Meat production could be the answer for Brazil

Brazil's abundant natural resources are a blessing or a curse, depending on whom you ask.

The share of raw materials in Brazil's total exports increased from 29 per cent when the ruling Workers' Party (PT) assumed office in 2003, to 49 per cent last year, according to the country's ministry of development. The proceeds of the world's increasing demand for Brazilian agricultural produce, minerals and oil were invested in social programmes and fuelled a consumer boom.

The view that Brazil has become too dependent on commodities, however, is gaining prominence, as Chinese demand softens and a slower-than-expected European recovery depresses key commodity prices. Over the past year, soya beans have fallen more than a third, Brent crude oil more than 40 per cent and iron ore by almost half.

Daiane Santos, from the centre for studies of foreign trade (Funcex), a think-tank, says: "The expectation for the next two years is that prices for these commodities will not return to levels they were at and the alternative we have is to diversify exports." But, despite her bearish short-term perspective, Ms Santos believes that, in the long term, "prices will pick up and it makes sense to use our competitive advantage".

One of the areas in which Brazil is already a leader but where it can further strengthen its position is in meat production. Global demand for higher protein diets and convenience food is growing as a result of urbanisation and rising incomes.

Brazil is home to some of the world's largest food companies, whose portfolios include meat but also ready meals and pizzas. These include the world's largest protein producer JBS, Marfrig, whose Moy Park division supplies the UK's Tesco and Waitrose, and BRF, whose Claybom and Qualy margarines are the preferred brands for almost half of Brazilians, according to FT LatAm Confidential, a research and analysis service.

Brazil has distinct advantages in the meat sector, explains Cesar de Castro Alves, an analyst at MB Agro, a consultancy. "Know-how is well developed and in­stalled capacity is high," he says, while Brazil's access to cheap feed for pigs and chickens keeps production costs low.

But the meat industry faces a number of problems.

Exports in the first quarter of 2015 were down significantly on the same period last year. Revenues for Brazilian beef, pork and chicken fell 29 per cent, 15.7 per cent and 6.6 per cent respectively, according to the ministry of development.

Some of this relates to one-off factors: a truck drivers' strike in February; several markets imposed short-term import bans on Brazilian beef; and Brazilian exporters applied greater discounts in an effort to sustain markets such as Russia and Venezuela, where purchasing power has been reduced as a result of the fall of local currencies against the US dollar.

Nevertheless, robust exports are essential to hedge against a softer domestic market, which is depressed as a result of higher unemployment and tighter household incomes, as well as an undersupply of cattle. This has pushed beef to record prices, at a time when consumers can ill afford to spend more.

Brazil's large multinationals have the scale and level of diversification to offset these issues, particularly through their growth of higher margin branded and processed foods, which are less vulnerable to short-term commodity fluctuations. But many smaller companies are going out of business.

There are also longer-term problems. While Brazil has access to relatively cheap feed, exports lose competitiveness as a result of poor logistics, as well as the fact that much of meat production is in remote locations thousands of miles from its ports.

Adolfo Fontes, an agribusiness specialist at Rabobank, the Dutch bank, also points to productivity issues in the beef sector due to low-quality pasture and the lack of food supplements.

"In Brazil, cattle take 36 months to mature; in the US it is 18-24 months," he says. In addition Brazil is not able to export fresh beef to the US yet, although negotiations have been under way for some time to allow this to happen.

This could transform the Brazilian industry because of the impact on exports elsewhere.

"Having a 'US visa in our passport' would increase our bargaining power with [other markets] such as Canada, Mexico and South Korea," he believes.

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