Brazil's Booming Agriculture Faces Obstacles
Brazil's position as
a food and agricultural superpower could be threatened
as supply-side factors slow production growth and
rising domestic demand reduces surpluses.
Constanza
Valdes
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Brazil
has emerged as an important player in
global food and agricultural markets. |
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But
the long-term growth of Brazilian agriculture
could slow due to supply-side factors.
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And
continued growth in domestic food demand
and the changing composition of food
demand could dampen growth in processed
and high-value agro-food exports. |
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| This
article is drawn from . . . |
| “Foot
and Mouth Disease in Brazil,” by Constanza
Valdes, in Livestock,
Dairy, and Poultry Outlook, LDP-M-137,
USDA, Economic Research Service, November
17, 2005.
“Brazilian Meat Industry,” by
Constanza Valdes, in Livestock,
Dairy, and Poultry Outlook, LDP-M-138,
USDA, Economic Research Service, December
16, 2005.
“Factors Affecting Brazilian Growth
or Are There Limits to Future Growth of Agriculture
in Brazil?” by Ignez Vidigal Lopes,
Mauro de Rezende Lopes, Constanza Valdes,
Marilene Silva de Oliveira, Pedro Rangel Bogado,
Getulio Vargas Foundation, Rio de Janeiro,
Brazil, 2006.
“Brazil’s Agribusiness: Threat
or Opportunity for the NAFTA?” by Constanza
Valdes, Elisio Contini, Ivan Wedekin, Arnaldo
Chibbaro, in Achieving NAFTA Plus –
Executive Summary, Third Annual NAAMIC
Workshop, Calgary, Alberta, Canada, May 2006.
|
| You
may also be interested in . . . |
| The
ERS Briefing Room on Brazil.
“China’s Growing Affluence:
How Food Markets Are Responding,” by
H. Frederick Gale, in Amber
Waves, Vol. 1, Issue 3, USDA, Economic
Research Service, June 2003.
“The
Elephant is Jogging: New Pressures for
Agricultural Reform in India,” by
Maurice Landes, in Amber
Waves, Vol. 2, Issue 1, USDA, Economic
Research Service, February 2004. |
Brazil has emerged as an agricultural
superpower in global food and agricultural markets
thanks to economic and trade stability and regulatory
reforms that encourage investment in agriculture.
Brazil is an important producer and the largest
exporter of sugar, ethanol, beef, poultry meat,
coffee, orange juice, and tobacco.
Rising global income and Brazil's
ready availability of land, water, and labor to
increase crop and meat production have driven exports.
Brazil exports agricultural and food products, such
as soybeans, pork, and poultry, to most countries
of the world, including large markets in the European
Union (EU) and the United States. But soaring demand
in China has been at the root of much of Brazil's
export growth. Brazil's agro-food sector accounted
for over two-thirds of its total trade surplus in
2005. At US$27.5 billion, Brazil's agro-food
trade surplus is the largest in the world. Brazil's
success in world markets has given U.S. farmers
a powerful competitor.
Although greater competitiveness
in the agro-food sector can be partially attributed
to market liberalization up to early 1999, new methods
of providing government incentives for Brazilian
agriculture also contributed to the agricultural
growth. These include preferential credit, tax exemptions,
financing for agricultural research, marketing and
infrastructure improvements, as well as an array
of Federal, State, and local subsidies.
Continuing trade expansion and
diversification of markets and products remain at
the core of Brazil’s agricultural growth strategy.
However, several constraints could hinder further
long-term growth of Brazilian agriculture. Supply-side
constraints include adverse macroeconomic shocks,
ongoing transportation and marketing bottlenecks,
financial constraints, and a slowdown on the expansion
of agricultural land. On the demand side, rising
consumer demand for high-value foods plus the growth
of Brazil’s biofuels industry could reduce
the availability of Brazil’s exportable surpluses.
Agro-Food Sector Important
to the Brazilian Economy
Over the past decade, Brazil—the
world’s 11th largest economy—has been
consolidating its position as an important agro-food
producer and major supplier to international markets.
