Fórum de Agronegócios Alemanha-Brasil
An overview of Brazilian agribusiness
Andy Duff, Head of Food & Agribusiness Research, Rabobank Brazil
27 August 2011
Brazil is already a global agriculture superpower
Only the US and the EU(27) are bigger exporters of agricultural goods
Brazil: ranking in global agri production & exports (2011)
Brazil: agriculture exports
[Billion USD]
Sugar
World
ranking,
production
World
ranking,
exports
Exp. Value
(USD bln
2011)
1st
1st
14.9
Soybeans
Sugar
Soybean meal
Ethanol
Soybean oil
Coffee
Beef
Orange juice
Poultry
Others
95
76
Pork
Coffee
1st
1st
8.7
FCOJ
1st
1st
1.8
Ethanol
2nd
2nd
1.2
Beef
2nd
2nd
72
65
58
49
44
39
4.2
31
Soybeans
2nd
2nd
16.3
Poultry
3rd
1st
8.2
Soy Oil
4th
2nd
2.1
25
2002 2003 2004 2005 2006 2007 2008 2009 2010 2011
Source: MAPA, USDA
2
Volumes and prices have been growing
Brazil: trend annual exports value growth, 2001 - 2011
[% per year]
Price growth
30
Volume growth
25
22
12
6
19
19
18
15
8
13
10
16
10
17
10
19
5
11
9
7
5
Soybean
complex
3
Beef
Poultry
Sugar
Source: MAPA
3
Ethanol
Cotton
Coffee
5
Orange Juice
Where is the demand coming from?
Brazil: destination of agricultural exports
[Billion USD]
95
Advanced economies
Emerging markets account for an increasing share of
Emerging markets
Brazil’s agricultural exports, from 36% in 2002 to
58% in 2011
76
72
65
Brazil’s agricultural exports to emerging markets
suffered far less as a result of the global economic
58
slowdown in 2009 than exports to advanced
49
economies
44
39
With growth in 2012 and beyond expected to be
robust in emerging markets, the outlook for Brazil’s
31
25
agricultural exports is promising
2002 2003 2004 2005 2006 2007 2008 2009 2010 2011
Source: MAPA, USDA
4
An overview of Brazilian agribusiness
How did Brazilian agribusiness achieve this?
What are the opportunities and threats in the future?
5
An overview of Brazilian agribusiness
The strengths of Brazilian agribusiness
6
Climate, soil & topography are all favourable
Brazil: rainfall distribution
[mm/year]
Soil
Soils with
structure
Fertility management allow high yields
low
natural
fertility,
but
with
good
Climate & rainfall
Most agricultural production regions have rainfall
between 1,200 and 2,200 mm/year
Mild winters allow production year-around, securing
second cropping in most regions
550 - 650
Topography
1,250 - 1,350
Landscape is favorable to mechanization in most
agricultural regions
2,150 - 2,250
2,750 - 2,850
Source: Rabobank
7
Average farm size is large in key regions
Brazil: average farm size by activity
[hectares]
Northeast
45
25
20
Annual
crops
Center-West
Permanent
crops
Pasture
723
South-East
382
144
152
Annual crops
Permanent crops
Pasture
South
41
58
Permanent
crops
Pasture
41
33
Annual crops
Annual crops
55
Permanent crops
Pasture
Source: IBGE Censo Agropecuário 2006
8
Regional characteristics
Brazil: regional agriculture characteristics
Northeast
North
Climate
-Hot and humid summer and dry
winter
Climate
-Hot and humid summer and dry
winter
Crops
Crops
-36% of cotton production
-21% of cattle herd
-8% of soybean production
-2% of soybean production
Considerable scope for growth in
MAPITOBA¹ region, which has
favourable logistics and medium/large
farm scale
Restrictions on agricultural
development, poor logistics
Center-West
Climate
-Hot and humid summer with dry winter
South-East
Crops
Climate
-46% of soybean production
-60% of cotton production
-30% of cattle herd
-Hot and humid summer with dry winter
Crops
-Most of orange production
Large farms, soils inherently poor but responsive to
fertilizers, logistics poor
-Most of coffee production
-Most of dairy production
-Most of sugar-cane production
South
1. MAPITOBA region
includes Maranhão,
Piauí, Tocantins and
Bahia states
6% of soybean production
Climate
30% of corn production
-Hot and humid summer with cold and humid winter
Crops
-41% of corn production ; 37% of soybean production (2 crops per year -> summer soy + winter wheat or corn)
