Market U.S. Dairy

Export Council® Research

SOUTH AMERICA Dairy Export Prospects

DECEMBER 2007

Copyright ©2007. USDEC. All rights reserved. Regional Overview – Contents

EXPORT PROSPECTS FROM KEY SOUTH AMERICAN COUNTRIES

REGIONAL OVERVIEW

Page

INTRODUCTION i

1.0 Project Background i 2.0 Project Objectives i 3.0 Work Scope and Methodology ii 4.0 Content iii

REGIONAL OVERVIEW 1

1.0 Milk Production 1 2.0 Milk Prices 4 3.0 Production of Key Dairy Products 5 4.0 Dairy Industry 6 5.0 Local Consumption 11 6.0 Foreign Trade 12 7.0 Projections 19

U.S Dairy Export Council December 2007 Regional Overview-Introduction

EXPORT PROSPECTS FROM KEY SOUTH AMERICAN

COUNTRIES

INTRODUCTION

1.0 Project Background

The current global shortfall in dairy product availability is well documented, with the effect being demonstrated through ever-increasing prices for most dairy commodities. USDEC has obtained insights from iRIS Consulting into the global dairy market in recent years, which predicted the current tightening market as early as 2004. This work mainly concentrated on analysis of the major supplier countries—New Zealand, Australia, the EU and the U.S.—when weighing up supply and demand equations in the world market.

However, when market conditions change leading to a strengthening in demand, a number of “non-traditional” dairy producing countries are often sought out as natural supply sources for the world market. Usually this involves the large milk producing countries and, more often than not, the focus turns to the major Latin American dairy producers such as Argentina, Brazil, Uruguay and Chile, to become increasingly active in international markets.

While the desire and willingness to increase dairy exports usually exist in these countries, the question becomes which country is really likely to emerge as a key competitor to the traditional dairy export power houses, and what future scenarios are likely to emerge.

This report provides a country-by-country assessment of the potential that exists for each of these Latin American countries to become significant dairy exporters in their own right over the next decade. The work informs the U.S. dairy industry as to the likely industry supply dynamics that will emerge in the region as the global market continues to develop. Furthermore, it provides a comprehensive and focused reference point to dairy industry participants seeking to understand the trade dynamics of this region.

2.0 Project Objectives

The report aims to understand the potential that exists for Argentina, Brazil, Uruguay and Chile to become significant dairy exporters on the world stage. Sometimes relatively small export-wins from these countries U.S Dairy Export Council i December 2007 Regional Overview-Introduction

gain disproportionate publicity in relation to their true impact. Understanding the true likely position will allow the U.S. dairy industry to make informed decisions on where it should focus future efforts.

Accordingly, the principal issues analyzed in the report are as follows:

• What are the fundamental drivers and constraints of these countries’ dairy sectors and how are they likely to impact the potential to develop significant export businesses? • What barriers to increased production and quality are faced in the nominated countries, and what are the prospects of these being overcome? • What is the impact when farmers in the region shift between various forms of livestock and crop farming? What drives such decision making and what are the impacts and implications for dairy production and export prospects? • What products will be exported from these countries and what are the likely target markets? What is the likely level of quality and consistency of supply?

3.0 Work Scope and Methodology

The study provides a thorough assessment of the export potential that may exist in the following key countries:

• Argentina • Brazil • Chile • Uruguay

Additionally, the work provides a regional summary which directly compares key figures and issues in each of these four countries.

The work was completed by applying a mixture of secondary and primary research:

• Review of iRIS Consulting’s existing body of knowledge from previous projects in the region

• Analysis of official statistics—production, processing, foreign trade and other relevant data and publications issued by national statistics offices, industry organizations and trade publications

U.S Dairy Export Council ii December 2007 Regional Overview-Introduction

• Face-to-face interview programme with key industry participants in each country:

¾ Relevant government bodies ¾ Industry associations ¾ Major dairy processors ¾ Major dairy traders—exporters and importers

• Trade interviews with secondary industry and trade sources:

¾ Regional industry bodies ¾ Smaller local processors

• Follow-up and verification of information through phone interviews

• In-house analysis and interpretation of the gathered information

4.0 Content

Each country report provides detailed information on the following issues:

• Milk production • Dairy processing • Milk pricing • Local market considerations • International trade • Strategic summary

U.S Dairy Export Council iii December 2007 Regional Overview

EXPORT PROSPECTS FROM KEY SOUTH AMERICAN COUNTRIES

1.0 Milk Production

In 2006, the three Mercosur countries of Argentina, Brazil and Uruguay produced over 37 bn liters of raw milk. Brazil was by far the largest producer, producing around 70% of this volume. Conversely raw milk volumes in Uruguay and Chile∗ were relatively insignificant. Moreover, only Brazil has consistently managed to increase its raw milk output, with both Argentina and Uruguay experiencing setbacks and fluctuations – in particular in late 2006 and the first half of 2007.

Table 1.0 Milk production, 2000–2007

Argentina, mn Uruguay, mn Year liters Brazil, mn liters liters Chile, mn liters 2000 9,816.7 19,767.2 1,277.8 1,990.0 2001 9,474.7 20,510.0 1,523.5 2,190.0 2002 8,528.6 21,643.7 1,554.1 2,170.0 2003 7,951.3 22,253.9 1,446.1 2,130.0 2004 9,168.6 23,474.7 1,295.9 2,250.0 2005 9,493.3 24,571.5 1,465.9 2,360.0 2006 (1) 10,162.0 25,709.0 1,554.7 2,400.0 2007 (2) 9,300.0 N/A N/A N/A

Source: Argentina – SAGPyA Brazil – IBGE, Terraviva, EMBRAPA/CNPGL Uruguay – DICOSE / MGAP Chile – ODEPA Notes: (1) 2006 figure for Uruguay is an estimate (2) 2007 figure for Argentina is a forecast

∗ Chile remains outside Mercosur, but is a member of the Association Latinomericana de Interacion (ALADI), and has various Free Trade Agreements. U.S Dairy Export Council 1 December 2007 Regional Overview

Argentina: Milk Production

While Argentina’s milk output has been rising in the last few years, in 2006 it managed to only get back to 1999 levels—the year before economic crash, which caused a sharp drop in milk production.

Argentina’s production in 2007 is forecast to be around 810 mn liters, or 8% lower than 2006 production—this is due to a combination of factors. Adverse weather conditions in late 2006 and early 2007—including severe floods which destroyed a lot of pasture land—caused a decrease in milk production. Additionally, government interference in the form of fixed retail prices for staple dairy products, export taxes and other export restrictions in 2007 have eroded profits from exports. At the same time, milk shortages and consequent steep rises in milk price have put increased pressure on processors’ profits.

Informal milk, including autoconsumption on dairy farms, is estimated to be around 7% of the total volume.

The Argentinean dairy farming sector has undergone substantial consolidation in the last 20 years. With a reduction in farm numbers, the dairy herd remains relatively stable and yields increasing markedly.

Argentinean dairy farmers are extremely adept at analyzing profitability data provided by a number of sources and switching production between milk and commercial crops, depending on which form of agriculture provides the best profits. If crops are forecast to be more profitable than dairying, more land is given over to crop production and cows are provided with less space and less feed, in order to minimize dairying costs and maximize crop output.

Brazil: Milk Production

In 2006, Brazil produced 10 bn more liters of raw milk than it did in 1990. Production is expected to continue to increase at an average of 4% per annum as strong farmgate prices encourage farmers to increase their output.

Around 65% of Brazil’s milk is delivered to government-inspected dairies. The remainder is processed by small, artisanal dairies, consumed on-farm or sold informally.

The key regions for dairying are all in the southern half of the country – Minas Gerais, Sao Paulo, Goiás, Rio Grande do Sul and Paraná. Fastest growth in milk production can be found in the north-eastern states of Paraiba and Sergipe, but volumes are still small compared to overall production.

U.S Dairy Export Council 2 December 2007 Regional Overview

Brazil is in the process of implementing tighter milk quality regulations, a process which is due to be finalised countrywide in 2012.

Production is seasonal with a peak in output in December/January to a trough in May/June – milk prices vary accordingly.

During the last quarter of 2005, Brazil suffered outbreaks of FMD in two states – Matto Grosso do Sul and Paraná. This did not help Brazil’s reputation as a quality exporter, and exports of perishable products decreased in 2006. In 2007, exports are increasing again as states are declared free from FMD and the associated vaccinations.

Uruguay: Milk Production

Uruguay’s 2006 milk production levels resulted from regular growth during the 1980s and 1990s, interrupted by short periods of lower production caused by adverse weather conditions. Around 80% of the volume is delivered to industrial processors. In late 2006 and early 2007, milk production decreased over the previous year due to adverse weather conditions. However, the Uruguayan dairy industry forecasts that the second half of the year will compensate for this (assuming normal weather conditions) and that 2007 production will end up close to the same level as 2006.

Milk production is forecast to grow at 5% per annum for the next few years as farm management practices and productivity continue to improve.

Milk production peaks in the spring (September–December). Most cows are pasture-fed all year round, supplemented by forage and fortified rations throughout the year and extra silage during the winter months.

Unlike their Argentinean neighbors, Uruguayan dairy farmers are not as prone to switching between milk and crop production. Many of them have made substantial investments in equipment, infrastructure and livestock, and are likely to continue working towards achieving ever higher yields and productivity in order to be profitable.

Chile: Milk Production

Chile’s milk output stood at around 2.4 bn liters in 2006, considerably up from the levels in the early 1990s. Chile has recorded good growth rates of around 8% p.a. in recent years, although 2007 growth is only forecast to be at 1 to 2% due to adverse weather conditions earlier in the year. Future growth forecasts are for a 6% annual increase in milk volume.

Around 76% of all milk is industrially processed. Milk production is seasonal, peaking in the spring/summer months and dropping

U.S Dairy Export Council 3 December 2007 Regional Overview

substantially in autumn/winter, when Chile tends to supplement it production with imports of milk powder.

Farm numbers are decreasing and farm sizes are going up. Most of Chile’s milk—around 70%—is produced in Region X, the lake region roughly 1,000 km south of Santiago. This area has a climate that is unsuitable for growing crops hence dairy farming only competes for land with beef cattle rearing.

2.0 Milk Prices

Milk prices in Chile are higher than in Argentina and Uruguay, although not as high as Brazil’s farmgate prices. In all four countries, it is noteworthy that farmgate prices have virtually doubled in the last three years.

Table 2.0 Milk prices, converted to US$

Uruguay, Uruguay, US$/liter Argentina, Brazil, US$/liter industrial Chile, Month / year US$/liter US$/liter quota milk milk US$/liter Dec 2004 0.14 0.20 0.178 0.150 0.20 Dec 2005 0.16 0.19 0.200 0.172 0.24 Dec 2006 0.16 0.23 0.208 0.157 0.22 Jan 2007 0.17 0.23 0.208 0.166 0.22 Feb 2007 0.18 0.24 0.209 0.170 0.23 March 2007 0.19 0.25 0.218 0.197 0.25 April 2007 0.21 0.27 0.220 0.209 0.27 May 2007 0.24 0.30 0.221 0.211 0.33 June 2007 N/A 0.32 N/A N/A 0.36 July 2007 N/A 0.36 N/A N/A N/A August 2007 0.27 – 0.29 0.40 – 0.45 N/A 0.29 – 0.31 0.37 -0.40

Source: Argentina – SAGPyA Brazil – CEPEA Uruguay – MGAP Chile – ODEPA Note: Uruguay has two types of milk prices: Quota milk – applies to milk which is processed into pasteurized and ultra-pasteurized drinking milk in 1 liter packs; it is set by the government at six-month intervals; this tends to be the higher price of the two Industrial price is negotiated between processors and farmers based on quality with Conaprole, the largest processor, being a key price setter

U.S Dairy Export Council 4 December 2007 Regional Overview

3.0 Production of Key Dairy Products

SMP

Table 3.0a Local production of SMP, 2002–2007

Argentina, Brazil (1), Uruguay, Year tonnes tonnes Chile, tonnes tonnes 2002 34,000 273,000 9,186 8,358 2003 31,100 280,000 8,938 13,833 2004 35,500 290,000 10,175 12,443 2005 32,100 354,000 11,906 8,515 2006 29,600 382,000 15,765 N/A Jan – June 2007 N/A N/A 5,883 N/A

Source: Argentina – SAGPyA Uruguay – MGAP Chile – ODEPA Brazil – iRIS Consulting estimates based on Terraviva Note: (1) Brazil is all milk powder – SMP, semi SMP and WMP. Definitive production statistics for Brazil do not exist, therefore iRIS Consulting has estimated the volume for Brazil based on LME data supplied by Terraviva.

Semi SMP / WMP

Table 3.0b Local production of Semi SMP / WMP, 2002–2007

Argentina, Uruguay, Year tonnes Brazil, tonnes Chile, tonnes tonnes 2002 204,200 See above 58,524 29123 2003 197,800 See above 52,929 24647 2004 259,900 See above 53,459 29850 2005 254,400 See above 46,823 37468 2006 259,800 See above 49,776 N//A Jan – June 2007 N/A See above 18,293 N/A

Source: Argentina – SAGPyA Uruguay – MGAP Chile – ODEPA Brazil – iRIS Consulting estimates based on Terraviva

U.S Dairy Export Council 5 December 2007 Regional Overview

SCM

Table 3.0c Local production of SCM, 2002–2007

Argentina, Uruguay, Year tonnes Brazil, tonnes Chile, tonnes tonnes (1) 2002 6,900 133,000 24,190 0 2003 7,500 164,000 30,558 0 2004 5,500 191,000 38,698 0 2005 5,600 224,000 39,645 0 2006 6,500 231,000 43,426 0 Jan – June 2007 N/A N/A 22,380 0

Source: Argentina – SAGPyA Uruguay – MGAP Chile – ODEPA Brazil – iRIS Consulting estimates based on Terraviva Note: (1) Uruguay produces caramel toffee spread, not SCM

Butter

Table 3.0d Local production of Butter, 2002 – 2007

Argentina, Brazil, tonnes Uruguay, Year tonnes (1) Chile, tonnes tonnes (1) 2002 38,800 N/A 11,551 14,253 2003 35,500 N/A 10,849 16,998 2004 40,900 N/A 13,084 16,433 2005 40,000 N/A 14,655 16,317 2006 46,900 N/A 17,157 N/A Jan – June 2007 N/A N/A 9,157 N/A

Source: Argentina – SAGPyA Uruguay – MGAP Chile – ODEPA Note: (1) Local data on Brazilian butter production unfortunately is not available

4.0 Dairy Industry

Argentina: Dairy Industry

Out of a 1,100 registered processors, ten companies process more than 50% of the total collected milk. The major Argentinean processors are:

U.S Dairy Export Council 6 December 2007 Regional Overview

• Mastellone – 1.5-1.6 bn liters p.a. • Sancor – 1.1 bn liters p.a. • Saputo Argentina – 600 mn liters p.a. • Williner – 530 mn liters p.a. • Verónica – 440 mn liters p.a. • Milkaut – 300 mn liters p.a. • La Sibila – 220 mn liters p.a. • DPA (Fonterra/Nestlé) – 200 mn liters p.a. • Manfrey – 200 mn liters p.a. • Corlasa – 180 mn liters p.a.

There is a good degree of foreign participation in the Argentinean dairy processing industry: Danone processes milk purchased by Mastellone; Santa Rosa (Bongrain) has merged with Milkaut so Bongrain now has a 40% stake in Milkaut; Corlasa has a JV with Gloria of Peru; La Sibila packs private label product for the Numico group.

In 2006 the following raw milk volumes were used for processed products:

Table 4.0a Raw milk usage by end product, 2006

Caramel toffees spreads and other dairy products - 9% Yogurts - 4%

Butter - 7% Cheese - 39%

Drinking milk - 17%

Milk powder - 24%

Source: iRIS Consulting based on SAGPyA

U.S Dairy Export Council 7 December 2007 Regional Overview

Brazil: Dairy Industry

The Brazilian dairy processing industry is fragmented and includes a wide array of processors. There are around 1,317 federally inspected dairies. In 2004, the top 68 processors (ie the top 6%) processed around 55% of total formal milk. In 2006, only 13 processors averaged more than 500,000 liters per day throughput.