Production agriculture accounted for 10 percent
of the country’s gross domestic product (GDP)
in 2005, but with the associated supply chain, the
agro-food sector (production agriculture, processing,
and distribution) accounts for nearly 27 percent
of total exports and employs 18 million people,
equivalent to 37 percent of the labor force. The
agro-food sector, which was valued at US$254 billion
in 2005, accounted for 28 percent of the country’s
GDP.
Brazil enjoys a low-cost resource
base for agricultural production and has easily
raised output by expanding area and increasing productivity.
Production expansion has exceeded the rate of increase
in consumer demand, leaving surplus production for
more exports. Major economic and agricultural policy
changes, including those that encourage investment
in the sector, have broadened export channels.
Brazil’s
growing dominance in world agriculture,
2005 rankings
|
| Commodity |
World
rank |
Market share
of global exports |
Total exports |
Export
growth rates, 2000-05 |
|
|
Exports |
Production |
Percent |
2005 US$ million |
Percent |
|
|
|
|
|
|
Sugar |
1 |
1 |
42 |
3,919 |
20 |
Ethanol |
1 |
1 |
51 |
766 |
79 |
Coffee |
1 |
1 |
26 |
2,533 |
11 |
Orange juice |
1 |
1 |
80 |
796 |
4 |
Tobacco |
1 |
1 |
29 |
1,380 |
15 |
Beef |
1 |
2 |
24 |
2,944 |
32 |
Poultry |
1 |
3 |
35 |
3,770 |
31 |
Soybeans |
2 |
2 |
35 |
5,345 |
22 |
Soymeal |
2 |
2 |
25 |
2,865 |
13 |
Corn |
4 |
3 |
35 |
121 |
48 |
Pork |
4 |
4 |
13 |
1,252 |
40 |
| Note:
Harmonized codes: sugar (1701), ethanol
(2207), coffee (0901), orange juice
(2009), soybeans (1201), beef (0201/0202/160250),
poultry meat (0207/160231/160232/160239),
pork (0203/160241/160242/160249), soymeal
(2304), corn (1005), and tobacco (2401).
Source: USDA’s Foreign Agricultural
Service and Global Trade Information
Services data. |
|
The value of Brazil’s 2005
agricultural exports reached US$30.9 billion, led
by soybeans and products, sugar, ethanol, beef,
pork, and poultry. Since 2000, the value has grown
at an average rate of 20 percent per year. Brazil
also imports commodities that it does not produce
competitively, including wheat. The value of those
imports was US$3.4 billion in 2005.
Exports of primary bulk, semi-processed,
and processed commodities (soybeans, fresh, chilled
and processed meats, coffee, flour and oils) have
contributed the most to Brazil’s total agricultural
exports. Primary bulk agro-food products grew 8
percent annually during 1997-2005, compared with
9 percent annually for processed products and 5
percent annually for semi-processed products. Horticultural
products, which include fruits, vegetables, flowers,
nuts, and spices, have grown at a rate of 10 percent
per year since 1997; however, both the volume and
growth in horticultural exports are low as sanitary
and phytosanitary regulations restrict access to
foreign markets.
Since 2000, growth of exports
of processed agro-food products accelerated to 20
percent per year. The food manufacturing industry
has been stimulated by the desire for higher per
unit returns, access to new processing technologies
and international capital, and a growing entrepreneurial
class. Between 2004 and 2005, the growth in exports
of processed products (fresh, frozen, and processed
meats, dairy products, breakfast cereals) accelerated,
expanding by 33 percent, and now accounts for 44
percent of agro-food exports. In 2005, primary bulk
commodities accounted for 25 percent of total Brazilian
agro-food trade.
Stability and Reforms Support Farm-Sector
Expansion
Rapid expansion of Brazilian agriculture
and agro-food restructuring began in the mid-1980s,
with the end of a policy regime that had channeled
resources away from agriculture into the industrial
and services sectors. Economic reforms in 1985 sought
to eliminate domestic and export taxes and restrictions
on agricultural exports of soybeans, cotton, and
meat and to eliminate import licenses for corn.
During the early 1990s, the Government also removed
much of the state intervention in agricultural markets—privatizing
state enterprises and eliminating minimum support
prices, government purchases of wheat and milk,
and marketing boards (for coffee, sugar, and wheat).
