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Domestic demand grows, but Brazil beef still represents powerful force on world stage

Jon Condon, 28/03/2017

ECONOMIC and political improvements in Brazil are likely to see domestic beef consumption rise this year, but the country’s rapidly expanding beef herd is still likely to deliver a net expansion in beef export volumes in 2017.

That was the message delivered by Brazilian economist Adolfo Fontes during the early stages of his visit to Australia this week. Among other industry engagements across the country, Mr Fontes will address the NTCA conference in Darwin on Friday.

Rabobank Brazil economic analyst Adolfo Fontes with his Australian equivalent, Angus Gidley-Baird in Brisbane yesterday

Rabobank Brazil economic analyst Adolfo Fontes with his Australian equivalent, Angus Gidley-Baird in Brisbane yesterday

While Brazil’s economy was in poor shape 12-18 months ago, a new government had made a raft of fiscal changes which were restoring consumer confidence, and driving domestic beef consumption higher, Mr Fontes said.

Given Brazil’s current population of around 210 million people – ranked among the largest beef eaters in the world – even a small shift in domestic consumption can absorb large volumes of beef.

But at the same time, beef production in Brazil is still rapidly increasing, meaning there was little prospect of net deficit in volumes available for export.

Mr Fontes said two years of female retention in Brazil’s national beef herd, which restricted beef production for a period in 2015-16, was now expected to increase production 3pc this year, and a further 2pc in 2018.

Current herd size was around 215 million head, up from a figure in the 190s only six years ago.

“We expect domestic beef consumption to begin to grow in the second half of this year,” Mr Fontes told Beef Central.

“The economy is still improving after its earlier difficulties, and it will take some time for employment levels to restore, and for consumers to feel more confident to again eat more beef – which is more expensive than other animal proteins in Brazil.”

In a typical year, some 80pc of Brazil’s beef production is consumed domestically, with 20pc available for export.

“But equally, with increased herd size and beef production growth, there will be more beef available. The net result will be more beef available for the international market.”

Currency factor

While currency movements had gone against Brazilian exports in the past 12 months, this was not expected to impact on export trade in any significant way.

When Mr Fontes last visited Australia last year for the World Brahman Congress, the Brazilian currency, the Real, was almost 4:1 against the US$. Today it is 3.15 Real to the US$.

“That’s largely happened because of the improvements that have happened in the Brazilian economy and stabilisation of the political situation,” he said.

But despite the currency movement, Brazil remained very competitive on the world beef stage.

“Brazil can still sell product on the international beef market at a very attractive price, without the currency advantage,” he said.

Slaughter cattle prices had remained quite stable in Brazil over the past year, but were anticipated to decline during 2017 due to the expected production increases, and also because of short-term impacts from the recent Federal Government investigations.

“Producers in Brazil are making money at the moment, because their costs are going down,” Mr Fontes said. “Calf prices are much cheaper than last year, and corn prices have also declined substantially from a year ago. Calf prices have declined because of the greater supply of cattle coming forward.”

Production growth focus switches from herd increase to productivity

Mr Fontes said the expectation was that Brazil’s national herd would continue to increase a little, before stabilising in coming years.

“But the big focus right now is not on larger herd size, but on improving productivity. There is still a lot of room for improvement here. Brazil produces less beef annually than the US, with a herd size more than twice as large.  This is the big change we have seen in Brazil – the focus on productivity, with producers investing more in technology, genetics, animal health and nutrition.”

“This will make it possible for Brazil to further increase beef production, without having to increase herd size.”

Brazilian processors are currently making positive margins on cattle, but that is expected to improve as the year progresses, due to the anticipated fall in cattle prices due to herd expansion – perhaps about 5pc lower through to later this year. Slaughter cattle prices this year had already fallen about 8pc from last year.

“Last year and 2015 were quite difficult for processors, because cattle supply was not so readily available,” he said.

Slow US access

Despite its recent setbacks caused by a national investigation into corruption within the country’s  meat inspection system which has seen temporary suspension placed on exports to key countries like China, Egypt, of Chile (see this morning’s separate story), Brazil still anticipates total exports this year to be being larger than 2016, Mr Fontes said.

After a very slow start to beef trade with the US since gaining access around September last year, he remains confident volume will begin to grow during the latter stages of this year and into 2018.

Batch testing protocols required for entry to the US have been one of the points of resistance to greater trade so far.

“During January and February this year, Brazil exported around 1500 tonnes of fresh beef to the US. While Brazil’s current meat inspection investigation may slow progress to the US for a period in the short term, we’re anticipating total exports to the US this year of 10,000 to 15,000t, and larger in 2018.”

When questioned about prospects to gain access to Japan and Korea,  Mr Fontes said the recent Brazilian government investigations into meat inspection might also delay prospects of Brazilian beef gaining entry onto those markets this year.

“Two weeks ago, I would have said access was likely to Japan, Korea and Mexico sometime in 2017. But as a result of the recent investigations, we think that is now likely to be pushed back into 2018. But Japan and Korea are still on the horizon.”

He anticipates that once all the destinations discussed above are open to Brazilian beef, different products would find their way into different markets.

“To the US, we think the trade from Brazil will be much more about forequarter cuts and commodity manufacturing meat for the hamburger trade,” Mr Fontes said.

“Brazil is very competitive in this kind of product, and it complements Brazil’s own domestic market, which prefers hindquarter beef.”

“In Japan and Korea, if and when the markets open, we still don’t have a clear view, but it is more likely to be about premium cuts.”

In both the US and North Asian markets, frozen was likely to be used in preference over chilled out of Brazil, because of the transport distances involved.

That was likely to create some ‘separation’ for Australian chilled product, because of the shorter distances involved, and the strong chilled ‘brand’ reputation that Australia had established.

Lotfeeding continues to expand

Lotfeeding also continues to grow dramatically in Brazil.

Currently the country has some four million head on feed, but because corn prices last year were so high, the number declined somewhat. But corn production and price has again returned to more normal patterns this year, and there are expectations that feedlot capacity will continue to grow to about eight million head over the next ten years.

While that’s not that far behind the size of the US feedlot industry, it would still only represent about 20 percent of overall Brazilian slaughter numbers, currently around 40 million head each year.

Greater expansion into lotfeeding would have obvious impacts on lifting carcase weights (currently around 250kg/head), and meat quality.

 

 

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