The key processor by far is Dairy Partners of America (DPA), the Fonterra/Nestlé JV. The main processors are as follows:

• DPA (Fonterra/Nestlé) – 1.7 bn liters plus p.a. • Itambé – 1.04 bn liters p.a. • Eleva (previously Eleva Elege) – 898 mn liters • Parmalat Brazil – 612 mn liters

Around 26 companies have a total of 40 milk powder spray driers with a capacity of 16.1 mn liters per day total. Extra capacity is constantly being added.

Table 4.0b Usage of milk in Brazil, 2006

Product Usage, mn liters LME Pasteurized milk 1,735 UHT milk 5,012 Milk powder 3,778 Cheese 4,230 Yogurt 420 SCM 590 Cream 448 Other 609 Sub-total official milk 16,822 Unofficial production 2006 Raw milk 1,200 Cheese 6,550 Other products 1,137 Sub-total informal milk 8,887 Total milk 25,709

Source: Terraviva

U.S Dairy Export Council 8 December 2007 Regional Overview

Uruguay: Dairy Industry

The leading processor in Uruguay for many years has been Conaprole, which is the leader both in the domestic markets as well as in exports. Conaprole is a cooperative and processes around 70% of the country’s formal milk. The remainder of the processors are mainly privately-owned businesses, several of which have some foreign participation, such as Ecolat which is Argentinean-owned, Inlacsa which is owned by La Esmeralda of Mexico, and Bonprole which is a JV between Conaprole and Bongrain of France.

• Conaprole – 900 mn liters p.a. • Ecolat – 170 mn liters p.a. • Inlacsa – 75 mn liters p.a. • Bonprole – 55 mn liters p.a. • Pili – 53 mn liters p.a. • CALCAR – 48 mn liters p.a. • Claldy – 44 mn liters p.a. • Lactosan – 35 mn liters p.a.

Table 4.0c Uruguay’s milk use by product, 2006

Product Usage, mn liters LME Pasteurized and ultra-pasteurized milk 214.7 WMP 316.3 SMP 104.5 Dairy blends (mainly SMP) 85.9 (E) Cheese 437.3 Yogurt 29.0 Butter 39.1 Casein and caseinates 25.7 Others (whey, BMP, AMF, cream, caramel toffee, desserts) 34.1

Source: MGAP:DIEA Note: Excludes informal milk

U.S Dairy Export Council 9 December 2007 Regional Overview

Chile: Dairy Industry

Chile does not restrict foreign investment in the dairy processing sector and key multinationals are:

• Nestlé • Fonterra (57% of Soprole) • Iparlat (50% of Surlat) • Danone and its joint venture with Vialat which formed Danone Chile S.A. (70% Danone, 30% Bethia Group) including fresh products and juices, the plant in Chillán and the brands Danone, Parmalat and Calán • Celber Chile (50% Celber Mexico and 50% Chilean producers)

Milk volumes in 2006 were processed in first place by Soprole with almost 438 mn liters or 24% of the total volume—this represented 6% growth to the previous year.

For the first time after five years of continuous growth, Colun was in second place with a 20.1%, replacing Nestlé with 19.8%. In fourth place was Loncoleche (Watts) with 12.4% followed by Mulpulmo, which with high growth reached 12.3%.

Table 4.0d Shares of milk processed by company, 2006

Other - 11.4% Soprole - 24%

Mulpulmo - 12.3%

Loncoleche (Watts) - 12.4% Colun - 20.1%

Nestle - 19.8%

Source: ODEPA

U.S Dairy Export Council 10 December 2007 Regional Overview

All the Chilean dairy processors essentially use plants originally built for supplying the local market, not specifically to manufacture for export. As interests in exports increase, however, many processors are planning or implementing capacity increases and investing in new plants.

5.0 Local Consumption

Table 5.0 Per capita consumption, LME, 1997–2006

Argentina, liters Uruguay liters Year p.a. Brazil, liters p.a. p.a. Chile, liters p.a. 1997 216 125.8 216 128.1 1998 212 126.1 211 132.0 1999 228 127.3 202 124.6 2000 219 125.7 208 125.5 2001 207 122.2 213 124.9 2002 184 130.2 208 118.6 2003 164 126.5 203 125.2 2004 169 129.1 214 118.6 2005 172 134.3 207 123.1 2006 184 137.4 N/A 129.4

Source: Argentina – SAGPyA/INDEC Brazil – Ministry of Agriculture (MAA) Uruguay – MGAP:DIEA Chile – ODEPA

Argentina: Local Consumption

From 2003, domestic consumption of dairy products has increased as a result of a general reduction in unemployment, increasing salaries and growing disposable incomes after recovering from the economic crash and devaluation in 2002. Per capita consumption in 2006 stood at 184 liters per annum LME (excluding informal milk) and is expected to increase by 5 to 7% in 2007. However, this is still much lower than the 1999 levels of 228 liters p.a.

Recovery in consumption is aided by low prices for dairy staples—these are kept artificially low by government intervention, in spite of rising farmgate prices and high local inflation. There is uncertainty as to what will happen to consumption in the medium term as domestic prices will eventually have to adjust to international levels—this is unlikely to happen before the October/November 2007 general election.

U.S Dairy Export Council 11 December 2007 Regional Overview

Brazil: Local Consumption

While the average dairy consumption levels in Brazil are considerably lower than in Argentina and Uruguay, there are wide regional variations. In the southeast, southern and central-west states of the country, per capita consumption is much higher than in the northeast and northern regions. The average per capita consumption is forecast to grow in coming years. This, coupled with an increasing population, leads to forecasts of growth in total dairy consumption of around 3% p.a. in the near future, unless high local dairy prices observed in mid-2007 force a reduction in consumption.

Key products consumed in Brazil are cheese, UHT milk, milk powder, pasteurized milk and raw milk.

Uruguay: Local Consumption

Following the economic crisis of 2002/3 which suppressed demand, consumption is now increasing again. Inflation and unemployment are falling and disposable incomes are rising. Consumption is forecast to increase by 2% p.a. Uruguayan per capita consumption is one of the highest in Latin America.

Chile : Local Consumption

Local sales of dairy products are increasing, in particular in the categories of fresh/chilled products such as yogurt, desserts, chocolate flavored drinking milk and cheese. Sales of drinking milk are expanding slowly as UHT milk is increasingly substituting retail milk powder.

As Chilean consumer spending is increasing slowly, a further growth in dairy product consumption is forecast to be in the region of 3 to 4% p.a. in the next few years. Key categories are yogurt and fresh quesillo cheese.

6.0 Foreign Trade

The table below illustrates the differences between the three Mercosur countries. Argentina is a strong exporter in volume terms. Uruguay exports most of its milk production; however volumes are small in absolute terms. Brazil is a net importer in most product categories.

U.S Dairy Export Council 12 December 2007 Regional Overview

Table 6.0a Export volumes 2006

Argentina, Brazil, Uruguay, Chile, Product tonnes tonnes tonnes (1) tonnes UHT milk 16,412 43.5 22,780 2,560 Other milk 33.0 0 Cream 1,281 4,950.0 693 Total milk and cream 17,693 5,026.5 23,473 2,560 WMP 210,662 13,953.2 37,335 6,718 Semi SMP 1,407 3,316.5 SMP 22,686 3,493.9 19,013 783 Total milk powder 234,755 20,763.6 56,348 7,501 SCM 0 49,046.1 0 37,844 Evap / other concentrated milk 0 3,402.2 0 127 Total concentrated milk 0 52,448.3 0 37,971 Yogurt 4,956 0.2 4 7 Other fresh/cultured products 924 1,491.9 3,417 162 Total yogurts and cultured 5,880 1,492.1 3,421 169 products Raw whey 4,706 SWP, DWP, WPC 20,692 0.7 4,556 6,756 WPI 7,182 13.3 MPC, natural milk constituents 20.1 Total whey and whey 27,874 34.1 9,262 6,756 products Butter 12,363 1,250.9 15,297 1,110 Butteroil/AMF 3,570 294.8 512 Total butter and butteroil 15,933 1,545.7 15,809 1,110 Hard cheese 14,588 896.4 5,929 20 Semi-hard cheese 27,888 252.8 15,559 11,107 Soft cheese 14,073 2,749.0 8,421 7 Processed cheese 213 2,996.5 61 2 Other cheese 1,434 680.9 279 1,623 Total cheese 58,196 7,575.6 30,249 12,759 Caramel toffee spread 6,251 350.6 N/A 2,832 Lactose 1,419 3.0 N/A N/A Casein 2,299 0 N/A N/A Caseinates 9 0.7 N/A N/A Total casein and caseinates 2,308 0.7 N/A N/A Ice cream 1,685 213.3 N/A 2,783 Infant formulae 4,016 9,323.4 N/A N/A

Source: Argentina – INDEC/SAGPyA Brazil – SECEX Alicenet Uruguay – Banco Central de Uruguay Chile – Chilean Customs Office U.S Dairy Export Council 13 December 2007 Regional Overview

Argentina: Foreign Trade

Argentina has been a net exporter since the early 1990s. Export volumes were constrained in 2003 by production shortfalls caused by floods, but recovered in 2004 and 2005 to reach an all-time high in 2006. Exports are expected to decrease sharply in the first six months of 2007, however, due to adverse weather conditions that have reduced milk production and the government’s efforts to discourage exports.

The Ministry of Economy has passed a number of resolutions to force dairy processors to sell domestically. The first resolution established that all profits made from the difference of exporting at international prices and a base price (called Valor de Corte/VC) would have to be paid to the government to be used in a fund compensating farmers for lost profits due to selling at low farmgate prices. In February 2007, the government started to pay US$ 0.016 per liter to farmers for delivered milk, allowing them to earn US$ 0.198 per liter. However, the Argentinean processors soon learned that if they exported at prices lower than international prices, they could avoid payment to the compensation fund and recover additional profits offshore. The Ministry then introduced a minimum export reference price for each dairy product so that any offshore kick-backs were minimal. The reference price for each product was changed every few weeks to follow international price trends and in June 2007 was very close to the international price. At the same time, the government blocked another legal loophole when it also included “modified milk powders” (HS 1901) in this legislation in June 2007 and analog cheeses containing vegetable fat in July 2007.

At present, the Argentinean government charges two export levies:

• 5% export tax on the FOB export price • The above mentioned deduction of the difference between the net FOB value after 5% tax and the Valor de Corte (VC) for each product that goes into the compensation fund for farmers.

Trade sources estimate that in 2006, almost 28% (LME) of Argentina’s milk production was exported, but as explained above this percentage will be much lower in 2007. In June 2007, there was only enough milk for the domestic market and exports were virtually zero. In July some of the Sancor farmers started to export unprocessed bulk milk to Conaprole in Uruguay for processing, indicating that a surplus is developing again.

Argentina’s good reputation as a reliable international supplier of dairy products has been severely harmed as contracts have been broken or deliveries delayed, and it will take time for the Argentinean dairy industry to repair this damage.

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Table 6.0b Argentina’s milk balance, LME

Opening Local Closing Exports as inventory, mn Production(1), Imports, consumptio Exports, mn inventory, mn % of Year liters mn liters mn liters n, mn liters liters liters production 2000 1,012.9 9,118.6 72.0 7,853.1 1,407.0 943.4 15.4% 2001 943.4 8,780.8 73.0 7,501.9 1,158.0 1,137.3 13.2% 2002 1137.3 7,910.8 29.0 6,754.5 1,701.0 621.6 21.5% 2003 621.6 7,355.2 93.0 6,122.8 1,286.0 661.0 17.5% 2004 661.0 8,521.9 29.0 6,391.9 2,120.0 700.0 24.9% 2005 700.0 8,806.0 40.0 6,608.0 2,182.0 756.0 24.8% 2006 756.0 9,434.0 21.0 7,186.0 2,625.0 400.0 27.8% 2007 400.0 8,560.0 20.0 7,620.0 1,050.0 400.0 12.1% Scenario 1 2007 400.0 8,150.0 20.0 7,620.0 550.0 400.0 6.7% Scenario 2

Source: iRIS Consulting based on trade sources and official statistics Note: (1) Excludes autoconsumption and informal milk

Scenario 1 presumes some increase in Valor de Corte and some decrease in farmgate milk price to around US$ 0.24 per liter so that farms continue to prioritise dairying over crops but processors at the same time can make some profit on exports.

Scenario 2 presumes that the Valor de Corte does not change in 2007 and that processors only purchase the milk needed to satisfy domestic demand. As a result, farmgate prices will drop and farmers will reduce milk production in response, switching some dairy pasture to commercial crops instead.

Brazil: Foreign Trade

Despite the growth in export trade, many product imports still exceed exports in Brazil. The principal products which show a large trade surplus are:

• SCM • Canned sterilized cream • Infant formulae or modified milk powders • Evaporated milk • Mozzarella cheese • Processed cheese U.S Dairy Export Council 15 December 2007 Regional Overview

Smaller surpluses exist in:

• Caramel toffee spread • Butter, as opposed to butter oil • Buttermilk powder or fermented milk

Brazil exported significant volumes of WMP and SMP however it imported these products in even larger volumes from Argentina and Uruguay in 2006.

For example, in 2006, the balances for these products were:

• WMP and semi SMP: Exports: 17,262 tonnes Imports: 30,001 tonnes

• SMP: Exports: 3,493 tonnes Imports: 9,107 tonnes

Some of the other principal imports are SWP, DWP, lactose, UHT milk, MPCs and semi hard cheeses. For example, 2006 imports of whey and modified whey products reached 28,437.3 tonnes and MPC imports stood at 2,110.2 tonnes.

Uruguay: Foreign Trade

Uruguay’s dairy industry has been devoting increasingly large proportions of local milk intake to export sales, and export product accounted for 936 mn liters LME in 2005, almost 70% of the nation’s total processed milk. In total, 984 mn liters LME were exported as existing stocks were also reduced.

The loss of the key export market of Brazil after the devaluation of the Brazilian Real in 1999 was a major blow to Uruguay as it represented 67.6% of its dairy export value and 84.1% of volume. Since then, Uruguay has successfully diversified its export customers by increasing exports to North America, Asia, the Middle East and Africa. In the early months of 2007, Brazil only accounted for 7% of Uruguay’s dairy exports. Uruguay’s low-cost production base has been complemented by a series of favourable Free trade Agreements (FTAs), both regional (ALADI, Mercosur) and bilateral (Mexico, the US etc).

U.S Dairy Export Council 16 December 2007 Regional Overview

Some products are manufactured principally for export, and domestic sales represent only a small share:

• Cheese: hard, semi-hard, powdered and more recently soft cheese • Butter and AMF • Powders: SMP, WMP, BMP, DWP, SWP and modified milk powders • UHT milk: whole and skim

Table 6.0c Utilization of milk for domestic use and export, 2005, LME

Share or Share of Total sales, Export sales, Domestic production production mn liters mn liters sales, mn for export for domestic Product (LME) (1) (LME) liters (LME) (LME), % use (LME), %

Milk powder 476.8 448.6 28.2 94.1 5.9

Cheese 440.6 350.7 89.9 79.6 20.4

Dairy blends 86.6 86.6 0.0 100.0 0.0

UHT milk 57.4 51.2 6.2 89.5 10.5

Export milk, bulk 8.0 8.0 0.0 100.0 0.0

Yogurt 31.3 0.2 31.1 0.6 99.4

Pasteurized / ultra- 213.8 0.0 213.8 0.0 100.0 pasteurized milk

Butter 33.7 24.6 9.1 73.0 27.0

Casein 13.3 12.8 0.5 96.2 3.8

Other 39.2 1.0 38.2 2.6 97.4

Total 1,400.7 983.7 417.0 70.2 29.8

Source: ODyPA, DIEA, MGAP Note: (1) Excludes inventory build-up. When exports plus domestic use are larger or smaller than total production, then product is being exported from stock or added to stock

Chile: Foreign Trade

Around 93% of Chile’s dairy exports are organized by companies that are members of the Association ExporLac. The most aggressive dairy export promoters are Nestlé, Soprole, Colun, Mulpulmo and Watts (Loncoleche).

U.S Dairy Export Council 17 December 2007 Regional Overview

Most Chilean companies concentrate on exporting to countries with which Chile has an FTA because Chilean companies get preferential market access. If it were not for the competitive advantage of being able to export its products duty free, Chile’s relatively high milk price would make it hard to compete with exports from Argentina and Uruguay.