But the most significant economic
factor affecting agricultural output in Brazil since
the mid-1990s was introduction of the successful
Real Economic Stabilization Plan. Before 1994, Brazil
had inflation levels generally well above 1,000
percent a year. To halt inflation, a new currency,
the real, was introduced, which was initially pegged
to the U.S. dollar and later followed a “crawling
peg” policy of nominal depreciation of the
real against the dollar. The Real Plan stabilized
the economy, reducing inflation to around 5 percent
per year and setting off a domestic demand boom
that lasted for 5 years.
In early 1999, Brazil adopted
a floating exchange rate. The real depreciated considerably,
making Brazil an attractive low-cost supplier of
food and agricultural products. That stimulus led
to the rapid expansion in soybean and meat production
(see "The Impact of Exchange
Rates on Brazil's Agro-Food Sector").
The Real Plan was accompanied
by further privatization of state enterprises and
elimination of remaining barriers to foreign investment,
facilitating the presence of multinational companies
in Brazil. Multinationals stimulated investment
in agricultural research and development of integrated
supply chains that link inputs with commodity production
and distribution. In addition, by granting credit
to producers to buy inputs (fertilizers, seeds,
and chemicals), the large multinational corporations
have alleviated the difficulties that Brazilian
producers had in seeking credit from commercial
banks.
As a result, production of major
crops (soybeans, corn, rice, edible beans, and wheat)
rose to 54 million tons in 1990, double the level
of 1970. During the 1990s, total oilseed area increased
1.0 percent per year, compared with a decrease of
1.9 percent per year for total grain area, while
yield increased 5.2 percent per year, compared with
4.3 percent per year for grains.
Crop production in Brazil reached
an all-time high of 108 million tons in 2005, a
fourfold increase from that of the 1970s. In addition
to expanding export markets, a principal factor
fueling growth and modernization in the crop sector
was expansion of Brazil’s hog and poultry
industries and the accompanying rise in food demand.
While output of edible beans and rice, major food
staples, expanded roughly at the rate of population
growth, soybean and corn production grew much more
rapidly. Corn was once considered a Brazilian subsistence
crop, but rising demand for meat and eggs associated
with rising incomes has led to an expansion of the
mixed feed industry and increased demand for corn
by Brazil’s fast-growing poultry and hog industries.
Future Growth in Agriculture
Could Slow Due to Supply-Side Obstacles…
Agriculture in Brazil still has
plenty of room to grow. Brazil is using only one-third
of its potential arable land, suggesting that continued
growth of agriculture is possible. But a number
of factors are likely to slow expansion in production
and trade.
A more risky, less stable
macroeconomic environment. The economic stability
attained with macroeconomic reform during 1994-99
and a managed depreciating exchange rate signaled
lower risk and stimulated investment and growth
in the agro-food sector. But judging by the appreciating
exchange rate, the current economic environment
has dampened growth prospects for Brazil’s
agro-food sector. The restrictive monetary policy
to keep inflation under control has resulted in
rising interest rates, which in turn attract dollar-denominated
capital inflows. The inflows have increased demand
for reals, which have been steadily appreciating
since September 2004. The appreciation has already
affected Brazil’s competitive pricing and
the profitability of its food and agricultural exports.
For example, by July 2006, the real had appreciated
32 percent against the U.S. dollar, potentially
making Brazilian export products about one-third
more expensive in other countries. With the real
expected to continue to appreciate, Brazilian exporters
will face a deteriorating competitive position in
global food and agricultural markets.
Limited access to financing.
Producers are expected to see more limited access
to credit for production and marketing of crops
and livestock due to two factors: the high current
rate of indebtedness of crop and livestock producers
and the higher cost of credit available to producers
because of higher interest rates. In Brazil, financing
for agriculture comes from three sources: government
agricultural credit disbursed through the National
System of Rural Credit, SNCR (26 percent); agricultural
processors (20 percent); and commercial banks or
other government agencies (54 percent). About two-thirds
of the US$27 billion credit line announced for the
2006/07 crop year, to be disbursed under the SNCR,
will be at the subsidized interest rate of 8.75
percent per year. The government serves as the guarantor
for those loans. All other credit will have to be
financed at rates close to the prevailing commercial
rate—now more than 15 percent. Agricultural
industries and the commercial banks perceive credit
to agriculture as higher risk due to the already
high level of farm indebtedness. The current level
of nonperforming loans is estimated at US$7 billion,
around 10 percent of the value of agricultural production.
