April 10, 2015
Brazilian pork endures Eastern European disappointments
War, geopolitics put an end to booming Russian and Ukrainian exports, leaving the country's swine sector without a source of export-driven demand.
By Eric J. BROOKS
An eFeedLink Hot Topic
What a difference two years makes. After watching its exports rebound over several years, by 2013, Brazil appeared to have finally recovered from its post 2005 EU ban following a foot-and-mouth disease (FMD) outbreak. At 661,000 tonnes, its 2012 exports exceeded USDA projections by 10%.
Russia and Ukraine's booming markets were more than making up for its earlier EU export losses. Projected to export 704,000 tonnes in 2013, after PEDv hit the US swine sector, Brazil looked ready to break its 2007 record of 730,000 tonnes exported in 2014, potentially approach a million tonnes in exports by the end of this decade.
Russia, Ukraine turn sour
Unfortunately, after watching its 2012 exports to Ukraine jump 125% in one year from 56,000 to 126,400 tonnes, the country's government bowed to political pressure from Ukrainian hog farmers, banning Brazilian pork imports for most of that year. Instead of exceeding 700,000 tonnes, exports slumped to 556,000 tonnes, equaling the lowest volume of any year since 2007.
But worse news was to come. In early 2014, just a few months after Ukraine's ban on Brazilian pork was lifted, Russia's military intervention initially disrupted shipments, causing forecasts to be missed early on.
The latter part of the year should have provided good news but it didn't. Yes, Russia's ban on US and EU pork created an export bonanza of sorts. From 13% of Russia's pork exports in 2012, the vacuum created by the blockage of US and EU supplies saw Brazil supply 43% of Russia's pork imports in 2013, and up to 50% this year.
The bad news is that while Russia imported over a million tonnes of pork back in 2012, even before its war with Ukraine broke out, this had fallen to 868,000 tonnes in 2013 and 515,000 tonnes last year. As a result, rather than totaling 300,000 tonnes or more, Brazil supplied Russia 222,000 tonnes of pork.
With Russia's economy now imploding, so is its pork demand. Due to its worsening economic situation, the USDA recently revised its 2015 Russian pork import volume down from 375,000 tonnes to just 200,000 tonnes. Even if 60% of this imported pork is purchased from Brazil, the country would be lucky to sell 120,000 tonnes to Russia in 2015 –some 100,000 tonnes or 41% less than last year.
At this point, not even a spectacular 20% increase in Brazilian pork exports to all other countries would not be enough to cover the drop in exports to Russia alone. For this reason, the USDA is forecasting Brazil's 2015 exports to slump to 530,000 tonnes –their lowest volume since 2001.
Conservative as this trade forecast is, early statistics imply that the trade picture is even dimmer than predicted: Brazilian government trade statistics indicate that exports were 24% lower in the first two months of 2015 than at the same time last year. Moreover, the trend soured in February, where pork shipments fell 26.8% from a year earlier. Eastern European problems notwithstanding, Brazilian pork also faces competition from the EU's rising domestic pork production.
With Russia and Ukraine knocking each other out of Brazil's export picture, the country is currently seeking new growth outlets for its sector. Towards this end, the country succeeded in getting South Africa to allow in Brazilian pork for the first time since 2005's FMD outbreak. However, at 30,000 to 40,000 tonnes a year, South Africa's total pork imports do not even equal half the volume of this year's lost Russian exports.
Hence, after rising by 351% in seven years from 2000 onwards, 2015's export volume will be 27% below 2007's all-time high. What is most frustrating is that just two years ago, the industry appeared ready to pull out of its half decade slump. But just like its excessive dependence on the EU market snapped its early 2000s export boom, the sudden turning of the Russian and Ukrainian markets dashed its hopes this time.
Domestic market sags
Nor is Brazil's domestic market doing the industry any favours. After growing at a 3.5% rate from 2000 to 2010, from 2010 through to end of this year, Brazil's domestic pork consumption only increased at a 1.7% annual rate, barely keeping pace with population growth.
Squeezed between high debt levels, near recessionary economic conditions and relatively low chicken prices, domestic consumption is expected to increase 1.8%, from 2014's 2.75 million tonnes to 2.81 million tonnes this year. When added to the 26,000 tonne drop in export volumes, that leaves total domestic and foreign demand for Brazilian pork almost unchanged from 2014 –a far cry from the early 2000s, when it would often increase by 5% to 10% annually.
Consequently, instead of a large 5.4% gain in output forecast earlier, the USDA now expects Brazilian pork production to stay flat, rising a nominal 0.6%, from 2014's 3.31million tonnes to 3.35 million tonnes this year.
The good news is that unlike its poultry sector, Brazil's swine industry still has much growth potential. At 14kg, provided the economy resumes growing at the rate it did in the previous decade, Brazil's per capita pork consumption can easily rise 2% annually on top of its 1.5% to 2.0% increase in population growth.
Moreover, unlike broiler meat where it supplies nearly 40% of global exports, Brazil might be the number three pork supplier but it holds less than 8% of the world market. With its currency having fallen by 30% to 40% against the US and Canadian dollars in recent years, slack world demand disguises how vulnerable the top two exporters are to Brazil's improving cost fundamentals.
Hence, a combination of rising world economic growth and trade liberalization agreements could allow Brazilian pork to make a comeback in the latter part of this decade. Nevertheless, after watching an EU ban tank its export drive ten years ago and Eastern Europe this time around, Brazil needs to diversify its swine exports over the longterm even more than it needs to expand them over the short term.
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