Chile has the following FTAs:

• USA – signed • Mexico – singed • Canada – signed • EU – signed • Central America – signed • South Korea – signed • China – signed • Japan – under negotiation, should be signed later in 2007 • Australia – should be signed early 2008 • Malaysia and Vietnam – being studied

Chile’s main impact on international dairy trade is therefore mainly on diversion, which is the classical impact FTAs have on a market. For example, imports of Gouda to Mexico from other external parties are only likely to take place if either Chile has exhausted its quota volume or has sold all of its production into the Mexican market.

Chile’s imports also involve some form of “triangulation,” meaning that imports are made to free production for export to an FTA market, or to make up for the shortfall in local production during winter months.

Table 6.0d Production, import and export of key dairy products

Local production, % imports/ local % exports/ local tonnes production production

2006 2007, 6 m 2006 2007, 6 m 2006 2007, 6 m

SCM 43,426.2 22,379.6 0.8% 0.2% 87.1% 83.8%

Cheese 62,071.5 30,664.4 14.8% 11.2% 20.6% 31.5%

WMP, both 28% & 26% fat 49,776.5 18,292.7 12.2% 0.7% 13.5% 37.5%

SWP 23,217.7 12,020.5 22.6% 15.7% 29.1% 47.0%

Caramel toffee 24,846.8 11,799.4 13.6% 13.6% 11.4% 12.3%

U.S Dairy Export Council 18 December 2007 Regional Overview

Local production, % imports/ local % exports/ local tonnes production production

2006 2007, 6 m 2006 2007, 6 m 2006 2007, 6 m

Butter 17,157.5 9,157.1 7.6% 4.3% 6.5% 12.8%

SMP 15,765.8 5,882.9 37.4% 21.6% 5.0% 4.8%

UHT whole milk 184,195.1 76,703.2 0.3% 0.0% 0.1% 0.2%

Source: Odepa Note: UHT milk excludes flavored milk

The principal dairy products with a positive trade balance are SCM, Gouda cheese, Butter, SWP and specialty cheeses. There is a negative trade balance for SMP because import volumes are higher than exports; dairy products are imported duty free from Argentina and Mercosur to be used by processors in Chile, thus allowing them to export Chilean manufactured products to countries where Chile has signed an FTA. The safeguard for Argentina imports was 23% for most of 2007 but this has now been dropped.

7.0 Projections

Argentina: Projections

There are arguments for and against Argentina becoming a consistent, significant supplier to the world dairy market.

• On the supply side:

The farmgate milk price in Argentina, together with productivity indicators—such as average herd size—suggest that Argentina will continue to export profitably.

Dairying competes with other land uses, and increases in milk production will be dependent on the comparative return on investment from dairying in comparison to other forms of agriculture. Critical decisions on how much land is given over to cattle, forage fields and commercial crops are normally made each spring. Later in the year, if milk prices increase sharply (as they did in the second quarter of 2007), some crops can be converted to winter feed for cattle to increase yields and thus total milk production.

U.S Dairy Export Council 19 December 2007 Regional Overview

The Argentinean dairy industry is confident that it will increase milk production significantly in the years ahead and predicts an annual growth rate of 5% if dairy remains as profitable as soy and corn. It is worth noting that growth between 2003 and 2006 actually reached 8.5% per annum, but growth between 2004 and 2005 was only 3.5% per annum, and 2007 will be negative. History shows that the Argentinean dairy industry has never achieved such high growth rates consistently—from 1990 to 2005, the average annual growth rate has been 3.25%. The OECD uses a growth rate of 3.8% in its Agricultural Outlook forecasts—perhaps settling on a rate of 4% per annum would seem to be reasonable.

• On the demand side:

The domestic market is important to the Argentinean dairy industry. Demand is well below its peak, owing to recent economic crises. Government intervention is seeking to restrict price increases for dairy products by using export taxes and restrictions on exports to enhance the relative attraction of the domestic market.

Argentina has a history of periodic economic crises—it is unlikely that the underlying causes of these crises have been resolved; it is therefore reasonable to assume further crises will happen.

Macroeconomic instability affects domestic demand, the availability of credit for expansion, and no doubt reduces the amount of foreign investment.

While there is certainly room for increases in domestic demand and consumption, it is unlikely that there will be consistent, strong growth in the longer term.

• Other important factors:

The Argentinean government is doing very little at present to maintain and improve an export infrastructure and logistics for exporters. Cost is added in items such as transport to the port, port handling fees, and port processing time. All shipments have to go through the Buenos Aires port, which is one of the most expensive and slow-moving ports in Latin America, and it has only rudimentary handling equipment for containers.

The Argentinean Ministry of Economy has been trying to maintain the fine balance between exports and the domestic market for some time. When the peso was devalued in 2002, all export products became very profitable and a 5% export tax was applied to all agricultural exports. The Argentinean government additionally U.S Dairy Export Council 20 December 2007 Regional Overview

forced food processors to fix wholesale and retail prices for certain food staples, including pasteurized milk and cheese, in order to combat inflation. As exports became more profitable due to the fixed domestic prices and rising international prices, the government levied an extra export levy, thus reducing profits from international sales. The aim of this measure was to make processors negotiate the farmgate price for milk downwards. Farmers did not cooperate, however, and this situation, coupled with decreased milk production due to adverse weather conditions, meant that farmgate prices increased and exports all but stopped.

The main difficulty is that neither processors nor farmers know what is going to happen next to seriously affect their business. The government only works with short-term objectives such as reducing inflation, in particular prior to the October/November 2007 presidential elections. Within a free market, the current high international prices should encourage everybody to export. However, with the current government restrictions in place, only farmers are making profits because of high farmgate prices.

As the Ministry of Economy is squeezing profits, both processors and farmers consider that the government hinders rather than assists dairy development.

Brazil: Projections

In the first seven months of 2007, Brazil has shown a small trade surplus which is expected to continue until the end of 2007 and into 2008. How fast the surplus will grow depends on various factors:

• Climate in the principal dairy regions of the country: drought and cold winter weather will both reduce production • International prices: if these remain high then processors will pay more for milk, and farmers will be encouraged to do whatever they can to maximise yields • Domestic prices: if these remain high, then domestic dairy consumption will remain stable and possibly decrease, releasing more product for export; if they decrease again in the spring and summer 2007, then consumption among the poor will continue to increase, reducing the availability for export

U.S Dairy Export Council 21 December 2007 Regional Overview

Brazil is self-sufficient in all commodity dairy products; therefore imports should be very small. However, with milk production high between October and January and much lower between April and July, processors manufacture for export when milk is abundant and let the end users import in the low season. This applies principally to WMP, SMP, and possibly semi-hard cheese.

Three scenarios are being studied:

Table 7.0a Possible future scenarios for Brazil’s milk supply available for export

% change in milk % change in domestic Availability of surplus supply consumption milk in 2015 Optimistic 5% 3% 12.0 bn liters LME Probable 4% 3% 5.6 bn liters LME Pessimistic 3.5% 3% 2.7 bn liters LME

Source: iRIS Consulting analysis

Uruguay: Projections

Uruguay has one of the highest proportions of exports relative to total milk production in the world, with around 70% of its total milk destined for export.

Milk prices are significantly affected by international prices.

• Uruguay will export, no matter what the international situation, as it would be unable—by a large margin—to absorb the milk presently going to the export markets • Exports from Uruguay will certainly go primarily to countries that offer preferential import tariffs, such as Brazil, Mexico and the U.S. However, exporters and traders are becoming more experienced in identifying markets that are willing and able to pay higher prices and divert trade away from the more price sensitive markets, such as South Korea and Russia

U.S Dairy Export Council 22 December 2007 Regional Overview

• Uruguay is not likely to develop functional ingredients for export. It will continue to export a variety of cheese types, milk powder and dairy blends (formulated to enter specific markets such as Mexico at lower import duties). SWP, DWP, casein and caseinates are produced and exported when prices and profitability are favorable. In order to increase exports to a specific country, Uruguayan manufacturers will adapt by producing a specific cheese type, for example, such as Gouda, and adapt the product weight, sizes and packaging to local market tastes and requirements

In a global context, Uruguay’s small milk production, combined with its limited capacity to increase production, makes the volume of its exports less significant.

Chile: Projections

It is questionable whether the Chilean dairy industry wishes to reduce milk prices to the stage where it could export to a broader range of markets, outside those with which Chile enjoys FTA advantages. Instead, the strategy, backed by seemingly successful government action, seems to be to increase the number of countries with which those FTAs are in place. China and Japan, in particular, are major dairy importers, so FTAs with those countries could result in a large boost to export demand. The question seems to be, therefore, if Chile enters into further FTAs, what proportion of this new export demand would come from Chilean milk on a net basis, and to what extent would it result in further imports, mainly from its neighbors?

Given the rates of growth achieved by the Chilean dairy industry in the past, it would be unwise to dismiss the potential for much of any new FTA- driven demand to come from Chilean milk. However, the actual position will depend very much on the nature of the particular FTA. Both India and Japan are highly protective of their dairy industries, so it is hard to envision that free access or something akin to this will be granted. In addition, China is negotiating an FTA with New Zealand as well, so if agreements come into force with both Chile and New Zealand, and the conditions are similar, then it would be reasonable to expect the benefits to Chile to be limited (i.e. New Zealand would be better placed to take advantage of the FTA).

Given this view, it is predicted that Chile’s net exports are likely to remain small by international levels, but steadily grow albeit from a small base. If it is assumed that the effects of new FTAs are likely to be small, and further that Chilean milk prices do not move down to those level of its neighbors, then export flows will depend on growth of FTA volume limits.

U.S Dairy Export Council 23 December 2007 Regional Overview

A further point is worth considering—if Chile’s milk prices remain higher than those in neighboring countries, then why do not imports rise from those neighbors? Some natural import barriers exist, for example freight costs. However, most dairy imports are made by large manufacturers which are driven by economics—if it makes financial sense, they will import and export.

There may also be an opportunity for smaller ingredient users, as well as supermarkets wishing to import goods to be sold under private labels, to import themselves directly from neighboring countries with lower milk prices. While there is a great deal of protection given to the Chilean dairy industry, it might be reasonable to expect that imports into Chile will increase beyond the need of the Chilean dairy industry for triangulation and to cover seasonal demand.

While conditions exist that make it possible for Chile’s net exports to increase, the industry is relatively small and net exports are tiny at present. Therefore, it is not considered likely that Chile could have any substantial impact on net world trade, even with the trade diversion caused by FTAs. It is possible that Chile’s net exports could rise to 50,000-100,000 tonnes of WMP equivalent by 2015, but it is also possible that any cartel-like behaviour controlling imports may break down over time causing imports to increase.

U.S Dairy Export Council 24 December 2007 Market U.S. Dairy

Export Council® Research BRAZIL Dairy Export Prospects

DECEMBER 2007

Copyright ©2007. USDEC. All rights reserved. Brazil – Contents

EXPORT PROSPECTS FROM KEY SOUTH AMERICAN COUNTRIES

BRAZIL – CONTENTS

Page

1.0 EXECUTIVE SUMMARY 1

1.1 Milk Production 1 1.2 Dairy Industry 2 1.3 Local Dairy Market 3 1.4 International Trade and Export Trends and Potential 4 1.5 Currency Issues 6

2.0 MILK PRODUCTION 8

2.1 Trends in Milk Output and Deliveries to Processors 8 2.2 Dairy Farming Regions and Systems 13 2.3 Dairy Farming and Productivity 20

2.3.1 Dairy Cattle Breeds 20 2.3.2 Herd Sizes and Productivity 22 2.3.3 Seasonality and Climate 31

2.4 Milk Quality led by Export Culture 35 2.5 Production Costs and Profitability 37 2.6 Dairy Farming vs Other Agricultural Activities 38 2.7 Dairy Health Issues 40 2.8 Government Support to the Dairy Farming Sector 41 2.9 Room for Improvement? 42

U.S Dairy Export Council i December 2007 Brazil – Contents

Page

3.0 DAIRY PROCESSING 43

3.1 Key Industry Bodies / Organizations 43

• ASBIA – Associação Brasileira de Inseminação Artificial • CEPEA – Centro de Estudos Avaçados em Economia Aplicada • CNA (Confederação da Agricultura e Pecuária do Brasil = National Agricultural Confederations) • Embrapa (Empresa Brasileira de Pesquisa Agropecuária = Federal Agricultural Research Organization) • IBGE (Instituto Brasileira de Geografia e Estadisticas = National Statistics Institute) • Leite Brasil (Associação Brasileira dos Produtores de Leite = Brazilian Milk Producers Association) • G-100 Associação Brasileira das Pequenas e Media Cooperativas e Empresas de Laticinios

3.2 Dairy Processing Industry Overview 44 3.3 Profiles of Key Dairy Processors and Exporters 51

• Eleva Alimentos • Cooperativa Central Agro-Industrial Ltda (Confepar) • Cooperativa Central Agropecuaria Sudoeste SUDCOOP • Cooperativa Central de Laticínios do Estado de Sao Paulo (CCL) • Cooperativa Central dos Productores Rurais de Minas Gerais (CCPR = Itambé) • Cooperativa Sul-Rio Grandense do Lacticínios Ltda (Cosulati) • Embaré Indústrias Alimenticias S.A. • Valedourado (Ilpisa)

3.4 Profiles of Key Multinational Processors 61

• Cargill Agricola S.A. • Dairy Partners Americas Manufacturing Brazil Ltda (DPA) • Polenghi Indústrias Alimenticias Ltda

U.S Dairy Export Council ii December 2007 Brazil – Contents

Page

3.5 Dairy Industry Investment 66

4.0 MILK PRICING 68

4.1 Trends in Milk Pricing 68 4.2 Regionality and Seasonality in Pricing 73

5.0 LOCAL MARKET CONSIDERATIONS 76

5.1 Consumption Trends 76 5.2 Long Term Trends 77 5.3 Economic Growth Drivers 79

6.0 INTERNATIONAL TRADE 80

6.1 Export Products and Key Exporters 80 6.2 Export Levels and Trends 80 6.3 Key Export Destinations 87 6.4 Future Milk Availability for Export 87 6.5 Dairy Imports 89

6.5.1 Import Volumes and Products 89 6.5.2 Key Countries of Origin 93

6.6 Export Drivers and Constraints 98

6.6.1 Trade Access – Mercosur and ALADI 98 6.6.2 Pricing and Currency Issues 110 6.6.3 Quality Issues 110 6.6.4 Export Logistics and Costs 111 6.6.5 Foot and Mouth Disease (FMD) 111 6.6.6 New Plants 113 6.6.7 Quality 114

6.7 Dairy Exports by Key Product 115

6.7.1 SMP/WMP 115 6.7.2 SCM and Evaporated Milk 117 6.7.3 Cheese 119 6.7.4 Other – Cream and Butter 121

U.S Dairy Export Council iii December 2007 Brazil – Contents

Page

7.0 STRATEGIC SUMMARY 122

7.1 Milk Production 122 7.2 Domestic Consumption 124 7.3 International Trade 125 7.4 Projections 125

APPENDIX I: MILK PRODUCTION AND DELIVERY STATISTICS BY STATE I

LIST OF TABLES Table 1.3 Dairy Consumption in Brazil by Product, LME 3 Table 1.4 Brazilian Import/Export Balances by Product, 2006/7 6 Table 2.1a Number of Milk Processing Plants by Capacity, 2007 9 Table 2.1b Milk Purchases, Top-14 Dairy Processors, 1994 – 2005 9 Table 2.1c Milk Collection by the Main Processors, 2000 – 206 10 Table 2.1d Trends in Milk Production and Processing, 1990 – 2006 11 Table 2.1e Estimated End Use of Raw Milk, 2000 – 2006, LME 12 Table 2.2a Map of Brazilian States 13 Table 2.2b Main Micro Dairy Regions in Brazil 14 Table 2.2c Map of the Principal Dairy Micro Regions in Brazil 16 Table 2.2d Map of Increases and Decreases in Milk Production 17 Table 2.2e Trends in Milk Supply to Processors by State, 2002 – 2006 19 Table 2.3.1 Semen Doses Used by Cattle Breed, 2000 and 2006 21 Table 2.3.2a Trends in Cattle Numbers, Milk Production and Productivity, 1980 – 2005 22 Table 2.3.2b Average Annual Milk Yield Per Cow, Key Dairy States, 2003 vs 2005 24 Table 2.3.2c Average Milk Yield by Region, 2003 25 Table 2.3.2d Numbers of Regular Farms Supplying the Principal Dairy Processors, 2004 – 2006 26 Table 2.3.2e Average Milk Per Farm Supplying the Principal Dairies, 2004 – 2006 27 Table 2.3.2f Trends in Production of Animal Feed for Dairy Cows, 2003-2007 28 Table 2.3.2g Investment in Dairy Farms and Other Agricultural Activities, Reals per ha, 2005 29 Table 2.3.2h Estimate of the Cereal Volumes Used to Produce Concentrated Rations for Dairy cattle, 2007 30 Table 2.3.2i Value of Soy and Corn Feeds Relative to Milk, 2001 – 2007 31 Table 2.3.3a Availability of Milk to Processors, by Month, 2003 – 2006 32 Table 2.3.3b Milk Percentage by Month, Average 2003 – 2006 32 Table 2.3.3c Milk Collection Index (ICAP-L) by Month, 2004 – 2007 33 Table 2.3.3d Milk Delivery Index, 2004 – 2007 34 U.S Dairy Export Council iv December 2007 Brazil – Contents