Traditional agriculture region, small farms, strong co-op culture
Source: Rabobank
9
Traditional agriculture region, good
logistics, good technology
Productivity gains have been substantial
Brazil: grain area and grain production
[million ha / million metric tons]
175
Widespread adoption of modern
production & manufacturing
technology
Planted area
in
Production
150
Investment in research
management and genetics
on
soil
fertility,
crop
125
State (Embrapa)
+190%
Private
100
Increase yield & scale driving cost competitiveness
75
Increase of double cropping
50
+30%
25
0
1980
Source: CONAB
10
1985
1990 1995
2000
2005
2010
Double-cropping has boosted land productivity
Brazil: corn area by 1st and 2nd crop
[% total national production]
100%
90%
Double-cropping of corn has increased markedly in
recent years owing to the rise in corn prices
80%
70%
60%
Double cropping permits expansion in production
without any expansion in area under cultivation
50%
40%
30%
Not all areas are suitable for double-cropping;
depends on climate
20%
10%
1st Crop
Source: CONAB
11
2nd Crop
2011/12e
2008/09
2005/06
2002/03
1999/00
1996/97
1993/94
1990/91
0%
Integration boosts competitiveness
Brazil: integration of key agricultural value chains
Inputs
Farming
Processing
Poultry
Pulp & Paper
Soybeans
FCOJ
Sugar & ethanol
Beef
Coffee
Integration encourages:
-
The optimisation of field & factory operations, e.g.
-
Harvesting
Transport of raw material
The exploitation of economies of scale in field operations as well as in processing
Source: Rabobank
12
Trading
Policy: little intervention, high exposure to world
markets
The degree of policy intervention in Brazilian
agriculture is relatively low, and much lower than in
the US or the EU
Tariffs are small or zero, and supply management
policies (production or sales quotas for example) are
rare. In the case of biofuels, there are mandated
blends for both ethanol and biodiesel
Most farmers and processing companies
are therefore fully exposed to world
market prices (commodity price risk and
exchange rate risk)
There are mechanisms to support prices for some
commodities (e.g., soybeans, corn, cotton), but
these are generally only triggered at low price levels
They have to be highly competitive and
good at risk management in order to
survive in such a business environment
Official finance at preferential rates is available to
support agriculture, but the supply is limited, and
much of commercial agriculture requires financing
not only from private banks but also from trading
companies and input suppliers
Source: Rabobank
13
Sugar: an example of Brazil’s cost-competitiveness
Indexed white sugar production cost, average 06/07 – 09/10
[CS Brazil = 100]
Brazil’s cane, sugar and ethanol sector provides a
good example of the competitive advantage
achievable via:
Malawi
CS Brazil
Swaziland
South Africa
Zambia
-
Ideal growing conditions for cane
factory
Thailand
Australia
Tanzania
UK
-
Abundant land resources available for future
expansion
Zimbabwe
Mozambique
As a result, Brazil’s cane sector is now the world’s
leading sugar producer and exporter, and second
only to the US as an ethanol producer and exporter
India
Egypt
US
Pakistan
France
Large-scale,
operations
integrated
field
and
China
US
Russia
Ukraine
China
0
Source: Illovo Sugar Annual Report 2010
14
50
100
150
200
250
300
An overview of Brazilian agribusiness
The weaknesses of Brazilian agribusiness
15
Logistics in Brazil are poor...
Brazil vs US: distribution of transport modes for goods
World Banck Logistics Performance Index ranking
[%]
Air
Pipeline
4%
0%
1. Germany
2. Singapore
3. Sweden
4. Netherlands
5. Luxembourg
6. Switzerland
7. Japan
8. UK
9. Belgium
10. Norway
0%
Waterway
12%
19%
Railway
22%
12%
21.
22.
23.
24.
25.
26.
27.
28.
29.
30.
New Zealand
Italy
Korea, Rep.
UAE
Spain
Czech Rep
China
South Africa
Malasya
Poland
41.
42.
43.
44.
45.
46.
