The global meat supply has failed to keep up with increased demand, especially from consumers in developing nations. Even with record-high global prices, the supply response has been dampened by a variety of factors, including high grain prices, lack of adequate pastureland and limited water resources. Consumers, who will be reluctant to reverse dietary improvements and reduce their intake of animal protein in the face of higher prices, will force governments to increase dependence on imports.
Changing consumption patterns in emerging markets have resulted in the rapid expansion of global trade in animal protein. Despite a stronger appetite from consumers in the developing world, the cost constraints on animal production will limit domestic output, particularly in Asia and Russia. High grain prices will be the main culprit keeping prices elevated, but, even more important, the limited availability of arable land and water makes it unlikely that domestic production will keep pace with consumption in key markets. As we have argued in other reports (see Why China’s food inflation won’t go away), higher food costs have been one of the leading factors pushing up consumer prices worldwide. Rising grain prices have rippled through the production chain, causing global meat prices to rise by more than 19 per cent in the 12-month period ending in June, according to the FAO Global Food Price Index (see Chart 1).
Although many importing countries have reacted to higher prices by offering more subsidies for domestic meat production, these programmes are slowly reaching their limit. We believe that it will be difficult for these countries to enact policies that promote the necessary supply-side response in order to bring prices down. China is a case in point. One of the world’s biggest soybean exporters prior to 1995, today China is the world’s largest soybean importer and consumer. Yields have stagnated on account of shrinking arable land, water scarcity and drought. Chinese farmers are also shifting acreage from grain and oilseeds to more profitable vegetable and fruit crops, making it challenging to meet domestic demand. These trends, combined with the realities of feeding a population of 1.3 billion people, are setting the stage for Beijing to abandon its grain self-sufficiency policy.
We believe that protectionist policies impeding global trade in animal protein will also slowly be abandoned as domestic production fails to meet demand. The impact of higher pork prices has been particularly acute in South Korea and China (the world’s seventh- and sixth-largest importers respectively) and has resulted in a modification of protectionist policies. South Korea temporarily lifted on 2 August its 22.5 per cent tariff on chilled pork imports in an effort to ease tight supplies of raw pork, owing in part to a foot-and-mouth disease outbreak in late 2010. A South Korean animal health mission was also scheduled to come to Brazil this quarter in what Brazilian government officials hope will be the final stage in the export-approval process.
China has also faced serious pork supply issues, and that has been the main driver of food inflation this year, far surpassing price hikes of vegetables and fruit. Pork prices increased by nearly 57 per cent year on year in June, according to the most recent inflation data. The spike in prices has prompted the government to release pork from its 200,000-tonne strategic reserves to the market in 12 provinces in an effort to curb prices. It has also taken measures to increase production, among them providing Rmb2.5 billion (US$391.72 million) to fund large-scale pig farms and subsidies encouraging farmers to switch from vegetables, fruit and cotton to pork production, but most output still comes from small farms. It will take time before these measures have an impact on pork production and even more time to reduce dependence on breeders with two or three pigs, who account for as much as 90 per cent of supply at present.
Furthermore the Chinese government’s plans to create centralized animal husbandry zones in late 2008 has actually contributed to the decline in pork production, owing to the rapid spread of foot-and-mouth disease and swine fever in late 2010 in those areas. There could be resistance to the creation of the zones, as some municipalities in China want to ban pork production because of the water pollution that results from large-scale pig farming.
As we have pointed out in other reports, China’s push for greater pork production will also be hindered by insufficient domestic grain supplies. The USDA thinks that China will buy 2 million tonnes of US corn in the marketing year starting on 1 September, four times the previous estimate. And while we believe that China will continue to strive to meet as much of its domestic pork demand as possible through local production, there is growing evidence that the country will increase its dependence upon imports so as to keep prices stable. It was in this context that China authorized pork imports from Brazil in April of this year. The President of the Brazilian Pork Exporters' Association, Pedro de Camargo Neto, expects China to import roughly 200,000 tonnes/year of pork from Brazil by 2015. Brazil exported a total of 540,000 tonnes of pork in 2010, of which 230,000 tonnes went to Russia.
