June 22, 2016
Brazilian beef: Bright export potential, stagnant domestic prospects
by ERIC J. BROOKS
An eFeedLink Hot Topic
- Helped by a 38% currency plunge, Brazilian exports will replace most of the 300,000 tonne drop in Australian beef shipments
- Over half of the 10%, 170,000 tonne export increase is from higher shipments to China and Russia
- An optimistic 7% annual export growth forecast is counterbalanced by stagnant domestic market
- To achieve its export potential, Brazil needs a resumption of rainfall and a large corn harvest to make up for last year's excessive feed exports
After falling behind Australia for a couple of years, 2016 will see Brazil retake it to again become the world's second largest beef exporter. While Australia's beef production is expected to fall by several thousand tonnes, assisted by a 38% on-year fall in the real, Brazil's beef exports are expected to rise to 1.875 million tonnes, up 10% or 170,000 tonnes from 2015's 1.705 million tonnes.
It is however, still below the 1.9 million tonnes exported in 2014, with last year's decline mostly caused by Russia, who usually imports more beef from Brazil than any other country. Partly due to the Russian recession shrinking beef demand, partly because Brazilian beef was banned for antibiotic levels for part of 2015, shipments to Russia fell 45%, from 2014's 310,264 tonnes to 169,511 tonnes last year. With Russia's economy recovering and over 100 plants approved for export to that country, beef shipments to Russia are expected to rise by over 33%, and total 230,000 to 250,000 tonnes.
Last year's mixed performance was also due to a rebalancing of China market trade flows: To avoid being taxed, a large portion of Brazilian beef destined for China is officially exported to Hong Kong, then smuggled into the mainland. By approving more plants for direct export to China and cracking down on Hong Kong smuggling, China is gradually winding down this practice.
As a result, total 2014 exports to the Greater China market totaled 253,000 tonnes in 2014, of which 165,000 was accounted for by shipments to Hong Kong. In 2015, this rose to 4.1% to 263,400 tonnes, of which 97,400 tonnes was shipped through China, and the other 165,000 tonnes through Hong Kong. This year, exports to Greater China will rise a stronger 13.9% to 300,000 tonnes, with the USDA expecting the mainland to account for 200,000 tonnes and Hong Kong importing approximately 100,000 tonnes.
While Russia and China are expected to account for over half the USDA projected 170,000 tonne export increase, large market share gains could also be made in Japan and Saudi Arabia, both of which finally lifted their post 2012 BSE-outbreak ban on Brazilian beef.
All this remains a far cry from the 2.1 million tonnes exported in the late 2000s, before FMD and issues with sanitation got Brazilian beef banned from the EU for several years, which came just before the late 2000s recession reduced world beef demand. No sooner had its beef been readmitted into large importing countries than a 2012 BSE outbreak resulted in Brazil's beef being banned from large markets in Europe, Asia and the Middle East.
With India devaluing its rupee strongly at this time, that resulted in market share losses everywhere from the Middle East to Southeast Asian countries like Vietnam. Then, just as it was recovering from these challenges and its currency started cheapening the cost of its beef, Russia first slashed its meat demand, then temporarily suspended Brazilian beef imports for part of 2015.
Having endured all of the above, Brazil finally appears to be back on track, with Rabobank expecting its beef exports to grow at 7% annually through 2025. However, with only 20% of its beef exported, Brazil needs this optimistic forecast to counterbalance an increasingly problematic domestic market. Whereas consumption grew 2.2% annually from 2000 to 2010, 2016's domestic beef demand is only 1% higher than it was in 2010 and lower than what it was in 2012.
These, long-term demand issues in Brazil's home market are compounded by medium term supply-side problems. On one hand, the fact Brazil over-exported corn during a bad harvest year will not impact its beef exports the way it did shipments of poultry meat. Because a large majority of Brazilian cattle are grass-fed and take more than one growing season to mature, only a bad corn crop in the next growing season could impact beef production.
On the other hand, with production costs ranging from labor to imported feed supplements and cattle genetics rising rapidly, a three-year drought in major cattle rearing central and western cattle producing regions is constraining supplies. That induced record cattle and beef prices, which resulted in several dozen processing plants shutting down and consumers shunning beef for cheaper pork or chicken.
Despite such challenges, Brazil is the only beef market supplier with sufficient unused feed, water and land resources to meet world demand, let alone boost exports by 7% annually as forecasted. That implies that over the next decade, Brazil should be able to retake its top world beef exporter role back from India.
This however, still depends on nature. While Brazil today can take advantage of Australia's drought to make up for most of the latter's 300,000 tonne export drop, it too needs for regular rainfall to resume in key cattle growing regions. Beyond the next year, it needs a coincidence of adequate precipitation and a large corn harvest to keep its exports expanding at their current double digit pace.
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