47.
48.
49.
50.
Road transport, interior of Mato Grosso state
42%
Road
63%
28%
Brazil
US
Sources: COPPEAD (2008), World Bank
16
Brazil
Iceland
Estonia
Philippines
Lithuania
Cyprus
India
Argentina
Chile
Mexico
...but Brazil is 24x larger than Germany
Germany
0.36 mn km2
Brazil
8.5 mn km2
17
“Custo Brasil” – the cost of doing business in Brazil
Inefficient legal system
-
From the lender’s perspective
Good laws but weak enforceability
Increases costs
Expensive capital
Discourages investment
Influences competitiveness
Heavy and complicated tax structure
18
An overview of Brazilian agribusiness
Future opportunities and threats
19
Brazil has considerable scope to expand agriculture
World: new land available for rain-fed agriculture
[million hectares]
Global demand for agricultural commodities is rising
as a result of increasing population and rising real
incomes
Sub-Saharan Africa
95
Latam/Caribbean
94
E Europe/C Asia
44
Although part of the need for greater output can be
achieved by raising productivity, new land will
nevertheless be required for agriculture in the future
ME/N Africa
RoW
29
7
3 11
S & E Asia
107
3 0
25
Good logistics
Bad logistics
28
South America: new land availability estimated by crop
The distribution of such resources is hard to
evaluate, but it is certainly uneven around the world.
Nevertheless, it is clear that South America, and
specifically Brazil, holds a substantial part of the
world’s unused agricultural land
[million hectares]
Brazil
Argentina
36
Other S America
26
22
11
10
1
7
2
Wheat
Source: World Bank, 2010
20
15
10
10
6
4
Corn
Soybeans
9
1
4
Sugarcane
Where in Brazil will expansion take place?
Brazil: areas of agricultural expansion by crop
Brazil’s prominence as an agricultural producer and
exporter has been achieved to date with the use of
65 million hectares
Brazil’s state research agency for agriculture
(EMBRAPA) estimates that as much as 100 million
hectares of land (mostly pasture today) could be
converted to agriculture in the future
Brazil: current land use
Pasture
158
Agriculture
65
Forest & protected areas
496
Other
141
Total land area
851
Cotton
Corn
Source: UNICA, Rabobank
21
Soybeans
Sugar cane
It’s not all about exports - the internal market is also
promising...
Brazil: real salary index and unemployment rate
Brazil’s population is 190 million
Brazilian consumers have seen a significant rise in
their real income and purchasing power; consumer
credit has also flourished in recent years
This has generated a significant increase in
consumer spending in a number of sectors linked to
agribusiness
Real
industrial
salary index
Unemployment rate
Industrial salary index
Unemployment
rate
(%)
120
14
110
12
100
10
90
8
80
6
70
4
2003 2004 2005 2006 2007 2008 2009 2010 2011
Brazil: income elasticity of food products
Class A/B = > R$4850
Class C = R$1125 –
R$4850
Class D = R$501 –
R$1125
Class E = < R$540
Rice
Beans
Pineapple
Wheatflour
Meat (premium cuts)
Meat (standard cuts)
Ham
Chicken
Milk
Condensed milk
Cheese
Oil
Beer
Wine
History & projected development of income distribution
-0.038
-0.072
0.642
0.195
0.52
0.11
0.912
0.178
0.34
0.708
0.806
0.632
0.809
0.684
Source: MCM, IPEA, FGV, Hoffman (2004)
22
[million citizens]
2003
Class A/B
2009
13
2014f
31
20
66
Class C
Class D
47
Class E
49
95
113
44
29
40
16
Where will the resources to fund growth come from?
The National Development Bank (BNDES) has been a
significant source of funds for expansion in key
sectors such as beef and sugar & ethanol
In recent years, in addition to bank lending, global
capital resources have been directed towards
Brazilian agribusiness via both IPOs and bond issues,
providing it with resources to expand...