Page Table 2.3.3e Approximate Average Rainfall per Quarter 35 Table 2.4a Milk Quality, 2005 36 Table 2.4b Quality Requirements for Refrigerated Farm Milk 36 Table 2.5 Dairy Farming Cost Structure, % Breakdown, December 2003 37 Table 2.6 Competition for Land Use – Dairy vs Other Agricultural Production 39 Table 3.2a Number of Inspected Dairies by Processing Volume, 2004 45 Table 3.2b Brazil’s Largest Processors by Milk Intake, 2006 47 Table 3.2c Production Capacity for Milk Powder and SCM by Processor 48 Table 3.2d Drying Capacity by Company 49 Table 3.3a Eleva Production Volumes, 2005 – 2007 52 Table 3.3b Eleva Exports 2005 – 2007 52 Table 3.4 Key Multinational Dairy Processors in Brazil 61 Table 4.1a Farm Milk Price Trends, Selected States, 2000-2007 69 Table 4.1b Milk Volumes Purchased on the Spot Market, 2004 – 2006 72 Table 4.2a Delivered Cost of Type C Farm Milk in the Key Dairy State by Month, 2005 – 2007, R$/liter 73 Table 4.2b Sample Milk Prices Farmgate vs Delivered, June/July 2007 74 Table 5.2 Per Capita Milk Consumption Trends, 1990-2007, mn liters LME 78 Table 5.3 Key economic indicators, 2004 – 2008 79 Table 6.2a Dairy Exports by Product, 2003 – 2007 81 Table 6.2b Exports of Dairy Products from Brazil, 2002 – 2007 82 Table 6.2c Import/Export Balance by Product, 2000-2007 84 Table 6.4a Brazilian GNP trends, 1999-2007 88 Table 6.4b Possible Scenarios for Brazil’s Future Milk Availability for Export 89 Table 6.5.1a Total Imports by Broad Classification, 2003 – 2006 90 Table 6.5.1b Key Import Trends, 2000 – 2006 91 Table 6.5.2a Key Supplier Countries of Whey/Lactose to Brazil, 2004 – 2007 94 Table 6.5.2b Key Countries of Origin for Milk Powder Imports, 2004 – 2007 95 Table 6.5.2c Key Supplier Countries of Cheese to Brazil, 2004 – 2007 96 Table 6.5.2d Key Suppliers of UHT Liquid Milk to Brazil, tonnes, 2004 – 2005 96 Table 6.5.2e Key Suppliers of Casein/Caseinates to Brazil, 2004 – 2005 97 Table 6.6.1a Mercosur Common External Tariff (CXT), Dairy Products 100 Table 6.6.1b ALADI Acordo Nº 59 – Increasing Export Access for Mercosur States 106 Table 6.6.5 Estimate of Share of Exports as % of Production, 2003 – 2006 113 Page U.S Dairy Export Council v December 2007 Brazil – Contents

Table 6.7.1a Exports of Milk Powder by Product, 2003 – 2007 115 Table 6.7.1b Brazilian Exports of WMP by Key Destination, 2003 – 2006 116 Table 6.7.1c Exports of SMP by Key Destination, 2003 – 2006 116 Table 6.7.2a SCM and Evaporated Milk Exports, 2003 – 2007 117 Table 6.7.2b Exports of SCM by Key Destination, 2003 – 2006 117 Table 6.7.2c Exports of Evaporated Milk by Key Destination, 2003 – 2006 119 Table 6.7.3a Cheese Exports, 2003 – 2007 119 Table 6.7.3b Exports of Mozzarella by Key Destination, 2003 – 2006 119 Table 6.7.3c Exports of Processed Cheese by Key Destination, 2003 – 2006 120 Table 6.7.4 Exports of Cream, Butter, Dairy Fat, BMP and Caramel Toffee Spread, 2003 – 2007 121 Table 7.4 Scenarios for Brazil’s Future Milk Availability for Exports 127

U.S Dairy Export Council vi December 2007 Brazil – Executive Summary

EXPORT PROSPECTS FROM KEY SOUTH AMERICAN COUNTRIES – BRAZIL

1.0 EXECUTIVE SUMMARY

1.1 Milk Production

• Brazil’s total farm milk production in 2006 is estimated at 25.7 bn liters—11.2 bn liters more than in 1990. Production is forecast to continue increasing at an average of 4% p.a. as strong farmgate prices encourage farmers to maximize productivity through feed increases and management of the dairy herd • Around 65% of total milk is delivered to officially inspected dairies. This proportion has increased since the late 1990s as a result of previously unregistered dairy processors being inspected • Key areas for dairy farming are in Minas Gerais, Sao Paulo, Goiás, Rio Grande do Sul and Paraná—all in the southern half of the country. Each of these regions supplies in excess of 1 bn liters p.a. for industrial processing, with Minas Gerais taking the lead with 4.7 bn liters annually. However, the fastest growth rates in milk volumes supplied to processors are being recorded in the north- eastern provinces of Paraiba and Sergipe; still, volumes remain small in the overall market context. Santa Catarina state is increasing milk production as farms diversify to include dairy as well as chicken and pork • Average annual yields are low at only 1,000 to 1,500 liters per cow; these, however, include farms operating at Argentina/Uruguay yield levels as well as those with much lower output. Average yield in 2005 was 1,189 liters per cow—up 2.9% from 2003 levels. All three main dairy states in the south recorded much higher yield increases—between 3.7 and 4% • Brazil is in the process of implementing tighter milk quality regulations, a process which is due to be completed in 2012 • With production volumes varying with a peak in December/January and a trough in May/June, farmgate prices are also cyclical. In 2007, they varied from US$ 0.23/liter in January to an unusually high price in July of US$ 0.36/liter. The processing industry

U.S Dairy Export Council 1 December 2007 Brazil – Executive Summary

accepted these high prices given the high international dairy prices which allowed them to make a profit both locally and internationally • During the last quarter of 2005, Brazil suffered an outbreak of FMD in two states—Mato Grosso do Sul and Paraná. This damaged Brazil’s reputation as a quality dairy exporter, and exports of perishable products (except processed cheese) decreased in 2006. In 2007 they are again on the increase

1.2 Dairy Industry

• The Brazilian dairy industry is fragmented, with around 1,317 federally inspected dairies. In 2004, the top 68 processors (the top 6%) collected more than 55% of the raw milk. In 2006, only 13 processors averaged more than 500,000 liters/day (182 mn liters p.a.), whereas 1,020 processors handled an average of less than 50,000 liters per day • The dominant processor by far is Dairy Partners of America (DPA), the Nestlé-Fonterra JV: ¾ DPA – more than 1.7 bn liters p.a. ¾ Itambé – 1.04 bn liters p.a. ¾ Eleva – 898 mn liters p.a. ¾ Parmalat Brazil – 612 mn liters p.a.

• There are around 40 milk powder spray driers in Brazil operated by 26 companies, with a capacity of 16.1 m liters daily. Key milk powder producers include DPA, Nestlé, Itambé, Eleva and Parmalat • Around 8 to 10 companies in Brazil produce SCM—the largest ones being Nestlé, Itambé and Eleva • Most local liquid whey is used in consumer dairy products— whether overtly in milk/whey drinks known as “bebidas lácteas” or possibly illicitly in liquid drinking milk • Whey powder is widely used in food manufacture in Brazil – chiefly in the production of chocolate, ice cream, milk replacement powders and bakery products, as it is a more economical solution than milk powder. As collection and drying of whey in Brazil is still very inefficient, large volumes are imported from Argentina, Uruguay, the U.S. and France. The main independent Brazilian whey producer is Cargill through its acquisition of Nestlé’s spray drier

U.S Dairy Export Council 2 December 2007 Brazil – Executive Summary

• Other whey manufacturers are cheese producers spray-drying whey when they have a surplus above their internal needs for chilled and UHT dairy drinks. Key among these are Eleva, Morrinhos/Leitebom, Montelac, Lacticinio Porto Alegre and Vigor • DPA (Nestlé/Fonterra JV) claims to be responsible for almost 50% of Brazilian dairy exports in 2006—mainly milk powder and SCM. The other main exporting group is Serlac, which up to September 2007 was a JV between processors Itambé, Ilpisa, CCL, Confepar and Embaré and Itambé’s trading company Serlat, exporting milk powder, SCM and evaporated milk. In September 2007, Itambé purchased the participation of the other four dairy manufacturers and is now the sole partner of SerTrading

1.3 Local Dairy Market

• Per capita consumption of dairy products is reported at 141 kg in 2007; however, this includes use of milk in animal feed on dairy farms. An adjusted figure is 139 kg • The main dairy products consumed in Brazil are cheese and drinking milk. The consumption split by products (LME) looks approximately as follows:

Table 1.3 Dairy Consumption in Brazil by Product, LME

Other - 13%

Raw Milk - 8%

Cheese - 40%

Pasteurized Milk - 7%

Milk Powder - 12% UHT Milk - 20%

Source: iRIS Consulting based on official statistics

• The main cheese products produced by almost all cheese manufacturers are Mozzarella, Prato (a semi-hard and strongly- flavored cheese) and a type of Tilsit or Edam. Other popular U.S Dairy Export Council 3 December 2007 Brazil – Executive Summary

cheese varieties produced and consumed in large volumes include Minas frescal (a fresh white cheese), a Parmesan-type cheese and Minas pedrão (a drier, room-temperature cheese used for cooking). The main cheese produced by un-inspected manufacturers is Mozzarella, used in pizza restaurants • Average per capita consumption is much lower than in Argentina and Uruguay; however, there are vast differences between regions. Consumption in the southeast, southern and central west states is much higher, and very low in the northeast and northern regions. Average per capita consumption is expected to grow by more than 3% p.a.—unless high dairy prices in 2007 force a reduction in consumption • SCM is an important product in Brazil, widely used to make caramel custard (“flan”) and caramel toffee spread (“doce de leite”) • One sector with strong growth in the last 10 to 15 years has been dairy drinks (bebidas lácteas). These chilled and UHT flavored dairy drinks have proven a profitable use for liquid whey and have stopped many companies from spray-drying their whey

1.4 International Trade and Export Trends and Potential

• Brazil’s main export products are milk powder and SCM, followed by cheese and dairy blends. SCM is a good export product for Brazil as local costs for tins and sugar are low; hence, Brazil can be an international low-cost supplier of SCM. SCM exports are growing, with imports negligible • Milk powder is exported in large volumes during times of excess milk supply in spring and summer; however, Brazil then imports similar volumes during the autumn/winter season when milk supply falls short of demand and prices increase. This results in either a small trade surplus or deficit in Brazil, depending on the season and the weather • The fact that Brazil continues to import quite a large volume of cheese while at the same time exporting even larger volumes is explained as follows: ¾ Mozzarella and processed cheese are exported ¾ Premium European cheeses, such as Brie, Camembert, Gruyère and Emmenthal are imported ¾ Mercosur cheeses such as semi-hard cheeses from Uruguay and hard and Blue cheese from Argentina are also imported as they are of better quality than equivalent Brazilian product

U.S Dairy Export Council 4 December 2007 Brazil – Executive Summary

• Main imports into Brazil, apart from milk powder, are SWP, DWP and whey permeate, which are used as lower-cost substitutes for milk in a variety of applications. Other imports are dairy ingredients such as lactose, which is not manufactured locally, and MPC or MPC/stabilizer blends which are both imported from Argentina • In 2006, Brazil was a net importer, with imports 5.6% higher than exports in volume terms and 11.7% higher in value terms. They consisted mainly of WMP and whey powder • In the first seven months of 2007, exports exceeded imports even though imports increased in comparison to the same period in 2006. This gives an indication that, for the full year 2007, Brazil will be a net exporter of dairy products, since imports normally exceed exports in the first half of the year, when milk powder is imported as a reserve for the low production months of autumn and winter. Due to unusually high international prices, Brazilian processors increased their production of milk powder for export • Key imports in the first seven months of 2007 were as follows:

¾ SWP, DWP and whey permeate – 14,357 tonnes ¾ WMP/semi-SMP – 13,629 tonnes ¾ SMP – 2,925 tonnes ¾ UHT milk – 3,789 tonnes ¾ Lactose – 6,107 tonnes ¾ Hard/semi-hard cheese – 1,399 tonnes ¾ MPC – 883 tonnes

• Main exports during the same period consisted of:

¾ WMP/semi-SMP – 15,463 tonnes ¾ SCM – 14,175 tonnes ¾ Cheese – 4,114 tonnes (including 1,990 tonnes of processed cheese) ¾ Sterilized canned cream – 2,871 tonnes ¾ Evaporated milk – 2,871 tonnes

U.S Dairy Export Council 5 December 2007 Brazil – Executive Summary

• The key products showing a large surplus of exports over imports are SCM, canned sterilized cream, Mozzarella cheese, processed cheese, caramel toffee spread, evaporated milk and infant formula • The following tables illustrate import/export balances in 2006 and 2007:

Table 1.4 Brazilian Import/Export Balances by Product, 2006/07

Jan-July Jan-July 2006, 2007, 2006, 2007, Product tonnes tonnes US$’000 US$’000 0401 Liquid milk and cream -10,498 -950 393 2,396 0402 All unsweetened milk powders -18,353 1,164 -42,078 9,015 Other 0402 milk powders 51,793 15,772 61,533 21,474 0403 Yogurt and BMP 863 235 32 -117 0404 Whey, WPC and MPC -30,537 -15,232 -35,483 -22,766 0405 Butter, AMF, dairy spreads 316 539 159 1,309 0406 Cheese 1,413 1,563 -743 463 Total -5,003 3,091 -16,187 11,774

Source: iRIS Consulting based on trade sources

• Many modern dairy processors in Brazil are gearing up to manufacture more products for exports—in particular milk powder and SCM. They appear convinced of the sustainability of milk production increases, and that these will lead to volumes which can be exported profitably in the short to medium term • Capacity expansions and new plants will increase the milk powder capacity from 16.1 mn liters per day to around 20.5 mn liters/day by the end of 2008. Another 9,000 tonnes/year of SCM capacity is also being added

1.5 Currency Issues

• The Brazilian Real (R$) was implemented in 1994 and initially appreciated against the US$ by virtue of major capital inflows in 1994/95. It then gradually depreciated culminating in the January 1999 currency crisis when it suffered a major devaluation and subsequent wild fluctuations • Further gradual depreciation until late 2002 was followed by another currency crisis and a spike in inflation. At its worst point in October 2002, the Real actually reached its historic low of almost R$4 per US$ 1 U.S Dairy Export Council 6 December 2007 Brazil – Executive Summary

• However high positive interest rates paid on treasury bonds as well as a high positive trade balance have meant that the Real has been appreciating against the US$, reaching R$1.88 = US$ 1 at the end of July 2007

U.S Dairy Export Council 7 December 2007 Brazil – Milk Production

2.0 MILK PRODUCTION

2.1 Trends in Milk Output and Deliveries to Processors

Total farm milk production in 2006 was estimated at 25.7 bn liters. This figure is 11 bn liters or 75% higher than the 1990 level, and reflects the annual growth in volumes throughout almost the entire period.

There are reported to be 1,317 federally inspected dairy processors, which include dairies blending dairy products as well as those processing fresh milk. This number is up from the 1,139 inspected processors reported in 2004.

The volume of milk officially delivered to inspected dairies represents around 65% of total milk production according to industry sources and industry organizations. An agro-census in 2007 should provide more accurate numbers for milk production and delivery as well as the dairy herd.

