040926 Brazil Might Be Ready to Make Move In Pork

Iowa Farmer Today - Brazil might be poised to make a move with its pork industry as it did with soybeans in the 1970s.

"We are sitting back to the equivalent of the 1960s and early '70s at the infancy of the Brazilian soybean industry," says Purdue University ag economist Ken Foster, comparing Brazil's pork production to its soybean increase of the 1970s.

"The long term is pretty clear. They will increase production because they have a growing grain base. They will want to find a way to add value to that grain base,'' he predicts.

"And, as we know here in Midwest, one good way to do that is to feed it to livestock.

"In terms of the U.S. industry, no one should be getting out of the business in North America because they worried about Brazil at this point."

Brazil exported 605,000 metric tons of pork valued at $532 million during 2003, a USDA Foreign Agricultural Service report says. That was a 2.5% increase from 2002.

In a September outlook report, the USDA notes Brazil will begin an aggressive marketing campaign to export pork to new markets. Traditional markets for Brazilian pork are Russia, South Africa, Singapore, Ukraine, Bulgaria, Armenia and Lithuania.

Sixty percent of Brazil's pork production in 2002 was in the southern and southeast states of Brazil, such as Santa Catarina, Rio Grande do Sul and Parana.

However, Foster says most of the growth of its pork industry is occurring in the central Brazilian states, such as Mato Grosso, Mato Grosso do Sul, Goias and Distrito Federal.

Those are the same areas that produce most of the country's corn and soybeans.

"There might be a certain strategy there of let's take our domestic grain production, add value to it through livestock and poultry and capitalize on our growing domestic meat demand," Foster says.

"When you look at their cost of production for grain and access to markets to grain, typically their opportunity cost for feed is less than ours.

"Their labor expense is going to be lower than ours. Their government intervention with respect to environmental regulations will be lower then ours.

"So, we expect their cost of production to be less than ours. If they get to the point where their product is acceptable to export markets, they can be a major competitor. But, it is a long time off."

Foster predicts it will take at least 10 to 15 years before Brazil likely will become a rival to the United States in pork production.

However, there might be some short-term roadblocks to Brazil becoming a world pork player.

"The problem with that region is all these diseases, such as foot-and-mouth, classical swine fever and pseudorabies are present in the grain-producing region of Brazil,'' he says.

Because of those diseases, Russia has become the largest market for Brazilian pork.

However, the Russians would like to develop their own agriculture economy. That means the Russian government has put some quotas on the amount of pork imported from Brazil.

Under the quotas, Brazil will be allowed to export only 40% of the pork it exported to Russia in 2003.

"What is happening is that product is being forced back into the Brazilian market," Foster notes.

"That is putting a lot of pressure on domestic pork prices in Brazil. That takes some the wind of the sail in terms of expansion."

That slowdown in the Brazilian pork industry might help it overcome its disease problems, he explains.

As the industry slows, the smaller and older pork operations likely will leave the business. That means after some adjustments, the pork operations left likely will be larger, more integrated or more efficient.

"Those bigger operations will find it easier to deal and eradicate these diseases. So, go through a couple of these adjustment cycles, and we might be dealing with a industry that gets those diseases under control in 10 to 15 years."

In addition to the export market, some of the expansion is due to economic growth in Brazil and other South American countries.

"Brazil is a big country with a lot of people and close to Argentina, which is another country with a lot people. That region is an area where we would expect long-term income growth and increase in meat demand."

Some U.S. companies are also banking on pork production increasing in Brazil, Foster adds.

"Some of that investment in the pork has been from domestic sources. A lot of it has been driven by U.S. and European investors.

"Cargill is buying out a Dutch concern that is quite large pork and poultry production in Brazil."

He says Smithfield also has looked at moving its vertical integration system into Brazil.

The reasoning behind increasing investment in Brazil is to produce the pork there instead of shipping from the United States, Foster notes.

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