Between May 2008 and Sept 2009, all 3 major
ratings agencies awarded Brazil investment grade
status
...and the first Brazilian agribusiness multinationals
are now emerging
Public offers in BM&F Bovespa
Country Risk Premium (EMBI)
[basis points]
1,520
463
192
219
205
2002 2003 2004 2005 2006 2007 2008 2009 2010 2011
Foreign Direct Investments
[nº of companies]
[USD billions]
F&A companies
64
66.7
Other companies
10
48.5
45.1
34.6
26
3
7
2004
9
2
7
23
2005
2006
25.9
54
2007
4
3 1
6
6 0
11
2008
2009
2010
11
11
0
11
2011
Source: MCM, BM&F Bovespa, BACEN
23
18.1
16.6
0
10.1
15.1
18.8
2002 2003 2004 2005 2006 2007 2008 2009 2010 2011
Sugar & ethanol sector in Brazil
Opportunities
Threats
Domestic ethanol market with tremendous potential
for further growth as flex-fuel cars increase their
share of the total fleet
[million tonnes]
650
600
Abundant untapped land resources suitable for the
production of cane
Ethanol
+117%
Sugar
550
500
Over the long term, global growth in sugar and
ethanol consumption cannot continue to be met
without growth of the Brazilian cane sector
450
400
350
Brazil: cane production by product
Costs have been on the rise, due to rising labour
costs, a strengthening currency, and, lately, low
levels of productivity and capacity utilization
300
250
200
There
are
concerns
that
Brazil
competitiveness and market share
is
losing
150
100
Government plays a significant role in two of the
sector’s three key markets – ethanol and electricity;
government policy also impacts rules regarding
foreign companies´ownership and use of land
Source: UNICA
24
50
0
81/82
91/92
01/02
11/12
Soybeans: opportunities and threats
Strengths & opportunities
Projected growth in soybean production
Favourable
scale)
Growing demand from animal protein industries
New and growing regions (MAPITOBA / North MT)
conditions
(climate,
soil,
landscape,
[million tonnes]
2010/11
2021/22
Possible additional revenues from farm financing
Geographical dispersion of production regions (risk
diversification) with different export channels
16,1
Northeast
+ North
+69%
27,1
Potential benefits from investments in logistics
Explore niche markets (non-GMO)
30,7
Weaknesses & threats
Centre west
+ southeast
Poor logistics and infrastructure conditions
Biodiesel factories margins are very volatile,
depending on the price of soybean oil in BRL and
ANP/Petrobrás auction prices
+26%
38,8
High exposure to volatile grains and FX markets
Tax system “benefiting” exports of raw grains in
detriment of oil and meal
28,7
South
+8%
31,0
CSR issues threatening origination in some regions
(Amazon Biome)
0
Source: ICONE
25
5
10 15 20 25 30 35 40
Beef sector in Brazil
Opportunities
Demand for Brazilian beef should remain robust in the long run
Domestic beef consumption is set to keep growing on the back of rising income levels
-
International demand is also anticipated to increase driven by the growing appetite for beef in emerging
coutrines (income effect) coupled with limted scope for supply growth in other regions at competitive costs
Currently, 80% of the total beef production are consumed domestically
Brazil’s low yields mean that there is still much room for supply growth without relying solely on grains
Productivity by Brazilian state
[@ produced/ha*]
Current
23
Potential
24
23
21
21
17
14
11
13
22
21
17
14
12
22
20
16
12
22
14
@ = 15 kf of carcass
GO
MG
MS
MT
PA
Source: Cepea
26
PR
RO
RS
SP
Average
+56%
Pork & poultry sectors in Brazil
Brazil holds key success factors to support sustainable growth
Key sucess factor
Abundant supply of grains at a relative low cost
Exports
Consumption
+5%
Integration model largely adopted
Strict control of the entire supply chain
Industry with high technology levels
9.3
9.4
2005
2006
10.3
11.0
11.0
2007
2008
2009
12.5
12.9
2010
2011
Favorable climate
Water availability
Threats
Pork – Domestic consumption and exports
Rising labour costs and a strengthening currency
On the pork side, the high exports dependency on
Russia means that the current stimulus to boost
Russian production will force Brazil to expand its
sales destination
[million tonnes]
Access to good genetics