The outlook for the expansion of Chinese beef production is even more limited, because it provides low returns compared to pork and poultry. In addition to the high cost of feed and to limited water supplies, land for cattle production is scarce. Overherding on grasslands is a major constraint that the industry will face in the long term. China’s current herd of grass-fed animals already exceeds its grassland capacity by one-third, according to the Chinese Ministry of Agriculture. These factors, coupled with the fact that the bulk of the Chinese beef trade is done by intermediaries who pay farmers low returns, further reduce interest in cattle farming. The USDA sees China’s beef herd declining by 1 per cent in 2011 to 46.5 million head from an estimated 47 million head in 2010. All these factors have contributed to price inflation, with average beef prices reaching a 4-year high of Rmb35.07/kg (US$5.33/kg) in December 2010.
Russia has been a problematic trade partner for Brazilian beef and pork producers, in part owing to Brazil’s dependence on Russia as a destination for both meats. Russia’s 15 June ban on Brazilian beef and pork imports highlights just how important it is as a trading partner. Although Brazil has reduced its dependence on Russia, it is still the largest market for beef, taking over 30 per cent of Brazilian exports in Q1/11. Brazilian trade specialists see the ban as part of Russia’s efforts to secure a positive vote in its attempt to join the WTO rather than as an indication that Russia will reduce its dependence on imported beef any time soon. Indeed, we believe that the long-term outlook for Brazilian meat exports to Russia is positive. Russia’s livestock sector is far from achieving basic efficiencies and economies of scale, and there is a big gap between the projected medium-term growth of beef consumption and domestic beef production (see Chart 3). Russian beef production is largely from family holdings, which generated roughly 47 per cent of the country’s cattle at the end of 2010, according to the USDA. This figure is down from 62 per cent in 2009.
The family holdings keep cows mainly for dairy production; and although the animals are later slaughtered for beef, this is of very low quality. The beef herd in Russia accounted for just 1.5-2 per cent of the total cattle herd two years ago, compared with more than 60 per cent in most developed countries. The challenge is to raise that percentage significantly, which would require a more professional approach to beef cattle farming and the development of specialized pedigree herds.
In addition to the long-term issues there are several short-term hurdles for the Russian meat industry. After the 2010 drought, because of which the Russian grain harvest was down by 38 per cent year on year, producers increased their slaughter rates in response to soaring feed prices. The USDA estimates that the increase in slaughter rates will result in a 3.2 per cent decrease in total cattle inventories in 2011. Although this year’s grain harvest is currently projected to be close to 2009 levels, Russian feed inventories were 25 per cent lower in early 2011 than in 2010, keeping beef production costs from declining.
Pork and poultry are likely to come closer to reaching the 85 per cent self-sufficiency target stipulated in Russia’s Food Security Doctrine signed by President Medvedev in January 2010. Russia expects to reach self-sufficiency in poultry and pork within the next year or two, and poultry is likely to get there first: poultry imports accounted for 17 per cent of total supply in 2010 and pork imports for 20 per cent, according to Institute of Agrarian Marketing. Beef self-sufficiency will be much harder to attain, because the industry is less developed. The main reasons for this are:
1. The poor quality of the Russian beef industry, including low inventories, poor-quality herds and few economies of scale. In addition the beef sector has still not recovered from the large-scale slaughter of the 1990s after the end of Soviet-era subsidies.
2. Long-term capital commitment is a problem throughout the Russian economy, reflecting weaknesses in the financial sector and business risk aversion. These stem from familiar country risk problems, mainly red tape and corruption. These factors apply a fortiori in agriculture; and in the meat sector, such risk capital as is available will remain concentrated for several years to come in the shorter-cycle poultry and pork segments.
3. Climate: higher cost confinement is required for longer periods in Russia owing to the cold climate preventing open pasture-fed cattle from fattening quickly enough. In southern Russia, where temperatures are better suited for beef cattle, the opportunity cost of using land for beef herd pasture is high in view of the attractions of grain and fruit/vegetable production.
The persistent problem of meat inflation, which is one of the main drivers of consumer price inflation, points towards a continuation of beef imports despite the current ban on beef and pork exports from Brazil.