The Brazilian dairy sector is broadly divided between:

• Formal registered dairies—these are inspected by federal, state and sometimes municipal agricultural authorities • Other, un-inspected dairies which sell unregistered wholesale dairy products to businesses such as pizza restaurants and other food companies

Total milk production numbers in Brazil include on-farm consumption by humans and as animal feed, milk used for on-farm manufacture of cheese and dairy drinks, as well as raw milk sold locally to neighbors. These local raw milk sales are estimated at 2 bn liters per annum.

U.S Dairy Export Council 8 December 2007 Brazil – Milk Production

Table 2.1a Number of Milk Processing Plants by Capacity, 2007

Classification of Approx capacity at first plant (SIF) Number of SIF processors registration, liters / day LT1 11 > 500,000 LT2 16 400,000 LT3 43 200,000 LT4 54 75,000 LT5 182 35,000 LT6 195 15,000 LT7 273 7,500 LT8 543 5,000

Source: Terraviva Note: SIF is the Federal Registration Agency in the Ministry of Agriculture. Many of these processors will have increased capacity since Registration, but would not have been re-classified.

Inspecting dairies involves government agricultural or health ministry officials checking the incoming milk, production processes and the outgoing products for quality. It does not, however, involve checking the dairy’s financial or fiscal affairs. The IBGE (Instituto Brasileiro de Geografia e Estatística) numbers show milk volumes purchased on official invoices. They exclude purchases made without official invoices. Smaller dairies tend not to have a full-time sanitary inspector.

Table 2.1b Milk Purchases, Top-14 Dairy Processors, 1994—2005

30000000

25000000

s 20000000

15000000

'000 liter 10000000

5000000

0 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 Total raw milk Delivered to processors

Source: IBGE, CNA/DECON, EMBRAPA/CNPGL U.S Dairy Export Council 9 December 2007 Brazil – Milk Production

Table 2.1c Milk Collection by the Main Processors, 2000—2006

Change, Dairy 2000, 2002, 2003, 2004, 2005, 2006, 2000 to processor State / region ‘000 liters ‘000 liters ‘000 liters ‘000 liters ‘000 liters ‘000 liters 2006 DPA Southeast + 1,393,000 1,489,029 1,500,179 1,509,067 1,708,000 1,702,000 22.2% Goiás

Itambé Ninas (SE) + 773,000 732,000 750,000 829,500 1,005,000 1,039,000 34.4% Goiás

Eleva Rio Grande (S) 760,239 711,335 671,780 717,707 841,549 897,965 18.1% Parmalat Minas (SE) + 919,483 751,921 641,127 406,688 591,847 612,070 -33.4% Goiás (CW)

Lat Goiás (CW) 146,200 210,572 191,782 252,702 299,444 338,098 131.3% Morrinhos

CCL Minas (SE) + 512,687 268,385 309,540 338,437 360,124 316,045 -38.4% Goiás (CW)

Embaré Minas (SE) 123,471 192,378 218,687 256,398 306,249 309,453 150.6% Confepar Paraná (S) n/a 109,239 115,834 189,308 262,233 288,482 Centroleite Goiás (CW) 174,902 213,503 261,230 229,135 268,268 263,128 50.4% Batávia Paraná (S) 272,775 165,276 232,311 209,893 224,561 241,601 -11.4% Líder Paraná (S) 206,568 163,766 129,177 151,482 202,679 226,535 9.7% Alimentos Sudcoop Paraná (S) 181,670 230,952 226,016 261,099 266,261 225,995 24.4% Danone Minas (SE) 130,210 272,236 225,033 200,737 196,399 221,905 70.4% Grupo Vigor Minas (SE) 229,629 154,158 153,145 196,425 191,922 177,821 -22.6%

Subtotal 5,832,834 5,664,750 5,625,841 5,748,578 6,724,536 6,860,098 17.8% Leite Nilza Sao Paulo + 141,449 182,568 0 0 196,500 38.9% Minas

Source: IBGE, CNA/DECON, EMBRAPA/CNPGL Notes: 2001 figures are not available. Leite Nilza experienced financial difficulties and had to stop operating from 2003 to 2005. It was subsequently sold and, after some new investment, is now increasing its milk purchases again.

Milk volumes delivered to processors increased strongly between 2004 and 2005 as farmers were striving to maximize their yields and output in order to profit from high milk prices. Additionally, producers were shifting from informal milk sales to supplying to officially inspected dairies.

U.S Dairy Export Council 10 December 2007 Brazil – Milk Production

Table 2.1d Trends in Milk Production and Processing, 1990—2006

Delivered to Total raw milk inspected Top 14 dairies’ production, dairies, ‘000 Share of total, Delivered to top share of total Year ‘000 liters liters % 14 dairies, ‘000 delivered mil, %

1990 14,484,000 N/A N/A N/A N/A

1991 15,079,000 N/A N/A N/A N/A

1992 15,784,000 N/A N/A N/A N/A

1993 15,591,000 N/A N/A N/A N/A

1994 15,784,000 9,442,000 59.8 N/A N/A

1995 16,474,000 11,353,000 68.9 N/A N/A

1996 18,515,000 11,512,000 62.2 N/A N/A

1997 18,666,000 10,688,279 57.3 5,560,115 52.0

1998 18,694,000 10,995,373 58.8 5,258,178 47.8

1999 19,070,035 11,138,930 58.4 5,525,826 49.6

2000 19,767,206 12,107,741 61.3 5,832,834 48.1

2001 20,509,953 13,212,710 64.4 6,312,863 47.8

2002 21,643,740 13,221,307 61.1 5,664,750 42.8

2003 22,253,863 13,713,815 61.6 5,625,841 41.0

2004 23,474,694 14,503,132 61.8 5,748,578 39.6

2005 24,571,538 16,175,545 65.8 6,724,536 41.6

2006 25,709,000 16,663,907 64.8 6,860,098 41.2 Source: IBGE, Terraviva, EMBRAPA/CNPGL

While there may be some doubt as to the total raw milk production figures as they tend to be estimates based on figures provided by the different municipalities, the volumes delivered to inspected dairies are well- documented.

Total raw milk collection increased by an average of 4.4% p.a. between 2000 and 2006.

Based on industry estimates, it is thought that approximately 55% of unofficial milk was being used to make foodservice cheese for pizza restaurants, hotels, snack bars/sandwich stores, fast food/burger bars, etc. It is thought that the volume for unofficial milk used for cheese manufacture is higher than that of official milk. However, with the increase in sanitary and tax inspections, it is forecast that much of the currently unofficial cheese production will shift over to the formal sector in the next ten years.

U.S Dairy Export Council 11 December 2007 Brazil – Milk Production

Table 2.1e Estimated End Use of Raw Milk, 2000—2006, LME

2002, mn 2003, mn 2004, mn 2005, mn liters 2006, mn liters Product liters LME liters LME liters LME LME LME

Official production

Pasteurized milk 1,480 1,500 1,550 1,700 1,735

UHT milk 4,200 4,225 4,402 4,800 5,012

Milk powder 2,700 2,770 2,870 3,507 3,778

Cheese 3,760 3,830 3,930 4,150 4,230

Yogurt 239 309 378 415 420

SCM 340 417 488 570 590

Cream 240 310 370 441 448

Other 243 352 515 592 609

Subtotal official 13,202 13,713 14,503 16,175 16,822 production

Unofficial production

Raw milk 2,000 2,000 2,000 1,500 1,200

Cheese 4,600 4,800 4,900 5,700 6,550

Other 1,842 1,741 2,072 1,197 1,137

Subtotal unofficial 8,442 8,541 8,972 8,397 8,887 production

Total 21,644 22,254 23,475 24,572 25,709

Source: Terraviva

U.S Dairy Export Council 12 December 2007 Brazil – Milk Production

2.2 Dairy Farming Regions and Systems

Table 2.2a Map of Brazilian States

Source: IBGE

The main regions for dairy farming are:

• Minas Gerais – 4.7 mn tonnes • Rio Grande do Sul – 2.3 mn tonnes • Goiás – 2.2 mn tonnes • São Paulo – 2.2 mn tonnes but decreasing • Paraná – 1.4 mn tonnes

U.S Dairy Export Council 13 December 2007 Brazil – Milk Production

Four states—Paraná, Rio Grande do Sul, Goias and Santa Catarina— increased production for industrial processing by more than 44% between 2000 and 2006, mainly by increasing yields per cow. Other states with significant increases in production are Rondonia, Mato Grosso, Espirito Santo and Pará.

Conversely, production decreased in Brasilia and three states—São Paulo (where pasture is being replaced by long-term land rental for sugar cane cultivation), Rio de Janeiro and Roraima.

A detailed survey by Embrapa in 2006 calculated milk production per square km in each of the 558 micro regions in Brazil. 36 micro regions, each producing 24,000 to 89,000 liters p.a. per sq km, accounted for 25% of the total milk output.

The second tier group of 52 micro regions, each producing 16,000 to 23,000 liters per year per sq km, accounted for another 25% of total milk output.

These micro regions have been grouped together into ten regions as shown in Table 2.2b below, together accounting for half of Brazil’s total raw milk production.

Table 2.2b Main Micro Dairy Regions in Brazil

000,000s Average in 000s Area, sq Liters/ liters / year per Zone State Micro Region km year sq km

SC São Miguel d'Oeste, Chapecó, Concórdia e Xanxerê L1 RS Santa Rosa, Três Passos, Não-Me- Toque, Cerro Largo, Passo Fundo, Ijuí, 109,546 4,392 40 Sananduva, Lajeado-Estrela, Guaporé, Frederico Westphalen, Erechim, Carazinho, Caxias do Sul e Montenegro

PR Capanema, Francisco Beltrão, Pato Branco, Cascavel, Toledo e Foz do Iguaçu

L8 PR Ponta Grossa 6,706 253 38

L6 PE Vale do Ipanema e Vale do Ipojuca

AL Batalha e Palmeira dos Índios 22,795 579 25 SE Sergipana do Sertão do São Francisco

U.S Dairy Export Council 14 December 2007 Brazil – Milk Production

000,000s Average in 000s Area, sq Liters/ liters / year per Zone State Micro Region km year sq km

MG Patos de Minas, Passos, Bom Despacho, Pará de Minas, Divinópolis, L2 Oliveira, Lavras, Patrocínio, Araxá, Três Marias, Sete Lagoas, Belo Horizonte, Itaguara, Piu, Formiga, Campo Belo, São Sebastião do Paraíso, Alfenas, Varginha, Itajubá, Poços de Caldas, 170,225 4,076 24 Pouso Alegre, Santa Rita do Sapucaí e São Lourenço

RJ Vale do Paraíba Fluminense e Barra do Piraí

SP Franca, Batatais, São João da Boa Vista, São José dos Campos e Guaratinguetá

L3 MG Andrelândia, São João Del Rei, Barbacena, Ponte Nova, Muriaé Ubá, Juiz de Fora e Cataguases 48,203 1,095 23 Itaperuna Santo Antônio de Pádua e RJ Cantagalo-Cordeiro

ES Itapemirim

L4 Anápolis, Anicuns, Goiânia, Meia Ponte GO e Pires do Rio 51,227 1,061 21

L5 MG Frutal e Uberaba SP Jales, Fernandópolis e Auriflama 35,254 702 20

L9 SC Rio do Sul e Ituporanga 6,706 137 20

L7 RO Ji-Paraná 25,024 435 17

L10 MG Mantena ES Barra de São Francisco 5,878 102 17

Total and averages 481,564 12,802 27

Source: IBGE, interpreted by SGE/Embrapa.

A map showing these regions follows.

U.S Dairy Export Council 15 December 2007 Brazil – Milk Production

Table 2.2c Map of the Principal Dairy Micro Regions in Brazil

L6

L7 L4 Percentual da L2 produção de leite L10

25% (6.486 bilhões)) L5 L3 50% (12.831 bilhões)

75% (19.296 bilhões) L2 L8 L1 L9

Source: Embrapa

Zones L1, L2, L3 and L4 showed the highest increase in milk production measured in liters/year/sq km. Two other regions showing excellent milk production potential but which do net yet show up as major producer regions are in the north/north-east of Brazil:

• Central east of Pará, Central west of Maranhão and north of Tocantins states • South of Bahía state

U.S Dairy Export Council 16 December 2007 Brazil – Milk Production

Table 2.2d Map of Increases and Decreases in Milk Production

Variação do volume de leite produzido aumento de 11 a 242 milhões

redução de 6 a 48 milhões

Source: Embrapa Note: Green shows an increase of 11 to 242 mn liters. Red shows a decrease of 6 to 48 mn liters.

The dairy farming sector is consolidating, in particular in the states of Minas Gerais and Goiás where processors pay a premium to farmers who deliver larger milk volumes. In southern Brazil, the emphasis is more on quality rather than quantity. Farmers in this region are more experienced and have better animal husbandry and farm management skills compared to those in the west, northeast and northern areas. Milk purchased from large farms in the southeast and central west regions of Brazil tends to be of good quality, but farm hygiene is poorer than in the states of Paraná, Santa Catarina and Rio Grande do Sul.

There are differences in the types of dairy farms in the main dairy states:

• Rio Grande do Sul: this state tends to have smaller farms with good yields of 15 to 20 liters/day/cow; farms are using technology to increase productivity, e.g. artificial insemination, improved pasture and forage based on corn, rye, etc.

U.S Dairy Export Council 17 December 2007 Brazil – Milk Production

• Paraná: farms are generally smaller with excellent yields of 25 liters/day/cow, mainly due to higher volumes of concentrated rations being fed • Sao Paulo state: tends to have medium-sized farms producing around 12 liters/day/cow; farms have lots of pasture and forage fields and feed silage made from corn, soy and sugar cane • Minas Gerais state: tend to have larger herds but are less open to new technologies, resulting in lower yields of just 9 liters/cow/day; farmer use natural pasture and have not invested in planning calving or improving efficiency of insemination, resulting in longer periods between lactations • Goiás state: herds are large but, similar to Minas Gerais, farms are less technologically advanced, resulting in average yields of 10 liters/cow/day; natural pasture, shorter lactation periods and longer periods between calving (15 to 17 months) all contribute to this low yield

In the areas of Sao Paulo, Minas Gerais and Goiás states, where land is also suitable for planting cane or corn, dairy farms have been pushed out and have moved to the hillier areas. The increase in production is in larger farms in western Brazil, which are located on flatter pasture areas of tropical grasses, and cycle-grazed in strips.

Milk supply is increasing significantly in Santa Catarina as farmers have been encouraged to produce milk, as well as chickens and pigs, so that they can compensate when export of one or the other is prohibited for a reason (bird flu, FMD, etc.).

Two of the principal pork/chicken exporters have entered the dairy business—Aurora and Perdigão, which purchased Batávia. Another manufacturer, Frimesa, intensified its efforts to increase its dairy business, including exports.

Other major states showing a considerable increase in milk production are Paraná, Goiás, Mato Grosso and Rondonia states, where low-cost grain and soy have favored the growth of the dairy business.

The table below illustrates growth rates in the key dairy states. Appendix I provides more detail on milk delivery volumes to processors by state between 2000 and 2006, and also highlights the percentage share of total milk produced in each state.

U.S Dairy Export Council 18 December 2007 Brazil – Milk Production

Table 2.2e Trends in Milk Supply to Processors by State, 2002— 2006

Ranking in milk Change 2000 to State deliveries Region 2006, %

Sergipe Northeast 667.6

Paraiba Northeast 434.4

Pernambuco No 6 North-east 117.7

Santa Catarina South 106.8

Maranhão Northeast 103.1

Piauí Northeast 88.5

Mato Grosso No 9 Central west 80.5

Pará North 67.2

Espirito Santo Southeast 58.7

Tocantins Northeast 57.4

Rondonia No 7 Central west 50.9

Paraná No 5 South 49.0

Goiás No 3 Central west 48.8

Ceará Northeast 46.2

Rio Grande do Sul No 2 South 44.7

Minas Gerais No 1 South-east 40.9

Mato Grosso do Sul Central west 26.5

Acre Central west 23.3

Alagoas Northeast 15.8

Bahia No 10 Northeast 12.6

Rio Grande do Norte Northeast 3.6

Sao Paulo No 4 Southeast -1.2

Rio de Janeiro No 8 Southeast -4.8

Disitrito Federal Central west -71.8

Roraima North -82.7

Amazonas North N/A (2000=zero)

Brazil 37.6

Source: IBGE – Pesquima Trimestral do Leite Note: Top ten states are highlighted.

