procurement by some countries and disrupted import shipment logistics in others. More than any other factor, political troubles in the Middle East and North Africa slashed Brazil's overall January to June beef exports by 12.1% compared to the same time last year.
According to the USDA, Brazil's January to June beef exports to Libya, Algeria, Egypt, Iran and Jordan were down by 58.6%, 83.9%, 26.8%, 20.1% and 29.5% respectively.
This drop in exports to MENA's fast growing markets was made worse by a rising Brazilian real, which coincided with a falling US dollar. In both Asia and NAFTA, this made American beef's export price fall by roughly the same percentage that Brazil's had risen in cost. Consequently, first half 2011 beef shipments to the EU, Hong Kong and Canada dropped by 38.9%, 15.9% and 23.6% respectively.
Market losses in Russia and East Asia
Among its major customers, only Japan and Russia saw beef higher January to June Brazilian beef shipment volumes than at the same time last year. This was due to Russia's own rapid economic growth, which exceeds its domestic production capacity. In Japan's case, the Fukushima's nuclear meltdowns and atomic explosions made much of that country's domestic beef radioactive and unsafe to eat.
Even so, while Brazil's beef exports to Japan jumped 9.2%, this was markedly slower growth than that of its US competitors, which increased their shipments to South Korea and Japan by over a third. This resulted in Brazilian beef suffering a market share loss in key Asian markets.
Furthermore, Brazilian beef's challenges in MENA and East Asia are compounded by major export difficulties it is facing in Russia. Until recently, Russia had replaced the EU as Brazil's largest beef export customer. Along with MENA, Russia took up much of the slack created by Europe's export ban. This year began promising enough, with first half export volumes to Russia 3.5% than in the first half of 2010. However, the third quarter saw monthly beef shipments to Russia fall by up to 50% after Russia banned imports from 85 Brazilian beef plants, citing poor farm safety and hygiene.
Russia's excuse for barring Brazilian beef closely resembles the rationale behind the EU's earlier ban. It is however, disingenuous, as the earlier EU action spurred Brazil into cleaning up its act and introducing cattle farm and beef processing traceability in line with EU standards.
In truth, Russia's blocking of Brazilian beef is actually a cover for two other agendas: First, Russia is trying very hard to achieve self-sufficiency in all major meat groups and is willing to employ protectionist means to achieve it. Brazil's Russian dilemma closely resembles those of American chicken imports, which Russia used food safety related non-tariff barriers to limit their entry year earlier. Indeed, many Brazilians claim that Russia's barriers against their beef are a means of blackmailing Brazil into backing Russia's entrance into the World Trade Organisation.
Given the bad news coming out of MENA, Russia and East Asia, market share losses are very much on Brazilian beef producer's minds: In July, the US exported 672.6 thousand tonnes of beef to America's 743.1 thousand. Several years ago, nobody expected America to overtake Brazil in beef exports but having said that, some factors are already turning around in its favour.
Slack exports counterbalanced by domestic consumption
First, growing domestic demand is picking up much of the slack created by falling exports. With 85% of Brazil's beef production consumed in Brazil itself, the 2.9% rise in domestic beef consumption almost offsets the entire steep 12.1% drop in exports. In fact, if it were not for Brazil's ongoing economic boom, the year's after 2007 would have seen outright declines in production instead of a topping out.
This growing domestic consumption both stabilizes Brazil's beef sector and limits it. On one hand, since 2003, the number of middle class Brazilians who eat red meat regularly has shot up by 45.8%, from 72 million in 2003 to an estimated 105 million by early 2012.
Over this time, per capita beef consumption has risen by 14.7%, from 34kg in 2003 to 39kg today. This makes Brazilians bigger per capita beef eaters than Americans, whose own per capita consumption has slipped to USDA estimated 38kg. With multiplied by Brazil's own fast rising population, this means that the country consumes 26% more beef today than it did in 2001.
With its vast market of over 193 million people stabilizes production, today's looming world recession is not expected to dent Brazil's huge and growing domestic beef consumption, which is expected to rise another 1.6% in 2012. With domestic cattle numbers rising and the US dollar rallying sharply against the real, the quantity of Brazilian beef available for export should increase even as its price relative to US beef falls.
Moreover, Brazil's exports to the MENA region, while badly dented, should recover once stability is restored. MENA's importance to Brazil was evident in August, when Iran for the first time became the biggest importer of beef, eclipsing even shipments to Russia, which traditionally bought the most Brazilian beef.
In all, the USDA expects Brazilian beef export volumes to recover by 5% next year. This leaves total beef export shipments below 2010's total. However, with MENA's economies enjoying strong immunity to the global recession, the next few years should see MENA's Brazilian beef imports rise at an above-trend rate, as pent up demand catches up to the disrupted growth of the last two years.
With the US slaughtering enough cattle to shrink its cattle herd to levels not seen since the 1960s and the dollar rising sharply as of late, this should be enough to let Brazil regain its title of world's top beef exporter in 2012.
Yet, the country does face long-term hurdles in regaining its once strong export momentum.
First, after watching the US gain market advantage in Asia, Australia is targeting the same fast-growing MENA countries as Brazil itself in its new beef export push.
Indeed, Australia has its own export troubles: As cheaper American beef crowds out Australian meat exports to South Korea, Japan and the US itself, Australian beef producers are offsetting these export losses with increased shipments to Russia, the Middle East and North Africa.
Russia and MENA of course, are precisely the markets Brazil's beef exporters were hoping would sustain them. This intensified competition could work against Brazil since Australian beef is not hobbled by food safety or quality issues the way Brazilian beef is.
Second, Brazil's cattle industry is simply not as productive as its American counterparts, who produce the same beef with fewer cattle. Beef processor JBS's CEO Wesley Batista, noted that even without the benefit of a lower US dollar, Brazil's beef production costs are rising relative to those of America and Australia. Bautista stated that, "For the first time in more than a hundred years, beef production costs in the United States are the same as those in Brazil."
This however, understates the situation: Even after falling sharply in value over the last few years, the US dollar remains well above purchasing power parity. Despite the economic disadvantage this creates for American beef producers, they now sometimes undercut Brazilian beef.
Brazil's beef producers are investing heavily in better cattle breeds and more efficient rearing methods but the US dollar's long-term downward path could undercut any competitiveness gained from such efforts.
Third, the last few years have brought about a significant change in the relative orientation of America and Brazil's cattle sectors. For most of the last fifty years, America was a large but self-absorbed beef producer: A high consumption, nominal net importer and most beef processors focused on their domestic market, which absorbed nearly all their output.
Brazilian beef by comparison, became export-oriented in the 1990s and early 2000s, with nearly a quarter of Brazil's beef being exported by 2006. Since then however, an expensive currency and rising consumption at home is making its cattle sector more domestically oriented. The proportion of beef exported has fallen from 23% to 15% as per capita consumption increased by 4kg.
In the US by comparison, both the US dollar and beef consumption per capita are down by a third from their peaks thirty years ago. With US beef's export price cheapening over time and its domestic consumption in a gentle secular decline, America's beef producers are becoming export oriented: US beef exports have gone from 1.9% of production in 2004 to approximately 11% this year.
Conclusion? US beef increasingly has to make its living out on the world market. By comparison, Brazil's rapidly rising beef consumption and secular, long-term currency appreciation may make it more profitable for Brazilian beef to be sold in its domestic market than overseas. Hence, while Brazilian beef will always be exported, it is possible that they will play a much smaller role in the industry's development in the future than they have over the last twenty years.
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