The recent spate of mergers and acquisitions heralds big changes for Brazil's pork industry, as it has consequences for ownership and exports. What happened in the largest pork producing state of South America in 2009? Here's a quick recap.
By Patrick Knight
The numerous takeovers and mergers in Brazil’s pig processing industry in 2009 has changed the ownership of companies responsible for about 30% of output and 70% of exports. The strategies and priorities of these companies and others can be expected to change as a result.
The takeover by Brazil’s second ranking poultry and pork processor Perdigão of the troubled market leader Sadia, has resulted in the formation of Brasil Foods. The new company will be responsible for more than 20% of the pork produced in Brazil and 40% of its exports.
Marfrig, Brazil’s second largest beef packer and which has expanded into pork in the past few years, has paid Cargill about US$900 million for the Seara company. Marfrig is now the country’s third largest processor after Brasil Foods and the Aurora co-operative, and companies in the Marfrig group will be responsible for about 18% of all Brazil’s pork exports, starting now. Marfrig is to emulate the two partners which form Brasil Foods and build new large processing facilities in Mato Grosso state. Feed costs much less in the west as in the traditional producing states of the south, while water is abundant there and waste is a source of revenue rather than a cost.
JBS and pork
Brazil’s largest beef packer, the international giant JBS, now processes almost 50,000 hogs a day at its plants in the United States. Following its acquisition of the Pilgrim’s Pride poultry meat company in September, JBS is now one of the largest processors of chicken in the United States as well. Many analysts think that JBS will soon enter the poultry business in Brazil, as part of its strategy of distributing all types of meat in the many countries where it operates. It would be surprising if JBS did not enter the pork business in Brazil in the near future as well. Analysts say that if Brasil Foods wants to remain a player in the increasingly globalised meat business, it too will have to make acquisitions in poultry and pork in the United States.
Hurt by high labour costs in Europe, the Doux group is now responsible for 4% of the pork exported from Brazil. Although Doux denies its Brazilian chicken and pork operations are for sale, the company is thought likely to dispose of some operations, having already sold its turkey processing units to Marfrig.
With the market changing this rapidly and smaller players being increasingly squeezed, it remains to be seen what Brazil’s 20 or so co-operatives will do. Between them they are responsible for about 15% of all the pork exported from Brazil.
Jurandir Machado of the Brazilian Pork Exporters Association, Abipecs thinks that with the exception of the large Aurora co-operative most of the other co-operatives will concentrate on supplying just the domestic market and confine themselves to selling regionally. Aurora has six pork processing plants, and is responsible for about 8% of all exports.
In terms of volume, 2009 has been more favourable than 2008. Earnings, however, went down by almost 30% because of lower prices. Due to difficulties at the end of 2008, when half the normal amount was shipped in November and December, total pork shipment for 2008 only was 529,000, which was 78,000 tonnes less than in 2007. More than 600,000 tonnes have been shipped in 2009, about 9% more than in 2008 and equal to 2007, when 607,000 tonnes were sold.
The industry is resigned to the fact that sales to Russia, which has taken 44% of all exports so far this year, compared with 50% three years ago, will continue to decline, as domestic production increases.
As Russia is one of the countries that was the worst affected by the world financial crisis, many consumers have turned away from beef and poultry meat and have returned to pork, at the end of 2009. About 15% more was shipped from Brazil to Russia in 2009 in comparison to 2008 – this is a higher than average increase.
Exports to number two ranking Hong Kong have increased by a fraction less than the average for all exports, 6.8%, to reach almost 100,000 tonnes in the first ten months. Exports to Singapore increased by almost 28% to total 23,000 tonnes, while sales to Argentina remained static at 22,000 tonnes.
Attention to Africa
Whenever the Brazilian large chicken and pork industries face difficulties in their prime markets, Europe and Asia, they attempt to sell more to countries in Africa. These countries are usually less attractive because they pay lower than average prices, while marketing there is more costly.
The new enthusiasm for Africa is reflected in the fact that sales to Angola, fast emerging as a major oil producing country, increased by 66% to 24,000 tonnes. Much more has also been sold to the currently small markets of Mozambique, Namibia and Senegal, which have grown by far more than the average so far as well.
Abipecs president, Pedro Camargo Neto, believes that Brazil will be exporting three times as much pork in 2015 as it does this year, that is to say 1.8 million tonnes.
By then, more than a third of all the pork traded worldwide will be Brazilian, predicts Camargo Neto.
To pave the way for this, Abipecs has been paying meticulous attention to sanitary matters, Camargo Neto indicates, although he admits the pay-off is slow. Only now, four years after an outbreak of Foot-and-Mouth Disease (FMD) affected animals in Mato Grosso do Sul state, Russia has agreed to resume imports from neighbouring Santa Caterina state, which was not affected by FMD at the time. South Africa still refuses to buy pork from Brazil, using FMD as a pretext.
The pork producers in Brazil are very well aware that it will always be extremely difficult to sell significant amounts of meat to the United States. Production costs in the US are similar to those of Brazil, while the US is now benefiting from the weakness of the US dollar. This makes its meat more competitive than that from Brazil, whose currency continues to gain ground.
But the Brazilians would very much like the US sanitary authorities to formally accept that the quality of Brazilian pork is high. Camargo Neto considers that a seal of approval from the US Animal and Plant Health Inspection Service (Aphis) would give Brazilian pork the credentials it needs to gain access to South Korea, Japan and Mexico, all now closed to Brazil, although important markets for pork from the United States itself.
Given the history of bitter trade disputes between Brazil and the United States, it is not surprising that the US authorities are not willing to take steps which would give Brazil access to the leading markets for its pork. Some of these were instigated by Camargo Neto himself and have invariably been decided in Brazil’s favour at the World Trade Organization.
As mentioned, in the latest months of 2008, pork exports plummeted, and according to Machado the Brazilian pork industry set about disposing of the large accumulated stocks on the domestic market.
Despite strong competition from cheaper beef, the increase in the purchasing power of the less well-off in Brazil has resulted in per capita consumption increasing from 13 kg in 2008 to more than 14 kg this year. Machado thinks domestic sales will increase further in 2010, an election year and when the economy is expected to grow by at least 5%.
The per capita increase has largely resulted from the big increase in sales of all types of sausage. Output will continue to increase during the first half of 2010 at least, says Machado. He notes that in 2009, about 7% more pork was produced in Brazil, twice the expected increase. This was mainly because sows produced more piglets, partly because animals were sent for slaughter older than usual.
Machado thinks the export increase in the last ten years has been extremely positive for the industry. In these years, the percentage of exported pork rose from 5% to 20%. The pork industry has been following the example set by the poultry industry, which has been anticipating the demand for more sophisticated cuts on the Japanese market, an important customer. Hence, more of these more profitable products are now available on the Brazilian market as well. Machado anticipates that the output of independent producers, which has fallen from 630 tonnes in 2002, to 342 tonnes last year, will continue to decline.It is becoming increasingly difficult for small, non-integrated producers to survive without long-term contracts which guarantee an outlet for their produce. This process will tend to push up the quality as well as productivity of Brazilian pork.