For the immediate future, a much larger share of
a producers’ working capital and investment
will have to be financed at higher rates. The reduced
availability and access to low-interest credit will
have a dampening effect on the investment boom underway
in the Brazilian agro-food sector.
Slower land expansion.
The current agricultural area is 62 million hectares,
but the potential for expansion is three times this
amount, including 69 million hectares in the Cerrados
tropical savannah area. The amount of credit required,
however, for bringing the additional land into cultivation
and further expanding agricultural production is
more than double the credit expected to be available
in the more risky economic climate. Additionally,
continued expansion in the Cerrados and Amazon forest
areas is likely to be constrained by environmental
concerns about the rate of land clearing. Even so,
the expected rate of expanding area to crop and
livestock production in Brazil will be one of the
world’s highest—4.5 percent per year
over the next 10 years, or about 1.8 million hectares
per year.
Infrastructure, transportation,
and marketing bottlenecks. These undermine
the competitive position of Brazil in world markets
and translate into higher costs. Development of
storage facilities, port facilities, roads, and
railways has not kept pace with the breakneck pace
of growth in agricultural production and exports.
In recent years, higher soybean volumes for export
markets have overwhelmed loading docks at Brazilian
ports, resulting in long delays (measured in days,
not hours) and additional costs. Some farm commodities
travel 1,000 miles or more over poor and highly
congested roads to reach the port. Less than one-quarter
of national roads are officially deemed in good
condition in Brazil. Recent studies have shown that
the cost for logistics when exporting soybeans from
Brazil is, on average, 83 percent higher than in
the United States and 94 percent higher than in
Argentina.
Large investments in rehabilitating
and expanding transport infrastructure are needed
to keep up with expected demand growth and to lower
the Custo Brazil (Brazilian cost). Custo Brazil
is a term that has come to denote general cost of
inefficiency from production and distribution bottlenecks,
including the various logistical transactions associated
with exports. Transaction export costs (an indicator
of the Custo Brazil) represent 15-20 percent of
the free-on-board (f.o.b.) price for agricultural
commodities. While the Custo Brazil could be reduced
through investments in producer-to-market, producer-to-port,
and port-to-market distribution systems to reduce
delivery times and costs and to maintain product
quality, those investments will come too little
too late to relieve the transportation bottleneck
for the next several years.
…Continuing Sanitary
and Phytosanitary Restrictions on Exports…
Brazil is still blocked from important
markets in the North American Free Trade Agreement
(NAFTA) and East Asia, due to sanitary and phytosanitary
(SPS) restrictions. For example, Brazil has been
unable to gain access to important markets for fresh,
chilled, and frozen beef and pork products among
NAFTA members—the United States, Canada, and
Mexico—or Japan, South Korea, and Taiwan because
of sanitary concerns, mainly Brazil’s foot-and-mouth
disease status. Brazil’s poultry meat exports
are accepted by some premium markets, such as Japan
and Korea, but the U.S. and Canada still bar imports
of Brazil’s fresh, chilled, and frozen poultry
meat because of disease concerns, particularly Exotic
Newcastle Disease (END). END re-appeared in July
2006 after 5 years without outbreaks. Oilseeds have
also faced sanitary restrictions from time to time.
In 2005, for example, some shipments of Brazilian
soybeans to China were barred from entry because
of fungicide contamination. These constraints can
be eliminated only by negotiations with trade partners
and may require changes in domestic SPS policies
and procedures, which could be very expensive.
…and Shifts in Domestic
Demand
Industrial use versus food use.