U.S Dairy Export Council 19 December 2007 Brazil – Milk Production

The dairy cow breeders association in the state of Paraná collects statistics on the top 20,000 dairy cows in the state. These cows are pure bred, and 2006 data indicated the following key statistics:

• Average yield of 26 liters/cow/day • 305-day lactation period • 400 to 425 days between calving • Annual average yield of 7,600 kg

These figures illustrate the huge potential of improving milk yield—and hence milk production volume—in the southern states with higher investment in genetics and feed and improvement of farm management.

Milk supplies to un-inspected dairies are high in the states of Bahia, Paraná, Maranhão, Pernambuco and Pará as well as states in the north- east of the country. The reason is that in these states, farms are more isolated from the major cities.

2.3 Dairy Farming and Productivity

2.3.1 Dairy Cattle Breeds

Brazilian farmers started using artificial insemination during the 1990s in order to improve milk yields and genetics of their dairy cows. During this process, they were increasing the percentage of European stock in the genetics in the main Friesian, Brown Swiss, Jersey, Guernsey and Simmenthal. The number of doses of semen from dairy breeds was a little over 2.91 mn, up from 2.37 mn in 2002. However, this still only represents no more than 10% of the cows used for commercial milk production, estimated at around 15 mn head. When profits from milk production are high, such as in 2005 and 2007, usage of artificial insemination increases.

The use of imported semen from dairy breeds did not increase much before 2004, but grew much faster than the use of local semen in 2005 and 2006 because of favorable exchange rates. Imports made up more than 63% of all semen used in artificial insemination of dairy cattle in 2006. As a comparison, the share of imported semen from beef breeds in 2006 was only a little over 10%.

U.S Dairy Export Council 20 December 2007 Brazil – Milk Production

Table 2.3.1 Semen Doses Used by Cattle Breeds, 2000 and 2006

2000 share, 2006 share, Breed 2000, doses % 2006, doses % Holstein black and 1,689,409 72.2 1,603,142 55.1 white Gir Leiteiro 194,325 8.3 552,313 19.0 Jersey 310,899 13.3 536,715 18.4 Girolando 17,516 0.8 109,828 3.8 Guzera Leiteiro 26,366 1.1 41,141 1.4 Brown Swiss 82,111 3.5 40,881 1.4 Brown Holstein 15,287 0.7 20,744 0.7 Gir Leiteiro Mocho 1,487 0.1 3,377 0.1 Others 140 Insign. 2,023 0.1 Total 2,337,540 100.0 2,910,167 100.0

Source: ASBIA

The region south of mid-Paraná state, which includes Rio Grande do Sul and Santa Catarina states, is suitable for breeds which are predominantly European. In the region from mid-Paraná north to the states of Sao Paulo, Minas Gerais, Goiás etc., a cross of 5/8th Holstein with 3/8th Gir, called Girolando, is more appropriate as it is a more sturdy animal with increased resistance to insects and tropical diseases. Girolandos give on average 10 to 15 kg of milk per day on pasture.

In the elite dairy herds, the predominant semen used for dairy cows continues to be that of black and white Holstein, but the use of other options such as Jersey (when there is a need for a lighter cow for farming in boggy/marshy areas for example) and dairy zebu breeds (such as the Gir and Gir Leiteiro with more resistance to tropical pests) is increasing.

The Gir Leiteiro, Guzero Leiteiro and Gir Leiteiro Mocho are pure zebu (Gir) breeds, and their semen is exported to other tropical countries. When inseminating Girolando cows with Girolando semen, the end result is not necessarily and reliably a Girolando calf, so farms have to choose between inseminating with Gir Leiteiro to produce a cross breed that is more Gir, or with Holstein to produce a crossbreed with a higher Holstein genetic share. This will be a more sensitive animal requiring cleaner and more elaborate facilities.

U.S Dairy Export Council 21 December 2007 Brazil – Milk Production

2.3.2 Herd Sizes and Productivity

The last agricultural census providing definitive cattle numbers took place in 1995; however, industry experts have continued to estimate cattle herd numbers on the basis of this. It is estimated that the number of lactating cows has slowly increased over the last twelve years. There was a decrease in 1996 when criteria used to count cattle were changed after the 1995 census, considering only the actual number of cows being milked at some stage during each year. This total includes cows which only produce milk in the spring and summer months (rainy season) and not in the drier, cooler months, and therefore is somewhat higher than it should be if only commercial lactating and dry cows would be considered. FMP, an agri-economic consultancy, estimates the total dairy herd at 15 mn head in 2006. The 2007 agrocensus should provide more accurate figures in mid-2008.

Table 2.3.2a Trends in Cattle Numbers, Milk Production and Productivity, 1980 to 2005

Production of milk Cows being milked, Productivity Year (‘000 tonnes/year) ‘000 heads liter/cow/year

1980 11,162 16,513 676

1981 11,324 16,492 687

1982 11,461 16,387 700

1983 11,463 16,276 704

1984 11,933 16,743 713

1985 12,078 16,890 715

1986 12,492 17,330 721

1987 12,996 17,774 731

1988 13,522 18,054 749

1989 14,095 18,673 755

1990 14,484 19,073 760

1991 15,079 19,964 755

1992 15,784 20,476 771

1993 15,591 20,023 779

1994 15,784 20,068 787

1995 16,474 20,579 800

U.S Dairy Export Council 22 December 2007 Brazil – Milk Production

Production of milk Cows being milked, Productivity Year (‘000 tonnes/year) ‘000 heads liter/cow/year

After the 1995 agricultural census, the number of adult dairy cows is considered to be the number producing milk for commercial sale only some time during the year

1996 18,515 16,274 1,138

1997 18,666 17,048 1,095

1998 18,694 17,281 1,082

1999 19,070 17,396 1,096

2000 19,767 17,885 1,105

2001 20,510 18,194 1,127

2002 21,644 19,005 1,139

2003 22,254 19,256 1,156

2004 23,475 20,023 1,172

2005 24,763 20,820 1,189

Sources: IBGE: Pesquisa Mensal do Leite, Pesquisa Trimestral do Leite, PPM (Annual Produção Pecuária Municipal = domestic animal production municipal survey); Secretaria de Politica Agricola, MAPA; Embrapa Gado de Leite Research Station

The average yield per cow is slowly increasing but still low compared to Argentina and Uruguay as the total milking cows include cows which only give milk for 3 to 5 months of the year. While some farms in Brazil are as productive as their Argentinean and Uruguayan counterparts, many are plainly very poor in terms of productivity.

The highest yield per cow p.a. is on the smaller farms in southern Brazil, whereas productivity is lowest in the northern and north- eastern states where a lot of milk is produced on small, multi-crop family farms with few dairy cattle.

U.S Dairy Export Council 23 December 2007 Brazil – Milk Production

Table 2.3.2b Average Annual Milk Yield Per Cow, Key Dairy States, 2003 vs. 2005

Liters/cow Liters/cow Change 2003 State Region 2003 2005 to 2005, %

Santa Catarina South 2,070 2,153 4.0%

Rio Grande do Sul South 1,950 2,050 5.1%

Paraná South 1,776 1,842 3.7%

Minas Gerais South-east 1,435 1,482 3.3%

Mato Grosso Central west 1,435 1,136 -20.8%

Alagoas North-east 1,416 1,493 5.4%

Rio de Janeiro South-east 1,153 1,186 2.9%

Goiás Central west 1,122 1,134 1.1%

Espirito Santo South-east 1,092 1,125 3.0%

São Paulo South-east 1,035 1,065 2.9%

Mato Grosso do Sul Central west 989 992 0.3%

Ceará North-east 782 794 1.5%

Rondonia Central west 678 680 0.3%

Para North 597 593 -0.7%

Bahia North-east 516 543 5.2%

BRAZIL 1,156 1,189 2.9%

Source: IBGE – Pesquisa Trimestral do Leite

The following chart assists interpretation of this regional data by showing the micro regions in different colors depending on their average milk yield in 2003.

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Table 2.3.2c Average Milk Yield by Region, 2003

Acima de 3.000 De 2.000 a 2.999 De 1.000 a 1.999 Abaixo de 1.000

Source: IBGE Note: Red – above 3,000 liters/cow/year. Dark blue – 2,000 – 2,999 liters/cow/year. Light blue – 1,000 – 1,999 liters/cow/year.

Data on milk production per farm is limited, apart from the farms supplying the top 15 dairy companies (see Table 2.3.2d). Industry specialists consider that around 70% of farms produce a maximum of 300 to 400 liters of raw milk per day, and that the remaining 30% of the farms produce around 70% of the total raw milk in Brazil.

With the Ministry of Agriculture tightening the minimum hygiene requirements and cell count standards in farm milk in stages starting in 2005, and with processors insisting that milk be chilled in tanks on the farm or promptly at a convenient collection facility, some farmers prefer to sell their cows and move into other agricultural activities. This normally does not result in a decrease in

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cattle numbers but rather in an increase of cattle per hectare on neighboring farms.

Average milk production per farm is increasing every year and most processors purchase their milk from a gradually decreasing number of farms. The exceptions are Itambé, Líder and Lat Morrinhos, which have recently expanded their production capacity and taken on new farms to supply additional milk, resulting in a decreased average purchase per farm.

Table 2.3.2d Numbers of Regular Farms Supplying the Principal Dairy Processors, 2004 to 2006

Processor State and region of supply 2004 2005 2006

Elegê Rio Grande (S) 21,402 25,001 19,641

Itambé Minas (SE) + Goias (CW) 6,063 7,325 9,700

DPA South East + Goias 6,112 6,110 6,000

Confepar Parana (S) 5,467 6,152 5,740

Sudcoop Parana (S) 6,872 5,998 5,434

Líder Alimentos Parana (S) 4,557 5,243 5,320

Centroleite Goias (CW) 4,920 5,049 4,850

Parmalat Minas (SE) + Goias (CW) 4,566 4,400 4,640

Batávia Parana (S) 3,907 4,019 4,104

Lat. Morrinhos Goias (CW) 2,178 3,200 4,100

CCL Minas (SE) + Goias (CW) 4,461 4,388 2,846

Embaré Minas (SE) 3,666 2,380 1,992

Grupo Vigor Minas (SE) 1,510 996 1,266

Danone Minas (SE) 1,072 605 496

Total 14 76,753 80,866 76,129

Source: CNA/DECON e EMBRAPA/CNPGL Notes: * Centroleite = Cooperativa Central de Laticínios de Goiás, which purchases farm milk to resell to processors ** CCL/SP = Cooperativa Central de Laticínios do Estado de São Paulo

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The average milk production per farm is much larger in the south- east and central west regions than in the southern region.

Table 2.3.2e Average Milk Per Farm Supplying the Principal Dairies, 2004 to 2006

2004, 2005, 2006, State and region of liters/day/ liters/day/ liters/day/ Processor supply farm farm farm

Danone Minas (SE) 297 609 909

DPA South East + Goias (CW) 509 559 569

Embaré Minas (SE) 166 289 360

Grupo Vigor Minas (SE) 298 470 296

Itambé Minas (SE) + Goias (CW) 346 367 274

Parmalat Minas (SE) + Goias (CW) 173 242 247

CCL Minas (SE) + Goias (CW) 185 159 211

Lat. Morrinhos Goias (CW) 300 200 207

Batávia Parana (S) 147 153 161

Centroleite Goias (CW) 128 140 148

Confepar Parana (S) 71 94 114

Sudcoop Parana (S) 93 107 110

Líder Alimentos Parana (S) 85 96 108

Elegê Rio Grande do Sul (S) 84 81 105

Average all 14 processors 173 187 204

Source: CNA/DECON, OCB/CBCL and EMBRAPA:CNPGL

Most farms have not increased in area, so that the statistics appear to confirm the opinion of industry experts that the number of cows per hectare is increasing at the same time as the production per cow is increasing as a result of better pasture and supplementary feeding.

As farmgate prices have increased above US$ 0.30/liter in mid- 2007, dairy farms are working hard to increase milk production. The approach is different in the farms in southern Brazil and those in the rest of Brazil:

• In southern Brazil, farms aim to increase yield per dairy cow on the same area of land by genetic improvements of their U.S Dairy Export Council 27 December 2007 Brazil – Milk Production

dairy cows (AI or Holstein bulls), better pasture management (increased use of fertilizers and strip rotation; oats and ryegrass), supplemented by home grown silage and purchased grains and soy bran • In south-eastern and central west Brazil, farms will normally increase the number of cows per hectare, improve pasture management, increase the supply of fresh forage (which includes sugar cane in winter months and tropical grasses in summer months), install irrigation to improve pasture (Panicum and sometimes Bermuda grass) and forage in the drier months, and supply generous quantities of corn silage and dry purchased rations. On some farms, they may introduce rotational grazing, especially where land is very expensive The increase in usage of animal feed concentrates (wheat bran, soy bran, corn, sorghum, mineral vitamin fortification, etc.) is confirmed by data from the animal feed association SindiRações:

Table 2.3.2f Trends in Production of Animal Feed for Dairy Cows, 2003 to 2007

Year Tonnes, ‘000 2003 3,216.6 2004 3,784.3 2005 3,805.0 2006 3,810.0 2007 4,076.8

Source: Sindiracões

High milk-yielding cows are fed on average 1.575 kg dry solids per cow per day and medium milk-yielding cows are fed an average of 1 kg per cow per day. The principal feed is forage supplemented by silage and sometimes sugar cane forage in the winter.

As in many developing countries, Brazilian dairy farms vary greatly in their levels of technological sophistication. The variability would appear to be higher than in many other sectors. For example, the Scot Consultancy (an independent beef and dairy consultancy specializing in technical assistance to farmers) estimates that the average Brazilian dairy farm operates with 50% of the technology of the best Brazilian dairy farm, compared to 89% for soy, 80% for corn, 79% for sugar and 33% for beef.

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Smaller farms are not necessarily the most primitive; the farms located in the rural hilly states in southern Brazil use artificial insemination, good pasture, silage and concentrated rations to increase the daily yield per cow to 15 to 25 liters per cow. The yields are lower on farms in Minas Gerais and Goiás states, where the herds are larger, but the yield per cow averages only around 10 liters per day per cow.

The most primitive farms are the mixed dairy/beef farms which breed beef cattle to be sold to other farms for fattening, but produce milk from the cows used for breeding. Low-technology dairy farms produce an average of 2,600 liters/ha/year, compared to 12,000 liters/ha/year for medium-technology farms and 25,000 liters/ha/year for high-technology farms.

Scot estimated investment in dairy farms per hectare as substantially higher than for other agricultural activities. Investment in Reals per hectare, assuming land price at R$5,000/hectare, is more than double that in other sectors.

Table 2.3.2g Investment in Dairy Farms and Other Agricultural Activities, Reals per ha, 2005

25,000

20,000

15,000

Reals 10,000

5,000

0 Dairy Sugar Beef cattle Beef cattle Soya or corn fattening breeding

Source: iRIS Consulting based on Scot Consultoría

Most dairy farms put the cows out to pasture, and supply concentrates to increase milk production in the drier months of the year. As the cost of concentrated rations has been low in 2004 and 2005 compared to the selling price of fresh milk, many farmers

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have extended the period when they feed rations to their cows to increase their profits, so increasing the volume of milk production.

Concentrates are never used as exclusive feed sources. The intensive feeding of dairy cows has been shown to be unprofitable in Brazil, and the dairy farms operating intensive systems are moving their cows to regions where they can be put out to tropical pasture and fed with fresh forage in the rainy season and corn silage in the drier season. Brazil produces dairy feeds based on wheat bran, soy bran, sorghum, corn, and occasionally by-products of the production of rice, citrus and cottonseed. The use of wheat bran in concentrates has increased because, even though wheat is imported, wheat bran is a local by-product of the production of wheat flour and is therefore very cost-effective.

Table 2.3.2h Estimate of the Cereal Volumes Used to Produce Concentrated Rations for Dairy Cattle, 2007

Type Volume, tonnes ‘000 Wheat bran 1,630.7 Corn 815.4 Sorghum 611.5 Soy bran 428.1 Calcium carbonate 190.4 Vitamin-mineral premix, salt, fat, etc. 400.7 Total 4,076.8

Source: Sindirações

Two of the traditional ingredients used for feeding cows are corn and soy bran. Table 2.3.2i shows the variation in the number of liters of milk required to purchase corn and bran during the last six years. In 2006 and 2007, the option of feeding concentrates to milking cows has been highly beneficial. In June 2007, a 60 kg bag of corn grain, equivalent to 48 liters or more milk, costs the equivalent of 30 liters milk—a profitable exchange. Similarly, one tonne of soy bran would cost the same as 710 liters of milk, but would produce a lot more milk, again a favorable exchange.

