Brazilian pork: Living in the Russian bear's shadow
By ERIC J. BROOKS
An eFeedLink Hot Topic
- Rising 13% in 2015 and 6.9% this year, Brazilian pork export growth greatly exceeds that of the US and Canada
- Export growth is dangerously dependent on Russia and its weak currency. Similar booms occurred twice in the last fifteen years and each time, Russia banned its pork
- Shipments remain substantially below their 2005 peak, which it will not exceed for at least another two years
- Once its currency recovers, it will face higher productivity, lower transport cost from rival exporters
- Due to bad economic conditions, domestic consumption is only growing at half the rate it did from 2001-10
- A domestic economic revival, lessening dependence on a singular export market are its best longterm hope
For a second consecutive year, Brazil's swine sector is having a much better year overseas than in its home market. Stimulated by booming exports, for a third consecutive year, 2015 output exceeded its original estimate, increasing 3.5% to 3.519 million tonnes. For 2016, the USDA projects a further 2.5% output increase, to 3.6 million tonnes.
With the real having plunged by 55% over two years against the US dollar and by 38% in the thirteen months prior to this article's publication, Brazilian pork is regaining the cost advantage versus American pork that it enjoyed ten years ago. From being 6% more expensive than US pork in 2012, Brazilian pork is now priced at least 20% lower.
Alongside a 60% rise in domestic feed corn costs that has offset much of the real's devaluation, pork exports are also hampered by Brazilian pork's quality reputation versus US, Canadian or EU competitors such as Denmark. Even so, despite US pork production ramping up and EU pork flooding into Asia, Brazil's 2015 shipments skyrocketed up 12.8%, from 556,000 to 627,000 tonnes.
Although the real has stopped falling, its low value has coincided with China and Russia approving several dozen pork processing plants for export. This year is also seeing a new free trade agreement with South Korea create scope for up to 35,000 tonnes of exports to that country over the next few years. The past year has also seen South Africa agree to liberalize its pork trade with Brazil. Led by these factors and higher demand for Brazilian pork in Japan, Mexico, Angola and Singapore, 2016 shipments are projected to rise a USDA estimated 6.9%, to 670,000 tonnes, its third highest annual volume.
It should however, be noted that Russia's highly volatile market accounted for 50,500 tonnes of its 71,000 tonne increase in 2015. Volumes shipped to Russia rose 27%, from a USDA estimated 185,900 tonnes in 2014 to 236,500 tonnes in 2015, and could exceed 275,000 tonnes this year. The only problem is that Brazil appears to keep repeating its history with Russia: It exported 301,000 tonnes to this country in 2003 before being banned for its outbreaks of foot-and-mouth disease (FMD).
Hence this is not Brazilian pork's first Easter European-based boom and each time, its best efforts are both made –and broken– by Russia. After its FMD bans were lifted, led by Russia again, from 2008, shipments made a recovery, rising at a 5.8% annual rate over the next four years and peaking at 661,000 tonnes in 2012.
Though it did a good job of entering new markets ranging from China and Africa and regaining some of its lost Russian exports, this was followed by a nasty late 2000s world recession, which coincided with its currency rising by 60% from turn-of-the-century levels.
With the real peaking against the dollar during those years, American pork shipments rose by more than 11% annually over the same time. Then, at the turn of the decade, export momentum was again broken when Russia, its fastest growing export market. It once again banned Brazilian pork; this time for sanitary reasons that were in truth, a cover for simple economic protectionism.
Moreover, while exports are currently booming in percentage terms, even though the world pork market is at least 25% larger than 11 years, Brazilian pork exports are still substantially below their 2005 peak of 761,000 tonnes. Consequently, their world market share is nearly a third lower than it was back then. That is because after enjoying a decade of 20% to 100% annual export growth similar to that of its poultry sector, Brazilian pork's Russian dependence repeatedly undermines its export aspirations.
Although its currency has fallen sharply since 2011, for two years, it was mostly blocked from the fast growing Russian market up to 2013. By the time Russia's boycott of US and European meat forced it to re-open its door to Brazilian pork, the expected export growth was initially offset by the oil price crash. It which caused a serious recession in Russia and for a time, the ruble plunged by even more than the real, making Brazilian pork unaffordable for many Russians.
It must be said that such difficulties were foreseen by Brazil's swine sector: In 2013, Luciano Roppa, head of Sao Paolo-based Roppa Consulting stated that even by the early 2020s, he did not pork export volumes to be nominally changed from their 2012 levels.
On one hand, should the real stay low in value, with Russia's economy recovering and new market opening up, Roppa's pessimistic forecast stands a good chance of being exceeded. On the other hand, even if it finally exceeds its 2005 record export volume by 2018 at the earliest, the industry is dogged by several longterm issues and one bright opportunity.
With approximately 70% of Brazilian pork output accounted for by integrators and a tenth by backyard farms, large, easy-to-achieve cost savings from introducing scale economies are exhausted. With Brazilian swine rearing already capital intensive, the US has been introducing new hog farming innovations such as larger litter sizes more quickly.
Moreover, once Brazil's currency recovers to normal levels, even if its productivity grows faster than that of America's swine sector, this could be offset by labor costs, which have shown a decades old tendency to rise more than two times as quickly than those of their US and Canadian competition. Finally, America and Canada's northern hemisphere location gives them lower transport costs to major export markets in China, Europe and East Asia.
On one hand, barring any unforeseen market shocks or a third Russian export ban, the latter part of this decade could see Brazilian pork shipments finally exceed their 2005 record high of 761,000 tonnes. On the other hand, given the temporary nature of its currency driven cost advantage, Brazil while remaining a solid number three world pork supplier, is unlikely to unseat America or Canada from their leading market positions.
The good news is that Brazil's swine sector does not need to be a leading exporter to prosper. With a population of 204 million, its 14kg per capita pork consumption is less than half the quantity of beef or chicken the average Brazilian eats. With no religious restrictions against pork consumption and incomes still at developing country levels, its domestic market should be able to take over from exports as a demand driver.
The bad news is that after growing at a USDA estimated 3.5% from 2001 through 2010, from 2011 through this year, pork consumption only increased at a 1.9% annual rate. With the country in its third year of a serious recession, consumption is only forecast to rise 1.6% this year to 2.94 million tonnes. Slack domestic demand growth looks set to continue for at least another year, when hopefully conditions improve and income and employment resume growing.
Over the longer term, Russia has used food safety pretexts twice in ten years to break the momentum of Brazil's export growth. There is no reason to believe that once its domestic economy recovers, Russia will resume protecting domestic farmers, ban Brazilian pork and shock the industry with yet another episode of 100,000+ tonnes of export losses.
Brazil's best hope would be for its economy to recover and large domestic market to resume growing by the end of this decade, when its present export momentum is likely to taper off. Unable to rely on a cheap currency for longterm competitiveness, it needs to boost its swine sector productivity, get its labor costs under control. Above all, Brazil needs to lessen its dangerous dependence on Russian goodwill and continue opening up fast growing markets such in China, Africa and Southeast Asia to its exports.
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