Changes in the composition of industrial use versus
food use of agricultural production will affect
the availability of agro-food commodities for the
domestic and export markets. For example, the rapid
expansion of Brazil’s biofuel industry could
profoundly affect the availability of grains and
oilseeds for export and other domestic uses. Brazil’s
sugarcane and associated sugar and ethanol industries
have grown rapidly in the last 5 years. Ethanol
now accounts for 37 percent (in volume) of fuel
used by passenger cars. In further efforts to reduce
Brazil’s dependency on fossil fuels, Brazilian
researchers are also investigating new biodiesel
technologies (using castor, soybean, sunflower,
cottonseed, and palm oils). Diesel consumption in
Brazil is about 59 percent of total fuel use. Demand
for soybeans as a raw material for biodiesel will
likely increase use of Brazil’s excess crushing
capacity but dampen the recent boom in soybean exports.
Food demand. Future changes
in the composition of food demand and the need to
meet rising domestic demand will also dampen agricultural
export growth. Improved economic performance, growth
in per capita income, a more balanced income distribution,
continued population growth, and retail marketing
are expected to strengthen demand for the quantity
and quality of food products in Brazil. For wealthier
consumers, growing urbanization and rising incomes
may shift greater food consumption toward higher
value and processed food products (meats, fats and
oils, dairy products, and ready-to-eat foods). For
lower income consumers, the need to meet necessary
caloric requirements may be the primary driver of
food consumption patterns.
Brazil is a large, growing market—population
of 183 million—with a large middle class and
a large youth market. Brazil is categorized by the
World Bank as a lower middle-income country with
per capita gross income of US$3,300 in 2006. However,
disparities in income distribution have restricted
food demand. Better income distribution, rising
incomes, and the new Zero Hunger social program,
which seeks to provide food access to 46 million
people in 9.5 million households, could change domestic
food consumption patterns as a large share of additional
disposable income may be used to raise animal protein
consumption (meat and eggs). Per capita meat consumption
has grown annually by 2 percent on average since
1995.
Higher income is expected to lead
to greater consumption of higher quality meats and
other processed and high-value food products. Continued
growth in domestic food demand and, more importantly,
the changing composition of food demand will dampen
growth in processed and high-value agro-food exports.
Despite great strides for Brazilian
agriculture in world markets, the competitiveness
and efficiency of Brazil are under pressure from
a number of sources. On the supply side, adverse
changes in the macro economic environment could
slow down new investment. Output expansion could
be limited by lack of financial resources for agricultural
production, environmental regulations restricting
the land expansion rate, lack of investment in infrastructure,
and diseases, such as soybean rust. On the demand
side, Brazilian products are blocked from a number
of foreign markets because of SPS concerns, and
growing demand for raw materials for biofuels and
increases in domestic food consumption could reduce
exportable surpluses.
The
Impact of Exchange Rates on Brazil’s
Agro-Food Sector |
| A currency
devaluation will impact domestic and foreign
prices, production costs, and debt indexed
in local and foreign currencies. With the
devaluation, prices of commodities in local
currency increase whereas all costs measured
in foreign currency decrease, leading to higher
profit margins and increased revenues. On
the other hand, producers and processors with
foreign-denominated debt see that debt increase
in local currency terms.
Both real and nominal exchange
rates have enormous effects on Brazil’s
competitiveness in international markets.
In recent times—1999 and 2001—Brazil
has had two major currency devaluations. The
accumulated devaluation between 1999 and the
peak nominal rate in mid-2002 was 217 percent
and through the end of 2005, the accumulated
depreciation was 82 percent.
The economic impact of devaluation
on the domestic agro-food industries depends
on the price structure within the economy
and the response of relative commodity prices
to the devaluation. For example, the devaluation
of the Brazilian currency benefited exporters,
while reducing the profitability of imports.
In the case where Brazil’s
share of the world export market is high,
the positive effect from the devaluation can
be offset by a decline in world commodity
prices. For example, the 1999 devaluation
of the real raised expected returns to soybeans,
which in turn led to a 20-percent expansion
in area planted to soybeans in the 2000/01
crop year. The increase in area planted and
higher production translated into 35-percent
growth in soybean export volume. Since Brazil
is a large player in the international soybean
market, this export expansion led to changes
in world prices and feedback effects, as well
as a 2-percent decline in world soybean prices
by 2001.
Since 2004, the real started
a new period of appreciation, which makes
Brazilian agro-food products more expensive
to importers around the world. |
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