The support of the poultry and pork industries over beef production was reinforced by Putin’s 22 July announcement to reduce 2012 tariff-quota quantities for poultry and pork while maintaining tariff quotas for fresh and frozen beef. This support for poultry and pork is driven not least by the fact that achieving self-sufficiency in both types of meat is within reach. Thus it is also tacit acknowledgement by the government that achieving self-sufficiency in beef is a near impossibility within the foreseeable future.
Although the Indonesian government announced in 2009 several measures to reduce its dependence on imported food, we see a potential for Brazil to increase its meat exports to Indonesia, in part because of Brazil’s halal slaughter capacity. Brazil’s main competitors in the meat export market, including the US, have limited capacity to supply halal certified products. Brazil has been catering to this market for several years and is already a major supplier of beef and poultry to the Middle East.
The Indonesian Council of Ulama’s Institute for Food, Drug and Cosmetic Assessment is reviewing the halal standards to require fully dedicated plants for halal slaughter and transportation for halal products, which Brazil already has in place. In a positive sign for the Brazilian beef industry, Indonesia has authorized duck and turkey imports from Brazil, and the Brazilian government is also working to gain approval for beef exports.
While the Indonesian government’s goal is to achieve self-sufficiency in meat production by 2014, industry specialists doubt Indonesia’s ability to meet that goal. The Food and Agricultural Policy Research Institute is projecting that imports will continue to increase as local production will not keep pace with demand. For example, before the Idul Fitri celebration at the end of Ramadan in September 2010, beef prices shot up owing to inadequate supply. The high prices resulted in an increased slaughter of breeding stock, which will reduce the number of new calves born over the next few years. These factors, combined with a recent trade spat between Indonesia and Australia over live-cattle exports, bode well for the approval of Brazilian beef imports by Indonesia during the next 6-12 months.
One of the biggest blows to the Brazilian beef industry took place in January 2008 when the EU suspended beef exports. Following an extremely well-organized campaign by Irish farmers, the EU Commission increased restrictions on Brazilian beef imports, claiming that the Brazilian government did not provide adequate traceability for cattle. After the ban, Brazilian exports to the EU plummeted from roughly 308,000 tonnes in 2007 to 144,291 tonnes in 2008 (see Chart 5). Exports have steadily declined since then as a result of the high cost of meeting the EU’s traceability requirements.
We believe that the outlook for exports to the EU could change in the medium term because of the increased likelihood that Brazil will file a complaint against beef import restrictions. According to Scott Andersen, an attorney with the Geneva-based trade law firm Sidley Austin, the EU trade restrictions on Brazilian beef violate the terms of the WTO. The EU requires Brazil to have its individual cattle holdings placed in the EU TRACES database in 2008, yet all other exporters with similar foot-and-mouth disease risk profiles are only required to register slaughterhouses that can process cattle from approved zones. The holdings requirement, according to Andersen, is a disguised restriction on Brazilian imports and discriminates against Brazil vis-à-vis other importers.
The EU’s Hilton Quota also incorporates discriminatory feed requirements for Brazil, Argentina, Uruguay and New Zealand, which result in higher production costs. Brazil has unsuccessfully attempted to negotiate an agreement with the EU to resolve these issues. Despite the fact that Brazil has a solid case, it could take years for a positive resolution via the WTO.
Brazil’s beef industry would benefit from a free trade deal between the EU and the Mercosur bloc. Although the likelihood that such a deal will be reached this year is extremely remote, Irish farmers are already concerned that such an agreement would increase Mercosur agricultural products’ access to the European market. Ireland’s agriculture minister Simon Coveney described the agreement as an “extraordinary threat to the Irish beef industry”. Despite Irish opposition, the EC’s Commissioner for Trade Karel De Gucht said that the European Commission remains supportive of a trade agreement. Talks between the EU and Mercosur were relaunched in May 2010 and have been ongoing since then.
Several of Brazil’s key meat buyers abroad are also among the fastest-growing consumer and import markets. While consumers in developed markets are actually reducing beef consumption, emerging middle class consumers in developing nations are doing the opposite. Iran, which was Brazil’s second-largest beef buyer in H1/11, is an example of a market that has seen a large increase in imports owing to stronger domestic consumption. Iran’s beef imports more than doubled in 2010, with Brazil grabbing a large part of this market. Egypt has become an important destination for Brazilian beef too. Although the January 2011 revolution disrupted Brazilian beef exports – with volumes declining by 25 per cent in H1/11 – June volumes showed signs of recovery.
