November 7, 2014
More beef, less corn: Why Brazilian agribusiness exports must shift from feed crops to red meat
An abundance of feed, horrid transport logistics and Asian beef demand are transforming Brazil's agribusiness export profile.
by Eric J. BROOKS
An eFeedLink Hot Topic
After a decade of stagnation, both the quantity and quality of Brazilian beef exports is slated to revive. Although 2014's export volume remains a hair below the 2.1 million tonne record set in 2007, market forces both inside and outside Brazil are putting its beef sector on its strongest growth path since the mid 2000s.
On one hand, with China, the Middle East and South Asia developing an appetite for religiously acceptable red meat, rising export demand for Brazilian beef can be taken for granted. On the other hand, growing Asian demand coincides with a profound rebalancing of Brazilian agriculture's terms of trade.
Specifically, Brazil's competitive advantage is shifting from feed crops to red meat. Moreover, all this coincides with a restructuring of its beef production paradigm, although the extent to which it will transform may be less certain than some analysts have projected.
The only supplier capable of boosting output
Ironically, the script for strong, sustained Brazilian beef production increases has been mostly written, by the country's beef exporting competitors: The United States, Australia and New Zealand have undergone decades of flat beef production and declining cattle numbers. Moreover, serious, long-term pastureland droughts have boxed in American and Australian beef production capacity through to the end of this decade.
Similarly, high Chinese dairy demand has made it more cost-effective for New Zealand to substitute dairy cattle in place of producing beef. Argentina, the only other country with feed crop resources comparable to Brazil, restricts exports to satisfy domestic demand. That has left Argentina's beef exports more than 50% below levels achieved in the 1960s and 1970s.
Amid the resulting flat export volumes, China, North Africa, the Middle East, the Indian subcontinent and Southeast Asia are demanding a growing quantity of beef that they themselves cannot produce. With the beef production of Brazil's export rivals boxed in, over the long run, it leaves this country in a position to increase its international market dominance.
Interestingly, alongside these above mentioned macroeconomic supply and demand trends, Brazil's unique mix of economic advantages and disadvantages are destined to make it less of a corn and soy exporter, and more of a red meat supplier.
On one hand, possessing a feed crop abundance that rivals that of North America, is the only major meat exporter whose planted feed crop acreage can still be easily expanded. This leaves it with the lowest marginal production costs of any meat producer seeking to expand output.
As the most feed-intensive livestock species, cattle magnify Brazil's resulting feed cost advantage more than other, more efficient protein lines. With its vast acres of virgin land, this country has the luxury of significantly raising its output of meat, corn and soy without having to profoundly boost crop yields.
On the other hand, high transport costs mean that Brazil can only project its feed cost competitive advantage through meat exports.
Nature's insurmountable transport cost disadvantage
According to a recent report by Rabobank Food & Agribusiness Research and Advisory ("Beefing Up in Brazil", Industry Note #459 – October 2014), to transport feed grain from Minnesota, America's most inland state, to Shanghai, China costs US$120/tonne. At US$180/tonne, transporting corn and soy from Mato Grosso, Brazil's largest soy and corn producing state, costs 50% more.
The situation is even worse for soy: the country's National Association of Cereal Exporters reports that at US98/tonne, it costs five times more to transport soy to ocean ports in Brazil than it does in the United States.
Although agribusiness analysts often mention Brazil's infrastructure deficiencies, even building new roads and railways cannot eliminate its transport cost disadvantage. Simply put, the United States is blessed with five Great Lakes and four exceptionally large rivers that drain into the Pacific and Atlantic Oceans. This allow America to transport inland grain to port cheaply. Having two coasts minimizes the cost of shipping US corn and soy to both Europe and Asia. Brazil is almost as large as America and has no Pacific coast ports. Nor does it have any comparable natural, water-based inland transport network.
In fact, even if Brazil decides to build new roads and railways to link inland feed crop growing areas with ocean ports, its transport cost disadvantage will remain large or could even widen. This is because most of the new, untapped land suitable for growing corn and soy is situated far inland, much further away from ports than mature production regions. According to Rabobank's report, "While the distance to port averages 650 kilometres in traditional productions in the southeast, most of the new grain areas in Brazil's north and centre/west are 2,000 kilometres away from coastal shipping points."
This can be seen in the accompanying graph. It clearly shows that while high transport costs force Brazilian soy to be exported at a discount to CBOT futures, the amount discounted is proportional to the soy production region's distance from the Atlantic Ocean.
With the bulk of Brazil's increased soy and corn output destined to come from inland states, the amount by which their exports will be discounted relative to the world price is destined to increase. Coming at a time when feed crop prices are low and America has rebuilt its corn and soy inventories, this is very bad news for Brazil.
Feed transport disadvantage = red meat advantage
Fortunately, Brazilian agribusiness has a way of avoiding its high transport cost dilemma: Instead of allowing high, inflexible shipping costs to undermine its feed crop profitability, Brazil can domestically produce beef, chicken or pork for export in place of soy or corn exports –while avoiding the latter's high transport costs.
–Moreover, because cattle have the poorest feed conversion ratio of any livestock species, exporting beef in place of raw corn and soy reduces unit transport costs more than feed-efficient chicken or pork. By transforming feed crop exports into inputs for export-oriented beef, Brazil creates a huge value-added boast to its value-added agribusiness export earnings while avoiding cost competition in feed commodities where it suffers from a cost disadvantage. As it dovetails with the first strong, sustained rise in beef export demand for decades, the timing could not be better: After eight years of declining or flat beef exports, the second half of this decade should see Brazil's share of the world beef market push ahead of rival producers in North America, Oceania and India.