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Table 2.3.2i Value of Soy and Corn Feeds Relative to Milk, 2001 to 2007

Nº of liters of milk to purchase 1,000 kg soy Nº of liters of milk to purchase bran 60 kg corn grain Nov 2001 1,911 41 Nov 2002 1,817 76 Nov 2003 1,614 40 Nov 2004 966 32 April 2005 870 32 Nov 2005 1,078 37 April 2006 848 28 Nov 2006 961 40 April 2007 800 33 May 2007 707 28 June 2007 710 30

Source: Cepea

2.3.3 Seasonality and Climate

The production of fresh milk is higher in the spring and summer months (October to January), which are generally the wetter months with abundant fresh green pasture.

The country effectively divides into two regions—the southern region south of mid-Paraná where a wetter winter gives a production peak in June and July, and the rest of the country where there is a drier winter and production peaks in December and January. In the past, the colder winter months were times when some of the natural pasture died and cows depended on forage, which was not always available. Most farmers are now better organized, pasture has improved, winter forage and silage and grain are available, and the variation in milk production between summer and winter is much less accentuated.

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Table 2.3.3a Availability of Milk to Processors, by Month, 2003 to 2006

Season 2003 2004 2005 2006 Average January Summer 9.37% 8.93% 8.85% 8.99% 9.04% February Summer 8.06% 8.04% 7.69% 7.86% 7.91% March Autumn 8.34% 8.00% 7.88% 8.44% 8.17% April Autumn 7.75% 7.39% 7.76% 7.92% 7.71% May Autumn 7.69% 7.67% 7.97% 7.86% 7.80% June Winter 7.60% 7.59% 8.07% 7.60% 7.72% July Winter 7.91% 8.16% 8.35% 7.95% 8.09% August Winter 8.06% 8.17% 8.38% 8.03% 8.16% September Spring 7.91% 8.15% 8.20% 7.82% 8.02% October Spring 8.60% 8.60% 8.81% 8.76% 8.69% November Spring 8.94% 9.28% 8.89% 9.12% 9.06% December Summer 9.77% 10.02% 9.15% 9.66% 9.65%

Source: IBGE – Pesquisa Trimestral do Leite

Table 2.3.3b Milk Percentage by Month, Average 2003 to 2006

12.00% 10.00%

8.00%

6.00% 4.00% 2.00% 0.00%

month by Percentage l ry st r er rch pri u a A May July be June ug m mb M A te JanuaryFebrua p October e Nove December S Month

Source: iRIS Consulting based on IBGE – Pesquisa Trimestral do Leite

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Cepea calculates the ICAP index showing the variation in milk collection in the six principal dairy states, plus Bahia. The total for the first six months of 2007 was 3.3% higher than for the same six months in 2006, indicating that milk production is still growing, although not as fast as many dairy experts would expect. Milk collection in April 2007 was lower than that of April 2006 because of some cooler weather, which reduced the forage production on farms. An increase in corn prices, showing up as an increase in the costs of concentrated rations, also played a role.

Table 2.3.3c Milk Collection Index (ICAP-L) by Month, 2004 to 2007

Month / year ICAP-L Monthly change, % Jun-04 100.00 N/A Jul-04 102.21 2.2% Aug-04 105.31 3.0% Sep-04 107.66 2.2% Oct-04 109.67 1.9% Nov-04 116.41 6.1% Dec-04 116.67 0.2% Jan-05 114.65 -1.7% Feb-05 111.74 -2.5% Mar-05 102.42 -8.3% Apr-05 103.67 1.2% May-05 100.51 -3.1% Jun-05 108.47 7.9% Jul-05 112.30 3.5% Aug-05 115.33 2.7% Sep-05 118.01 2.3% Oct-05 119.15 1.0% Nov-05 123.21 3.4% Dec-05 121.47 -1.4% Jan-06 116.88 -3.8% Feb-06 115.30 -1.4% Mar-06 109.31 -5.2% Apr-06 108.10 -1.1% May-06 102.82 -4.9% Jun-06 105.04 2.2%

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Month / year ICAP-L Monthly change, % Jul-06 109.16 3.9% Aug-06 111.89 2.5% Sep-06 118.33 5.8% Oct-06 124.38 5.1% Nov-06 126.87 2.0% Dec-06 128.13 1.0% Jan-07 124.44 -2.9% Feb-07 121.46 -2.4% Mar-07 111.87 -7.9% Apr-07 107.23 -4.1% May-07 104.79 -2.3% Jun-07 109.60 +4.6%

Source: CEPEA Note: Base: June 2004 = 100.00

The index shows the spring-summer high production is around 20 to 25% higher than the winter low production, which means that production for export occurs in the spring and summer months.

Table 2.3.3d Milk Delivery Index, 2004 to 2007

140.00 120.00 100.00 80.00

60.00 Index 40.00 20.00 0.00

Jun-04 Jun-05 Jun-06 Jun-07 Mar-05 Mar-06 Mar-07 Sep-04 Dec-04 Sep-05 Dec-05 Sep-06 Dec-06 Months

Source: CEPEA. Base June 2004 = 100

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The Ninho currents in the Pacific Ocean have a significant effect on the amount of rainfall on the east of the Andes. When this current shifts away from its normal position, the drought in the southern states can extend for a longer period of time, as it did in 2003, with loss of pasture and reduction in milk production. However, when this happens, the rain in the central west and southeast is more regular, and the additional milk produced in these regions generally compensates for the loss in the south.

Table 2.3.3e Approximate Average Rainfall per Quarter

Spring Summer Autumn Winter mm rain /quarter (Oct-Dec) (Jan-Mar) ( Apr-Jun) (Jul-Sept)

Goiás 700 550 450 250

São Paulo 500 400 500 250

Minas Gerais 600 500 250 250

Paraná 500 350 400 350

Santa Catarina 400 300 500 450

Rio Grande do Sul 300 200 400 500

Bahia 250 80 150 250

Mato Grosso do Sul 500 350 400 300

Source: CPTEC

2.4 Milk Quality led by Export Culture

During 2005, the Clínica do Leite ESALQ Campus in Piracicaba (University of Sao Paulo) conducted a study of the somatic cell count in 20,000 milk samples from 150 processors in the states of Sao Paulo, Minas Gerais, Paraná and Goiás.

Table 2.4a gives the topline results of this study. Analyses in earlier years showed much the same distribution of cell counts so that there is no sign that milk quality is improving.

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Table 2.4a Milk Quality, 2005

Somatic cell count Share of 20,000 sample, % < 200,000 18% 200 – 400,000 27% 400 – 600,000 21% 600 – 800,000 14% 800 – 1,000,000 8% > 1,000,000 (1) 14%

Source: Clínica do Leite, CEPEA Boletín de Leite Dec 2005 Note: (1) Outside legal limits for human consumption.

Legislation in 2005 introduced a new minimum standard for raw farm milk to apply from 1 January 2006, eliminating the standards of type B and type C milk used up to that date. Standards, which are less strict in the north and north-east of the country, will be tightened at intervals until July 2012. Milk outside the specification will not be permitted to be processed in plants manufacturing products for human consumption.

The standard requires refrigeration of milk, as well as setting maximum levels of total cell count, somatic cell count, minimum total solids, fat, protein, etc. New independent laboratories have been set up to provide the analyses to farmers and processors.

Table 2.4b Quality Requirements for Refrigerated Farm Milk

Regions: south, southeast, central west From 01/07/05 From 01/07/08 From 01/07/11

Regions: north and northeast From 01/07/07 From 01/07/10 From 01/07/12

Requirement Frequency of Analysis Total plate count, 1 analysis/month; Max 1,000,000 Max 750,000 Individual geometrical average over 3 farms: months <100,000 Collective farm tanks: < 300,000 Total somatic cells/ml 1 analysis/month; Max 1,000,000 Max 750,000 Max 400,000 for individual farms geometrical average over 3 months fat content, min, g/1 Min 3.2 Proteins, g/100 g Min 2.9 Density relative A, g/ml 1.028 – 1.034 Titratable acidity, g lactic acid/100 ml 0.14 – 0.18 g

Dry extract, defatted, g/100g min 8.4 Maximum cyoscopic index 0.530ºH (equivalent to 0512ºC) Temperature of milk 3 hours after milking (every milking) 7º C

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Regions: south, southeast, central west From 01/07/05 From 01/07/08 From 01/07/11

Regions: north and northeast From 01/07/07 From 01/07/10 From 01/07/12

Requirement Frequency of Analysis Temperature at time of delivery to processors 10º C Source: Instrução Normativa Nº 51 (18 Sept 2002) Note: The standards change with the dates in the above table. The last column comes into force in 2011, the penultimate column in 2008.

2.5 Production Costs and Profitability

A survey by the FAO and CEPEA in 2003 analyzed the key costs on dairy farms at different levels of production. It should be noted that larger farms used more technology and concentrated rations in feeding.

Table 2.5 Dairy Farming Cost Structure, % Breakdown, December 2003 300 to 500 500 to 1000 < 300 liters liters per liters per 1,000+ liters Cost element per day day day per day

Labor, direct and temporary 24% 20% 16% 12%

Maintenance 16% 10% 11% 9%

Depreciation 15% 21% 17% 17%

Concentrated rations 14% 15% 23% 31%

Forage, silage 10% 9% 10% 10%

Animal health 4% 5% 4% 5%

Freight 5% 4% 4% 5%

Electricity 2% 3% 3% 2%

Artificial insemination 0% 2% 1% 1%

Return on investment, interest 8% 7% 8% 7%

Other costs 2% 4% 3% 1% Source: CEPEA

U.S Dairy Export Council 37 December 2007 Brazil – Milk Production

Unfortunately no more recent data is available. The share of labor costs decreases with the higher milk production farm. The main change from this situation in 2003 to mid-2007 is that in the higher production farms, the use of concentrated rations increases and the payment for labor, maintenance (which is also considered a labor item) and unclassified costs decreases, with the share of the other costs staying reasonably constant.

2.6 Dairy Farming vs Other Agricultural Activities

One important question to consider is how dairy farming competes for land against other forms of farming. The main competition for use of land is in the region bordered in the south by mid-Paraná state, in the north by mid- Goias state. This region includes northern Paraná, most of central and western São Paulo state, western Minas Gerais state and southern Goiás. In these regions, many new sugar cane processors are being installed, and land is required for growing sugar cane.

This region includes three of the top four dairy zones in Brazil:

• Minas Gerais triangle, Upper Paranaiba (most important dairy zone) • South Goiás (third-most important dairy zone)

Brazil is committed to increasing the production of cane alcohol for use as fuel, both locally and for export. Land has to be rented for long-term periods because cane is planted and left for many years before the land is re-cleared. Rentals as high as US $571 per hectare have been recorded, but it is easy to rent land at US $285 per hectare within a 50 to 70 km distance of a cane processing plant.

To make the same profit from the land using it as a dairy farm, with a milk production of 10,000 liters/year, would imply a profit on the milk price of US $0.03/liter, which is not always easy to obtain regularly, year in, year out.

Some experts believe that the smaller dairy farms will continue because the owners have already invested in dairy equipment and want to go on employing their family and fellow workers rather than moving away from the land and living on rental payments. Experts are studying the milk production data and auctions of dairy cows to try to understand what is happening. Certainly, milk production in São Paulo is decreasing rather than increasing, and dairy cows are being auctioned off to be moved to farms in other states. Milk production in the sugar cane zone is not increasing as much as in previous years, but certainly is not decreasing.

U.S Dairy Export Council 38 December 2007 Brazil – Milk Production

In the rest of the country, where the land is flat enough to plant crops, and where farmers have invested in machinery and equipment for crop planting and harvesting, it is unlikely that any switching between forms of agriculture will occur.

In the hilly countryside, where mechanical seeding and harvesting of crops is not viable, dairy farms will continue in areas where a regular milk collection system exists. In these areas, milk production will increase as farmers continue to learn techniques to improve productivity. As a result, it is likely that milk production will increase in these dairy regions:

• Northern Rio Grande do Sul (second major dairy region in production) • Southern and south-west Minas (fourth); although close to the sugar cane belt, this region is mountainous and colder than the western part of Minas Gerais and has produced milk for generations; it is probable that many dairy farms will continue and invest in improved productivity • Western Santa Catarina (fifth), where coops are encouraging farms to diversify production to include both pig farms and dairy farms • Western Paraná (sixth)

Dairy farms have migrated to hilly regions of Brazil where pasture grows well for much of the year and there is plenty of low-cost corn and soy bran to feed as supplement in the winter, but the land is not viable for mechanized planting and harvesting.

Table 2.6 Competition for Land Use—Dairy vs. Other Agricultural Production

Principal competing land use State or region that is more profitable than Regions where dairying will (south to north) dairy continue Rio Grande do Sul Soy, corn Hilly countryside not suitable for crops Santa Catarina Pig farming, soy, corn Hilly countryside not suitable for crops Paraná Soy, corn Hilly countryside not suitable for crops Sao Paulo Sugar cane, oranges Elite farms producing highly profitable grade A milk Minas Gerais (west) Sugar cane, soy, corn Minas Gerais (rest of Pulpwood forests Hilly country not suitable for crops the state) Espirito Santo Pulpwood forests Hilly country not suitable for crops Goiás Soy, cotton, corn Hilly country not suitable for crops

U.S Dairy Export Council 39 December 2007 Brazil – Milk Production

Principal competing land use State or region that is more profitable than Regions where dairying will (south to north) dairy continue Mato Grosso do sul Soy, cotton, corn As one of the products on the larger diversified farms Mato Grosso Soy, cotton, corn As one of the products on the larger diversified farms Rondonia, Amazonas, Only beef grazing competes reclaimed forest with dairy during the first year where large tree after clearing the dense tropical trunks interfere with forest, because tropical pasture agriculture for the first grasses grow very efficiently 5 to 6 years after and the animals need very little clearing additional rations Rondonia, Amazonas, Soy, corn, cotton On the large farms, where part of the reclaimed forest, after area remains dairy but the largest 5 to 6 years area is used for crops

Source: iRIS Consulting based on trade sources

Other than other forms of agriculture, there is little competition for land from property development, housing, etc., as dairy farms are not located on the edges of villages because of security risks. They are normally some distance away from towns and villages so that competition from urbanization is not a problem.

2.7 Dairy Health Issues

Since the last outbreaks of FMD, Brazilian farmers and processors have tightened up on the rules of transporting animals from one state to another and also from one country to another. One explanation for the outbreak of FMD in Mato Grosso do Sul in 2005 was contamination by wild animals which swam across the river from Paraguay. This resulted in a joint country campaign to vaccinate animals on both sides of the border in Paraguay and Bolivia to reduce the risk of contamination of herds in Brazil and Argentina. This is now common practice, paid for by the Brazilian and Argentinean governments.

Another major problem for dairy cattle is ticks which suck the blood of some cows and, in the process, negatively affect their metabolism. The pure breed Holsteins suffer a lot from these ticks and are not suitable for farms in the warmer regions of Brazil, where the new cross breeds have thicker coats and are not bitten so easily by ticks.

Mastitis is common in Brazil and farmers are just beginning to learn how to reduce it. The Clinica de Leite in Piracicaba, SP is actively teaching its clients that there are economic benefits in improved milk production when mastitis is reduced.

U.S Dairy Export Council 40 December 2007 Brazil – Milk Production

2.8 Government Support to the Dairy Farming Sector

Many Brazilians working in the dairy business comment that the government does more to hinder the production of milk than to promote it. However, there are several government activities which benefit dairy farmers.

The most important program is Pronaf, low-cost financing to settle rural workers on land to support family agriculture. In some of the more remote regions, the government is arranging for the landless workers to be officially given a plot of land, a number of cows and training in taking care of them, so that they can start producing milk to feed their own families daily and sell to the local “zero hunger” welfare program. The land is often offered in remote hilly regions, where other agricultural crops, fruit orchards and market gardening are not viable because of the distance from the market. The purchase of milk is guaranteed by the local government for donation to municipal social programs with poor families. To encourage small farms to supply the social programs, there is a limit of 250 liters per day on the milk volume purchased from each dairy farm.