Once the political situation normalizes, Egyptian beef imports are forecast to continue to grow because domestic production is unable to keep up with demand. Domestic cattle herds were depleted in 2010 because producers took advantage of high prices and increased slaughter rates. Brazil has partly offset the temporary decline in beef exports to Egypt through an increase in exports to Iraq and Saudi Arabia, already major importers of Brazilian chicken. Revenues from Brazilian exports of frozen beef to the Middle East increased by 73 per cent in the first seven months of 2011, despite regional unrest.
Venezuelan beef imports are likely to remain strong thanks to slowly declining domestic production, which is offset by imports, according to the USDA. The Venezuelan government’s Food Sovereignty Plan has failed to increase domestic production of basic grains and food. The gap between domestic production and consumption continues to be large, and the country will probably need to import a broad range of food products in the foreseeable future. Expropriation of agricultural properties has further exacerbated food supply concerns, which will have a longer-term impact on domestic production. As a result of these policies, imported meat and live cattle account for an estimated 75 per cent of Venezuelan beef supplies, much of which is supplied by Brazil.
The most import “emerging” market for Brazilian beef is Brazil itself. Although Brazil is the world’s largest beef exporter, the vast majority of its beef production is consumed locally. Domestic consumption has been able to compensate for the recent decline in exports to Russia. According to the Brazilian Institute of Geography and Statistics, 78 per cent of beef production was consumed in Brazil in 2010. Higher wages, lower unemployment and increased government social spending have all helped to increase beef consumption in Brazil in recent years. The growth of the middle class – the single most important economic and social change in Brazil over the past five years – has been a key factor in pushing up protein consumption. Despite slowing economic growth and a more worrying inflationary outlook, middle class expansion has continued in 2011. According to a study released in June by the Getulio Vargas Foundation (FGV), 1.8 million people left poverty and joined the ranks of the middle class (defined as families with monthly incomes of between R$1,200 and R$5,174) between May 2010 and May 2011. The FGV researcher Marcelo Neri expects poverty reduction in Brazil to continue to the end of 2011, largely because wages are generally rising at a rate higher than inflation.
Consumers appeared indifferent to prices throughout much of 2010, when annual per capita consumption reached 40.4 kg, up over 1 kg from 2009 levels. Strong consumption pushed prices up by more than 36 per cent in 2010, according to the Esalq/BM&FBOVESPA Index.
Brazil has been able to meet growing domestic and international demand with little difficulty because of its huge potential for productivity gains. The use of confinement – or feed lots in which cattle are fed high-calorie diets and in smaller pens – is still quite limited, with most ranchers opting to maintain their cattle in the pasture. Brazil’s cattle herd is almost entirely grass-fed, which means that weight gain is much slower, with limited marbling (fat penetration) into the muscle. Large-scale production with high levels of confinement similar to those in the US are unlikely for Brazil; but as the use of semi-confinement during the period before slaughter increases, Brazil has been able to raise the productivity of its existing farms by raising slaughter weights. As a result the number of hectares dedicated to cattle ranching has actually declined while the output per hectare has increased. Despite the increase, Brazil still has significant room to increase productivity, which averaged roughly 54 kg/hectare in 2010. Productivity should be closer to 100 kg/hectare with more widespread use of semi-confinement so as to increase slaughter weights.
In addition to the availability of pastureland for expansion, Brazilian meat processors have already made massive investments in industrial capacity. In the state of Mato Grosso, the second-largest beef exporting state, the use of slaughter capacity has declined in recent years from 45.6 per cent in 2008 to 33.2 per cent in 2010. This is due in part to the closure or restructuring of several large beef processing firms including Independencia, Mata Boi, Arantes and others following the 2008 financial crisis. The reduction in the number of players in the sector has actually benefited larger, well-capitalized firms, largely because ranchers will no longer sell cattle to slaughterhouses on credit but require cash payment on delivery.
Despite the positive outlook, the market will face some short-term headwinds. The appreciation of the Real has been one of the factors eroding Brazil’s ability to export beef, chicken and pork. Although Brazil is no longer a low-cost producer, we believe that it will be able to expand its animal protein exports as global prices continue to adjust upwards and help to offset the stronger Real. This view is corroborated by the OECD-FAO Agricultural Outlook 2011-2020, released in June. The report forecasts beef prices to increase by roughly 20 per cent over the next decade while pork and poultry prices will rise by an average of 26 and 16 per cent respectively.