From a USDA estimated 2.03 million tonnes in 2014, Rabobank expects Brazil's beef exports to increase at a 7% annual rate over the next ten years. Shipments are projected to double from a USDA estimated 1.85 million tonnes in 2014 to approximately 3.73 million tonnes in 2023. This will help offset the impact of its slowing domestic market, where beef consumption is expected to rise only 2% annually over the next decade.
However, while Brazil is destined to monetize more of its feed cost advantage into value-added beef, the latter's production model is also gradually restructuring itself. Rabobank estimates that the volume of Brazilian beef production coming from feedlots increased 10% over the last year, from 0.9 million tonnes in 2013 to 1.0 million tonnes in 2014. It projects feedlot raised beef to rise by 50% output to 1.5 million tonnes by 2018, and to 2.5 million tonnes by 2023.
Similarly, after expanding 7% annually since 2005, it expects the number of cattle raised in feedlots to accelerate to a 10% annual increase. From 3.5 million head in 2013, the number of slaughtered Brazilian beef cattle raised in feedlots is expected to total over 9 million by 2023.
Though it accounts for a far larger proportion of production, beef produced from pasture fed or mixed model production is expected to rise far more slowly, from 8.8 million tonnes in 2014 to 9.7 million tonnes in 2018 and 10.6 million tonnes in 2023. Consequently, the proportion of beef coming from exclusively feedlot operation will rise from 9.4% in 2013 to 14.7% in 2018 and 19.1% in 2023.
Feedlots, pastureland conversion creates its own feed supply
As is the case in the relationship between the country's feed crop and meat exports, the trend to intensify beef cattle production is driven by a series of market circumstances unique to Brazil. A decade of record high feed costs and the repeated breaking of corn and soy price records made growing corn and soy more profitable than traditional pastureland-based cattle ranching. According to Rabobank, this trend is driven by, "Growing pressures for environmental sustainability and fierce competition for agricultural land from grain crops, along with …the need for scale to compensate for the lower margins, especially from more remote (inland) farms."
Moreover, because feedlots require considerably less land than traditional ranches, the shifting of beef production from pastureland to feedlots can boost corn and soy production by more than the amount of feed consumed by rising feedlot cattle numbers.
For example, Rabobank estimates that from 2013 to 2023, 4.8 million hectares of cattle pastureland will be converted into feed crop production. Let us assume that out of these 4.8 million hectares of converted pastureland, 2.8 million hectares are planted with soy, 1.5 million hectares are used to grow corn, and 0.5 million hectares for other purposes.
If Brazilian corn yields stay unchanged at their USDA estimated 2013 level of 4.5 tonnes/hectare and soy at 3.0 tonnes/hectare, the feedlot-driven conversion of 4.8 million hectares of pastureland into feed crop farms should yield an additional 6.75 million tonnes of corn and 8.4 million tonnes of soy annually by 2023. –This greatly exceeds the additional 4.4 million tonnes of corn and 0.6 million tonnes of additional soy Rabobank's report calculates would be required by rising beef cattle feedlot numbers by 2023.
Rather than be exported, the surplus feed corn and soy created by the transition from pastureland cattle farming to feedlots could be redirected into Brazil's swine and poultry sectors, thereby enhancing the competiveness of these meat lines too.
Possible investment delay, but trend is unstoppable
But there are also exists one factor which, while not stopping this projected rise in Brazilian beef production, could slow down the drive towards intensification. Various analysts estimate that this anticipated migration to feedlot production will require anywhere from US$200 million to US$500 million in new investment. Investors only commit such large sums of money when they feel confident of achieving a secure return. –And it should be noted that the incentive to intensify cattle production came from a decade of high feed costs, as it made the cultivation of land for feed crops such as corn and soy more profitable than traditional, pasture-based cattle ranching.
However, with beef prices now at all-time highs and feed costs at their lowest levels since the mid 2000s, underlying market dynamics may have gone into reverse. With soy near US$10/bushel at the time of publication, should it fall any further in price, it could destroy the incentive to convert cattle ranches to soy cultivation, thereby slowing down the migration to a feedlot beef production model.
Consequently, the prognosis for Brazil's beef cattle sector, while bright, is partly conditional. On one hand, with world beef prices at all-time highs and feed costs low amid booming Asian demand, Brazilian cattle farmers cannot resist the temptation to boost output at a time when other leading beef producers find themselves unable to do so.
Moreover, the lowest corn and soy prices since 2008 make the cost of transporting corn and soy to ocean ports even more economically burdensome than they have been over the last few years. Hence, to avoid a deteriorating ratio between feed crop prices and transport costs, Rabobank predicts that, "Over the next two years, we expect a large number of grain farmers to utilize animal feeding as a means of adding value to their grain."
On the other hand, many of the forecasts predicting a rapid transition towards feedlot-based beef production were undertaken before the prices of beef and feed went in opposite directions, and were based on trends that began during an era of sustained high feed costs and relatively low red meat prices.
Consequently, while it would be farsighted for Brazilian integrators to move up towards the feedlot production model, perceptions that the red meat price cycle has peaked may make them wait for the market to bottom out first. Similarly, the ongoing conversion of pastureland to feed crop cultivation may decelerate until the current oilseed market glut dissipates.
What is certain is that Brazilian beef exports and output will rise at its strongest, most sustained pace in decade-and that a trend towards feeding livestock for export rather than exporting feed will take hold.
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