Brazil’s Beef Transition Will Be Harder than Advocates Think

by Garrett Baldwin

Brazil’s export profile continues to center on soy oilseeds, corn, and sugars, a focus that some argue is outdated given changes in the global markets.

The nation is gradually losing its competitive advantage in the agricultural sector, fueled by rising labor costs, delays in joining free-trade movements, ongoing logistical nightmares, and other rising challenges. Despite the nation’s prolific ability to harvest grain for feed, its inefficiencies in transporting those goods has generated a conversation about a change in its export profile from agricultural economists and consultants.

In 2014, Brazil again jockeyed against rivals India, Australia, and the United States for the title of the world’s largest exporter of beef. But the nation could easily outpace its competitors if it boosts capacity for domestic beef production. Being the leader in exports is more of a conversation of “why not” than “how?”

A number of metrics suggest that the nation would benefit by shifting away from sending grain feeds to meat-producing rivals, and instead utilize its own production to boost its beef production for exports. Such a shift would come at a time when its rivals are seeing their competitive advantages erode and herds shrink due to ongoing droughts, all at a time when global demand for beef is on the rise.

But a number of questions must be considered before significant investment is pushed forward in effort to make this a reality.

Boosting Brazilian Beef Production

The basic argument for boosting beef production centers on two trends: First, a surge in excess grains in its production rich state of Mato Grosso, and second, surging beef demand on the international front.

Addressing the first challenge is the most critical. It centers on allocating land for beef production in the Mato Grosso region and shifting excess supply to new Brazilian feedlots. Excess and lower value corn could logically be used to boost cattle production. As Rabobank notes, “trapped corn” could be redirected to an increased system of domestic production, a process that could “create added-value in Brazil.”

According to Rabobank, the nation could double its lot-feeding production over the next 10 years. In addition, shifting from pasture-based production to more intensive feeding systems could boost the nation’s red meat production from 10 million tons this year to 13 million over the next decade.

Rabobank estimates that the expansion of feedlots and improved grain production could spur sorely needed investment in beef genetics, which would in turn boost red-meat production.

Brazil is one of the few producing nations that has the capacity to boost its beef production at a time when its rivals are facing new challenges to boost their sectors. U.S. herd level hit its lowest level since 1951 in 2014, in part due to prolonged drought. Australia has also faced two years of drought. And despite positive export flows for the nation in the face of a new free-trade agreement and phased-out tariffs with China, Australia faces its own infrastructure challenges, concerns about the nation’s regulatory environment, and producer complaints about transparency in the nation’s public authority. Finally, productivity growth leads a number of challenges for India in the face of low capital, falling land prices, and waning capacity growth.

It seems like a no brainer for Brazil… until you pull back the curtain and see the challenges.

Infrastructure Challenges Abound

First, there is the cost.

Investment in Brazil carries geo-political risk, and the rise in anti-business sentiment carries its own stigma. The bank currently estimates that the nation needs roughly $250 million to $500 million to overhaul its current production systems. Who is going to pay for this?

At a time when investment groups can earn more bang for their buck investing in agricultural technology or a more business-friendly environment, accessing capital raises an immediate challenge.

But even with that level of investment, infrastructure problems are likely to dog the industry. While Brazil’s prolific reputation for production of feed grains is well documented, the logistical challenges of transporting those products are just as known.

A lack of roads and rail in the north, and storage and crushing bottlenecks in the south have been compounded by high transportation costs. Nowhere is this more noticeable than in the high costs of production in Mato Grosso. According to a recent research note by Rabobank called “Beefing Up Brazil,” shipments of grains from Mato Grosso to China are 40% higher than the same volumes “originating from the U.S state of Minnesota.”

Meanwhile, basic infrastructure, such as silos, has forced farmers in Lucas do Rio Verde, Mato Grosso to store grains outdoors, threatening quality and value. Ongoing public-sector and union strikes have significantly delayed farm-to-port transport. And rising production and labor costs have evaporated a competitive advantage that the nation once enjoyed over the United States.

Back in 2000, Brazilian production costs were roughly 60% of those in the United States. Today, that is hardly the case.

The economics behind the desire to shift production from grains to beef are the same that require greater exploration to ensure that the region has the human resources, transportation capacity, and other important inputs to make such a transition possible.

But the same challenge will face the beef industry regardless of whether grains are used to ship abroad or to feed cattle. Producers will need to ask an important question. Where will the beef production facilities be? Furthermore, are there specific advantages to locating these facilities by the ports or in Mato Grosso for origination?

Near origination points, the same logistical concerns will continue to hinder the market. But near the ports, where it seems more logical on the surface, concerns about storage and refrigeration will be emerge for producers.

Global Demand Fueling Shift

The argument for a shift in Brazil’s export profile makes a vivid assumption: There will be a market, and China will be the primary buyer of Brazilian red meat.

China recently announced it will restore beef imports from Brazil after “an atypical outbreak” of Bovine Spongiform Encephalopathy (BSE) at a plant in the southern state of Parana, according to the Association of Brazilian Beef Exporters (ABEIC).

This is good news for the country at a time that ABEIC expects meat exports to China to surge to $700 million by as soon as 2016. This trend could increase to $800 million to $1.1 billion in the next few years.

Meanwhile, the nation’s exports will return to another import-heavy nation, Saudi Arabia, in 2015, as well. Prior to an import ban on Brazilian beef in Saudi Arabia, ABIEC says that exports reached $170 million annually.

These are just two growing nations that are unable to self-produce for their consumers. Thanks to rising wages, improved living standards, and dietary transitions, nations in Africa, the Middle East, Asia, and parts of India are seeing beef demand rise. Brazil is the most capable nation to fill that gap.

Yes, surging demand internationally warrants an emphasis on improved beef production. But China’s import focus is another factor. Will China, Brazil’s main trade partner, continue to buy soybeans at the same/increasing rates or will it start to import more red meat? And which types of red meat and at what volumes?

And, it’s important to keep an eye on Australia’s recent free trade agreement with the world’s largest market. Though Australia has been hit by drought, investment is expected to surge in its own beef and dairy markets thanks to the free-trade agreement. Will proximity to China provide Australia with an advantage over Brazilian beef in the long term, and will there be a significant distinction in quality and cost between the two producers?

Chinese consumer trends suggest that beef will be a central trade commodity. Safety concerns about pork (its most popular consumed meat), rapid urbanization, and population growth are driving the boom. According to Meat & Livestock Australia, Chinese beef demand is set to rise to 7.21 million tons by 2015, and 7.96 million tons in 2020.

But beyond that, Brazil needs to examine what the demand curve for beef production looks like outside of one market. Following a thorough examination, only then can the nation look internally to decide whether or not it is capable of addressing its own internal challenges and the costs associated with changing its export profile.