With international beef prices on the rise, we foresee increased room for exports of relatively inexpensive Indian buffalo meat to supplant Brazilian beef exports to low-end markets. Indian buffalo meat is exported to more than 60 countries in Asia, Africa and the FSU. But price has been the main element in pushing up exports. Quality is still a major drawback, because most of the buffalos that are slaughtered are older animals and were used in the dairy industry. However there has been a focus on improving the quality of the meat in order to further increase sales. Despite the positive medium- to long-term outlook, India is not yet in a position to supplant Brazil as the global provider of low-cost red meat, owing to land, water, grain production and herd quality issues. But as Indian buffalo production gains scale, we expect that it will compete with Brazil, especially in Asia and the Middle East, where India’s proximity to the import markets gives it an advantage over Brazil in freight costs. Furthermore several Indian buffalo meat producers, including the Allana Group, are already meeting halal requirements, which will help them to compete with Brazil.
We believe Brazil’s agriculture sector is in a secular growth phase that will continue for decades to come. Brazil has extensive land for agricultural expansion as well as significant potential to increase productivity, which, combined with its voracious domestic consumer market, contribute to the positive long-term outlook for Brazilian agriculture. The increase in grain and oilseed planting is resulting in greater local meat production as Brazilian agribusiness seeks to move up the value chain, which we highlighted in our recent report (see Why Brazil will plant more).
All Brazil’s major beef exporters have taken advantage of the strong Real to expand internationally, mostly via M&A. JBS, Marfrig and Brasil Foods have expanded their reach by buying or developing international production and distribution networks in the main foreign markets. Markets closed to Brazilian beef are now accessible to Brazilian meat companies with operations around the globe. These international operations provide a natural hedge against the weakening Real. The same M&A trend also means that all the major animal protein companies now have operations in the beef, pork and poultry processing segments. This allows them to maintain sales when consumers migrate from one type of meat to another.
On the international front, Brazil is already making some progress in breaking down trade barriers. The recent approval of beef exports to Malaysia, and South Africa’s recent decision to lift its ban on Brazilian pork following increased diplomatic pressure, are positive developments for exporters, as is the improved outlook for pork exports to South Korea and Japan. Brazil also hopes to begin exporting fresh beef to the US this year. However the ongoing dispute with Russia shows how dependent Brazilian producers are on their government to take a leading role in “meat diplomacy”.
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Description |
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Brasil Foods (BRF) (BRFS3:BZ, BRFS:US) |
The world’s largest poultry exporter, formed after Brazil’s two largest poultry exporters (Perdigao and Sadia) merged in mid-2009. The firm is also one of the world’s top 10 pork processors. The company exports to over 110 countries and has factories in Brazil, Argentina, Britain and the Netherlands. |
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JBS (JBS3:BZ, JBSAY:US) |
The world’s largest meatpacker, with annual revenues of around US$30 billion. Headquartered in Sao Paulo, JBS owns 140 industrial units in five countries (Brazil, Argentina, Uruguay, the US and Australia) and exports to 110 countries. The company acquired the bankrupt US poultry giant Pilgrim’s Pride in 2009 and also took over the beef unit of Brazil’s second-largest beef exporter, Bertin, in the same year. |
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Marfrig (MRFG3:BZ) |
Brazil’s second-largest meatpacker, with factories in Argentina, Uruguay and the EU. The company has made further inroads into the global poultry market with its acquisition in June 2008 of the UK’s largest integrated poultry company, Moy Park, its purchase of the turkey division of Brazil’s Doux Frangosul in June 2009 and its US$900 million acquisition of Cargill’s Brazilian poultry and pork unit Seara in September 2009. |
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Minerva (BEEF3:BZ) |
Brazil’s third-largest meatpacker, it has slaughterhouses in Brazil, Paraguay and Uruguay. The company also operates in the food service sector through Minerva Dawn Farms (MDF), a joint venture with Ireland’s Dawn Farms Foods. MDF produces beef-, pork- and poultry-based foods. |
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