Report Highlights:

Post projects beef and pork production to increase by five and three percent, respectively, in 2006, mostly driven by strong demand from the export market, as Brazil continues to benefit from the problems derived from animal disease outbreaks in some regions of the world. Although the Brazilian economy is projected to grow by 3.5 percent in 2006 with inflation under control, domestic demand for animal protein is estimated to increase at moderate rates due to the lack of consumer confidence resulting from the current political uncertainties and the high level of consumer debt from purchases of durable goods. Profit margins for both livestock producers and packers are expected to remain slim due to lower cattle prices, appreciation of the Brazilian currency, and higher production costs.

Executive Summary

Cattle inventories continue to expand in Brazil in response to higher investments in animal genetics, and improved pasture and management practices stimulated by government credit programs. Beef production is projected to increase by five percent in 2006, mostly driven by strong demand from the export market, as Brazil continues to benefit from the problems derived from animal disease outbreaks in some regions of the world. Continued strong export demand combined with moderate growth in domestic consumption will likely increase pork production by 3 percent in 2006.

However, there are some constraints that may temper the projected increase in beef and pork production in the near future: the continued appreciation of the Brazilian currency, higher interest rates, uncertainties derived from the current political crisis which dropped consumer confidence and consumer high debt, lack of adequate financing for government sanitary and inspection programs, lower cattle prices, and projected lower economic growth in 2006 as compared to the current year.

Commodity Outlook, Pork: Production

Post forecasts pork production to increase by three percent in 2006 because of continued strong demand from the export market combined higher domestic demand. This projection assumes a moderate increase in feed costs since the new Crop Plan to be officially announced for 2005/06-crop year will likely inject more subsidized credit to increase corn production. It also assumes that current favorable returns to hog breeders will continue the first half of next year. Brazilian pork exporters also project a moderate devaluation of the Brazilian currency in 2005 that will make the Brazilian product more competitive in world markets.

Our forecast also estimates an increase in hog production in the center-west region due to investments made by national and foreign groups, mostly in the state of Mato Grosso. These investments benefit from long-term federal credit lines as well state development programs. An increase in hog production in the center-west region will off-set a small decline in hog production in the south region of Brazil where hog producers have balanced supply and demand to increase profit margins. However, the three most southern states of Brazil still account for about 40 percent of swine slaughter and the production system is highly vertical.

About 40 percent of Brazilian pork production is concentrated among 10 large pork packers, of which Sadia accounts for 11 percent of production, followed by Perdigao with 8 percent, Aurora with 7 percent, and Seara with 5 percent. Although Seara only accounts for 5 percent of total pork production in Brazil, the company alone accounts for nearly 25 percent of all pork exports.

Consumption

Pork consumption in 2006 is expected to recover from 2005 mostly because of the expected stable consumer prices and strong market promotion conducted jointly by producers and packers to increase per capita domestic consumption of pork in Brazil. Pork utilization in Brazil is estimated at 70 percent industrial/processing, and 30 percent fresh consumption. A promotional campaign to increase fresh pork consumption, which started in the south, has expanded to other major cities in the southeast.

Pork producers remain concerned about the seasonal trend of fresh pork consumption in Brazil that is concentrated during the winter months (June-August), and are trying to address this concern with their campaign to promote the benefits of pork consumption year-round. Pork producers are trying to close the gap between the regions of Brazil in terms of pork consumption. Currently, per capita pork consumption is concentrated in the South with per capita consumption at 18 kilograms and the Southeast at 15 kilograms, while the Center- West (11 kilograms) and Northeast (6 kilograms) regions consume less pork.

Trade

Pork exports are projected to increase by a small rate in 2005, after a surprising significant increase this year. According to trade sources, although pork exports are still too concentrated in the Russian market, exports to other non-traditional markets are increasing through negotiations to resolve SPS issues and aggressive market promotion.

The volume of pork exports during Jan-Jun 2005 increased by 30 percent. This result is significantly better than previously estimated by pork exporters and reflects continued booming sales to Russia. Exports to other destinations in Eastern Europe also increased significantly, such as Kazakhstan, Uzbekistan, and Ukraine. The value of pork exports during Jan-Jun 2005 jumped by 81 percent, due to a higher average price of US$ 1,954.98 per metric ton, up 39 percent from the same period last year.

Marketing

In addition to the domestic campaign to increase consumption of fresh pork, Brazilian pork exporters initiated a marketing program in 2002 to expand overseas sales of pork. The program is half financed by the Brazilian Pork Processors and Exporters Association (ABIPECS) and the other half by the Federal Government Export Promotion Agency (APEX). In 2005, the program has received additional funds of US$ 1.5 million.

ABIPECS is a private, non-profit organization aimed at supporting pork exporters in overseas markets. Since pork processors and exporters in Brazil are also the poultry processors and exporters, ABIPECS works jointly with ABEF, the poultry exporters association, in market promotion. They share the same offices and staff, but their market promotion budgets are separate. ABIPECS’ major goal is to develop new markets for Brazilian pork exports that are still highly concentrated in Russia. Pork exports are also concentrated among five major companies, which account for 72 percent of all exports (based on 2002 data): Seara (26%), Sadia (17%), Perdigao (14%), Pamplona (10%), and Frangosul (5%). The same concentration is true for the three most southern states of Brazil.

Market promotion programs developed by ABIPECS include: trade servicing, participation in trade shows (principally FOODEX Japan, HOFEX Hong Kong, World Food Moscow, SIAL, and ANUGA Germany), display and sampling of products, sales catalogs in foreign languages, trade missions, reverse trade missions, and publicity. More recently, ABIEC jointly with the Brazilian Embassy in certain important cities of the world has innovated their programs by promoting Brazilian “barbecue” style (churrasco) for selected audiences. Brazilian “barbecue” style restaurants (churrascarias) are growing in different countries of the world, such as in the United States and China.

Target overseas markets include: Asia, the European Union, and other countries in Latin America. Since Russia became the largest importer of Brazilian pork, ABIPECS is targeting Russian retailers in their promotional efforts to avoid the high cost of doing business in Russia through European trading companies.

Policy

The same programs referred on pages 6 and 7 of this report apply to pork packers. In addition, pork packers can also benefit from a subsidized long-term credit program through the Ministry of Science and Technology (MCT) to finance projects aimed at genetic development and improvements in pork quality and carcass yields. Total funds allocated under this program for 2003/04 are estimated at US$ 10 million.

Further Information

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Source: USDA, Foreign Agricultural Service - Annual Livestock and Products Report - August 2005