Poultry – Domestic consumption and exports
For poultry, the recent reopening of the EU market
to Thailand and a possible lift of Japanese
restrictions to the same country may hurt Brazilian
exports
Source: UBABEF, ABIPECS
27
[million tonnes]
Exports
Consumption
+4%
2.7
2005
2.9
3.0
3.0
3.2
3.2
3.4
2006
2007
2008
2009
2010
2011
Farm inputs
The farm inputs chain in Brazil is growing rapidly and is essential for the
development of the competitive agricultural and livestock industries
Market size: USD 7,1 bi
65 thousand machines sold in
the domestic market + 19
thousand exported in 2011
Total production: 81 thousand
‒ 82% Tractors
‒ 8% Harvesters
‒ 10% Others
CAGR 2001-11: 6,3%
Market size: USD 16,9 bi or 28,3
MM tons
‒ 28% nitrogen
‒ 33% phosphates
‒ 38% potash
CAGR 2001-11: 5,5%
Market size: USD 8,5 bi
826.000 tons in 2011
‒ 32% herbicides
‒ 35% insecticides
‒ 28% fungicides
CAGR 01-11: 14.1%
Agricultural
Machinery
Animal Nutrition
Fertilizers
Market size: USD 20.0 bi
64 MM tons
‒ 57% corn
‒ 18% soybean meal
‒ 5% minerals
‒ 1% Premix
CAGR 00-10: 5.8%
Animal Health
Crop Protection
Products
Market size: USD 1.7 bi
‒ 34% anti-parasitic products
‒ 29% vaccines
‒ 22% antibiotics
CAGR 05-09: 6.9%
Seeds
Market size: USD 2 bi or 2.9 mln tons
Genetically Modified organism
Soybeans: 88.1%
Corn: 74.9%
Cotton: 50.1%
CAGR 05-10: 6.3% [volume]
Source: ANFAVEA, Sindirações, SINDAN, ABRASEM, ANDA, ANDEF, Kleffmann Group and Rabobank Estimates
28
Brazilian Crop Protection Industry Trends
Brazil is the world’s 4th largest consumer of fertilizers and the biggest
crop protection market…
High technological
adoption, together
with area expansion
on agricultural
frontiers areas like
Northern Mato
Grosso and
MAPITOBA region,
will probably
support a consistent
demand growth for
farm inputs in Brazil
over the coming
years.
The Brazilian Farm Inputs Industry
Fertilizer Sales in Brazil
[million tonnes]
Brazil is a large & growing fertilizer market
5,2%
Brazil is the 4th fertilizer market in the world,
following China, India and the USA
-
The historical growth of 5.2% per annum in total
demand is the highest among the main
consumers
22,8 22,8
17,1
19,1
28,3
24,6
20,2 21,0
22,4 22,5
24,5
Brazil became the world’s largest crop protection
market in 2011, surpassing USA
2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011
In 2011, sales in Brazil reached USD 8,5 bln, 16,4%
higher than in 2010
-
The growth of the Global Crop Protection
Industry between 2001 and 2011 was around
5.5% per year
Brazilian Crop Protection Industry Sales
[USD billions]
8.50
+14.0%
The tropical climate in Brazil increases the demand
for chemicals to combat agricultural pests
7.12
6.62
7.30
5.37
2.30 1.95
3.15
4.49 4.24
3.92
2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011
Source: SINDAG, Valor Econômico, Phillips McDougall, Rabobank
29
Summary: opportunities and threats
Import demand for key commodities set to grow in parallel with emerging markets
growth
Large (190 mn) domestic market with rising real incomes
More land available for agricultural expansion at a good price than any other
Opportunities
producing/exporting country
Good agronomic conditions, extensive use of advanced technology and large scale of
operations generally provide Brazilian agribusiness with a significant cost advantage over
other players
World class corporate producers and processors with a growing international reach and
capacity to attract international capital for expansion
Will logistics capacity grow at the same rate as production & export availability?
Will a strong exchange rate erode competitiveness?
Will trade barriers be gradually dismantled in order to give Brazilian agribusiness greater
Threats
market access?
Capacity to monitor, control, eradicate livestock diseases
Real or imagined abuse of the environment can provoke sanctions from trade partners
Volatile business environment – exchange rate, commodity prices, interest rates
30
Thank you!
Rabobank International Brasil
FAR - Food & Agribusiness Research
Endereço
Avenida das Nações Unidas 12.995 – 7° andar
Brooklin – São Paulo – SP
04578-000
Brasil
Rabobank International Brasil S.A.
31