It is estimated that around 700 mn liters are required for the zero hunger programs, and ideally much of this should be collected from the family farmers.

Low-cost financing at 8.75%/year (www.bcb.gov.br )

• Moderagro – US $685 mn to improve pasture and drainage, fencing. Limit US $114,000 • Moderfrota – Infrastructure for irrigation and grain storage • Moderinfra – Trucks and farm equipment • Prodeagro – US $285 mn for all farms, including dairy farms, to improve productivity by investing in fixed and semi-fixed equipment • Proger – US $57 mn for small farms to invest in fixed and semi- fixed equipment • Pronaf – Programs to benefit small family farms with training, infrastructure, machinery, land improvement, irrigation, etc. Limit US $21,000 per farm. Interest rate: 7.25%, long-term loans • Research programs at the Embrapa agricultural research centers, especially the “Gado de Leite” center near Juiz de Fora, MG to develop new cross breeds, new types of pasture, etc.

Dairy is perceived as the best option for small farmers in hilly regions away from the large towns. Two problems are solved: giving the new U.S Dairy Export Council 41 December 2007 Brazil – Milk Production

farmer a ready income immediately, and supplying milk to the local social program at competitive cost.

The principal motivation to start or continue operating a dairy farm is to obtain a steady income from feeding the cows and collecting and selling the milk. The government does very little to stabilize the costs of feed ingredients or raw milk prices so that the results are uncertain, with farmers sometimes making a profit and sometimes a loss. When planting crops, the government does offer lower-cost financing to the larger farms, and there is a government support price if prices drop too low. The larger dairy farms, which do not use the government financing, therefore don’t rate the dairy option very highly. Dairy is only one of the preferred options on land which is too hilly for crops, or on new forest land which has recently been cleared and is still full of tree stumps. In the second case, after 5 to 7 years when the tree stumps have disintegrated, the land is ploughed and planted for annual crops.

2.9 Room for Improvement?

With higher international prices, Brazilian processors continue to increase capacity to produce commodity dairy products for export. The principal items are WMP, SCM and dairy blends based on SMP (sometimes WMP) with vegetable fat, SWP and maltodextrin. Indirectly, as a result of producing SMP, more butter is produced for export. New SWP and DWP driers are also being installed to manufacture for the local market, replacing imports.

If the current high prices continue, farmers will continue to be paid a generous price for their milk, and they will continue to optimize their production, supplying their cows with forage and dry rations. This will increase the average daily yield per cow and the yield per hectare, and will result in an annual increase in national milk production of a little over 4% per year.

With higher liquid milk and cheese prices in the local market, domestic consumption will stagnate or even decrease, meaning that almost all the increase in domestic milk production can be exported.

During the next few years, industry experts predict exports will grow until Brazil becomes a much more significant player in the world market from 2010 onwards.

U.S Dairy Export Council 42 December 2007 Brazil – Dairy Processing

3.0 DAIRY PROCESSING

3.1 Key Industry Bodies / Organizations

• ASBIA – Associação Brasileira de Inseminação Artificial W3: www.asbia.org.br

ASBIA is the association which promotes artificial insemination in Brazil and publishes data on volumes of sales of semen (Brazilian and imported) and economic studies showing the benefits of AI in reducing time between births and improving genetics reliably. It covers both dairy and beef cattle.

• CEPEA – Centro de Estudos Avaçados em Economia Aplicada W3: www.cepea.esalq.usp.br

Cepea is a department of the University of São Paulo (USP), the state university in the ESALQ campus in Piracicaba. Its main function is to provide economic studies of agribusiness. Markets studied in detail include beef, pork, chicken, dairy, fruit and vegetables, sugarcane and fuel alcohol, cassava, cotton, citrus, coffee, soy, wheat, corn, wood pulp, etc. It publishes a dairy bulletin monthly with farmgate prices in various states, milk collection index for the major dairy states, an export dairy index and dairy product prices in São Paulo state.

• CNA (Confederação da Agricultura e Pecuária do Brasil = National Agricultural Confederations) W3: www.cna.org.br/cna/index.wsp

The CNA is a non-governmental organization located in Brasilia, representing all farmers, including a division representing dairy farmers. It is especially close to the farmer cooperatives. It is a farmers’ lobby to congress, and is the main agricultural organization to provide information during free trade negotiations and DOHA talks.

• Embrapa (Empresa Brasileira de Pesquisa Agropecuária = Federal Agricultural Research Organization) W3: www.cnpgl.embrapa.br

Embrapa operates various agricultural research stations all over Brazil. The center in Juiz de Fora (formally the Embrapa “Gado de Leite”) specializes in dairy pasture and genetics research. The manager of this center is the president of the Brazilian branch of U.S Dairy Export Council 43 December 2007 Brazil – Dairy Processing

the IDF, and the dairy farm economist is the Brazilian representative in the International Farm Comparison Network, which aims to compare farm production costs using standard procedures between different countries.

• IBGE (Instituto Brasileira de Geografia e Estadisticas = National Statistics Institute) W3: www.ibge.gov.br

IBGE is the principal statistics organization responsible for population surveys (latest 2000), inflation indices, details per municipality (from the census), industry activity surveys, unemployment and agricultural surveys (latest 1995, next one scheduled for 2007). With regard to the dairy business, IBGE is responsible for collecting information (at quarterly intervals) from the federal, state and municipal inspected dairy processors on the raw milk they acquire each month.

• Leite Brasil (Associação Brasileira dos Produtores de Leite = Brazilian Milk Producers Association) W3: www.leitebrasil.org.br

Leite Brazil started off as the São Paulo association for dairy farmers and became the national association in the late 1990s. It now acts as a lobby for those dairy farmers who are not members of the cooperatives. It no longer publishes its own statistics on milk production, but directs its members to the Embrapa CNPGL website, which publishes a full set of statistics.

• G-100 Associação Brasileira das Pequenas e Media Cooperativas e Empresas de Laticinios W3: www.terrviva.com.br

G-100 has 146 member companies, including several of the top 15 Brazilian processors, but excluding the multinationals and Itambé. It is a political lobby association, with its office in Brasília. On its web site, it publishes some statistics on milk production and an analysis of milk use in Brazil in LME.

3.2 Dairy Processing Industry Overview

A 2005 survey indicated that 61.1% of Brazil’s 1,139 federally inspected dairies process around 10.5% of Brazil’s total milk supply, processing on average less than 10,000 liters/day. Only 6% of the inspected dairies are responsible for processing 55.5% of formally processed milk, with an average throughput of more than 100,000 liters/day.

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Table 3.2a Number of Inspected Dairies by Processing Volume, 2004

% of federally Av Milk processed per No of inspected Percentage of day processors processors total milk < 5,000 liters 465 40.8% 6.5% 5-10,000 liters 231 20.3% 4.0% 10-12,000 liters 168 14.7% 9.0% 20-50,000 liters 156 13.7% 15.0% 50-100,000 liters 51 4.5% 10.0% 100-300,000 liters 42 3.7% 24.0% 300-500,000 liters 16 1.4% 17.5% >500,000 liters 10 0.9% 14.0% Total 1,139

Source: Cepea May 2005

Most of the main processors have expanded their milk intake over recent years, with the large regional milk processors such as Morrinhos, Centroleite, Embaré, Sudcoop and Confepar selling increasingly nationally through large supermarket chains and also manufacturing milk powder and SCM for export.

The key player by a wide margin is Dairy Partners of America (DPA), a joint venture between Fonterra of New Zealand and Nestlé. DPA incorporates all raw milk purchasing, as well as the milk powder and fresh dairy marketing businesses, of the two companies and their subsidiaries in Brazil and several other South American countries. DPA is by far the largest exporter of dairy products in Brazil, with exports close to US$ 40 mn p.a. International trade to Nestlé subsidiaries is managed by DPA but, in order to maintain confidentiality, to non-Nestlé customers Fonterra is the agent, not DPA.

There has not yet been a large amount of consolidation in the dairy processing industry. Some of the developments that have gone on in recent years include:

• CCL – SP (Leite Paulista) sold its chilled dairy and part of its UHT milk business to Danone. In 2007, it has started to rent its milk powder and butter plant to Eleva Alimentos (Elege) and its business is now much smaller, mainly pasteurized milk and UHT products

U.S Dairy Export Council 45 December 2007 Brazil – Dairy Processing

• Nabisco sold the Fleischmann Royal milk powder and SCM dairy business to Ilpisa

Dairies which have increased their raw milk purchases by the highest percentages between 2000 and 2006 are:

• Embaré – 151% • Lat Morrinhos – 131% • Danone – 70% • Centroleite – 50%

Danone increased its usage of milk after acquisition of the chilled dairy and UHT milk plants from CCL/Leite Paulista in 2001. The other companies have grown by diversifying their product lines and by increasing sales of retail milk powder and/or UHT milk at competitive prices to the poorer states of Brazil. Embaré is an important SCM and caramel toffee spread manufacturer.

The companies which reduced their raw milk purchases the most are:

• CCL/Leite Paulista – -38% • Parmalat – -33% • Grupo Vigor – -23% • Batávia – -11%

Parmalat and Batávia both had to reduce production and sales due to a lack of raw milk when their working capital was cut following the calling in of their bank loans during the time of the Parmalat crisis. However, both are in active growth again, and their volumes are increasing faster than the national average. In 2006, the 51% Parmalat share in Batávia was sold to Perdigão, a chicken and processed pork conglomerate, and this will contribute with national sales and distribution resulting in faster sales growth.

After renting its milk powder plant and possibly its UHT operation, CCL has further decreased in size, and it is not certain where the company is heading.

Nilza has increased its purchases of milk so much that it ran into problems of working capital and had to stop operations in 2004/05. It has now been re-sold to new owners who are investing to increase production capacity, mainly in UHT milk, hence the company is growing again. U.S Dairy Export Council 46 December 2007 Brazil – Dairy Processing

Vigor is a diversified, innovative producer which is finding it difficult to keep its market share in the face of competition from large players such as Danone, Nestlé and Batávia.

An export trading company, Serlac, owned by Itambé, Confepar, CCL-SP, Ilpisa and Embaré, exported close to 40% of all Brazilian dairy exports in 2006. It exported the following products on behalf of its owners:

• Itambé – milk powder, SCM, evaporated milk • Embaré – caramel toffee spread

Other exporters are Eleva (milk powder), Frimesa (Mozzarella cheese), and Cedrense (cheese).

Chapter 2.1 Table 2.1c has already displayed the milk intake of the key dairy processors in 2000 to 2006. To re-cap, Table 3.2b ranks the key processors by intake milk volume in 2006:

Table 3.2b Brazil’s Largest Processors by Milk Intake, 2006 Milk purchase volume, 2006, Processor Type of company mn liters DPA Multinational 1,702,000 Itambé Central of Cooperatives 1,039,000 Eleva Private Brazilian 897,965 Parmalat Multinational 612,070 Lat Morrinhos Private Brazilian 338,098 CCL-SP Cooperative 316,046 Embaré Private Brazilian 309,453 Confepar Central of Cooperatives 288,482 Centroleite Central of Cooperatives 263,128 Batávia Private Brazilian JV with 241,601 Central of Cooperatives Líder Alimentos Private Brazilian 226,535 Sudcoop Central of Cooperatives 225,995 Danone Multinational 221,905 Grupo Vigor Private Brazilian 177,821 Nilza Private Brazilian 196,500 Top 15 6,860,098 Source: Embrapa, CAN

U.S Dairy Export Council 47 December 2007 Brazil – Dairy Processing

Brazil’s key export products are milk powder and SCM. Tables 3.2c and 3.2d illustrate the production capacity by company for these key products.

Table 3.2c Production Capacity for Milk Powder and SCM by Processor

Installed Capacity Companies State (liters/day) Expansion (liters/day) CCPR MG 1,500,000 MP, SCM DPA MG 1,500,000 MP Elegê / Avipal RS 1,000,000 MP Elegê / Avipal RS 1,000,000 MP Confepar PR 1,000,000 MP CCPR MG 1,000,000 MP Embaré MG 1,000,000 MP, SCM CCPR GO 800,000 MP, SCM DPA SP 700,000 MP, SCM Nestlé MG 700,000 MP Kerry do Brasil MG 610,000 MP Parmalat GO 600,000 MP Lat. Tirol SC 400,000 MP CCL-SP GO 400,000 MP Italac GO 400,000 MP Lat. Bela Vista GO 400,000 MP, SCM Morrinhos GO 400,000 MP Canaã RO 400,000 MP Nestlé BA 380,000 MP Nestlé GO 320,000 MP Corlac RS 300,000 MP Cargill SP 300,000 DWP Ilpisa / Vale Dourado BA 220,000 MP, SCM Parmalat RS 200,000 SCM Nutrilat RS 200,000 MP, SCM Coop. Agropec. de Macuco RJ 200,000 MP Parmalat RJ 200,000 MP, SCM Dona Vaca ES 200,000 MP CCPR MG 200,000 MP Maroca & Russo MG 200,000 MP Nutrícia MG 200,000 MP Nutrícia MG 200,000 MP, SWP Morrinhos GO 200,000 MP ASA TO 200,000 MP CCLB BA 200,000 MP Cosulati RS 150,000 400,000 MP, SCM U.S Dairy Export Council 48 December 2007 Brazil – Dairy Processing

Installed Capacity Companies State (liters/day) Expansion (liters/day) Nestlé SP 150,000 MP DOCCE SP 120,000 SCM Camil / Vale Dourado AL 120,000 MP Agropecuaria Rio Machado RO 120,000 MP Frimesa PR 100,000 SCM Sooro / Dádiva PR 100,000 SWP, DWP Kremon / Mococa SP 100,000 MP, SCM Kremon SP 100,000 MP Maroca & Russo MG 100,000 MP Vigor/ Leco – sold MG 100,000 MP Parmalat PE 100,000 MP, SCM Comila MA 100,000 MP CCGL RS 1,000,000 MP Cemil MG 400,000 MP, SCM Lat. Bom Gosto RS 200,000 SCM Coaperidoce MG 200,000 MP

Source: iRIS Consulting based on trade sources

Table 3.2d Drying Capacity by Company

Total daily Planned capacity, ‘000 Number of spray expansions Cooperatives liters driers liters ‘000 /day) Itambé 2,650 4 Confepar 1,000 1 COSULATI 150 1 1 x 400 CCLB 200 1 COOP Agropec Macuco 200 1 CAMIL 120 1 Coop Santo Izodorp 120 1 CCGL 1 x 1,000 CEMIL 1 x 400 COAPERIODOCE 1 x 200 Subtotal 5,140 2,000 Private Brazilian companies Eleva ( Avipal, Elegê), incl CCL 1,800 3 1 x 600 Embaré 1,000 1 Morrinhos 800 3

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Total daily Planned capacity, ‘000 Number of spray expansions Cooperatives liters driers liters ‘000 /day) Goiasminas 400 1 1 x 400 Tirol 400 1 Bela Vista 400 1 Sooro / Dadiva ( Alibra Group) 300 1 1 x 100 Cargill 300 1 Ilpisa 220 1 1 x200 Nutricia 400 1 Amilton 200 1 Cotochês 300 2 Vencedor 150 1 Kremon, incl Mococa 100 1 Agropec Vale do Tocantins 100 1 Canãa 1 x 400 Nutrilat 1 x 300 Montelac 1 x 200 Bom Gosto 1 x 200 Agropec Rio Machado 1 x 120 Sub total 6,040 21 2,520 Multinationals DPA 2,600 3 Nestle 1,950 3 Parmalat 1,000 3 Kerry 170 1 Subtotal 5,720 10 Total 16,900 4,520

Source: Terra Viva G-100

Values are a little different from those in the earlier table, but provide a good indication of the principal processors in Brazil.

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3.3 Profiles of Key Dairy Processors and Exporters

• Eleva Alimentos Eleva Dairy Division Av de Industrias 720 Porto Alegre, RS CEP 90200-290 Brazil Tel: +55 51 3371 7079/7056 Web site: www.Eleva.com.br www.elege.com.br Contacts: Rosane Fuhr, National Sales Tel: +55 51 3371 7211 Michele Muccillo, Exports Tel: +55 51 3371 7464 E-mail: [email protected] Marinelly Silva, Export Assistant Sr Krug, Consultant Milk Acquisition

The Elege Dairy division is the principal business of Eleva, an agroindustrial company located in Southern Brazil. In 2006, Eleva’s dairy business represented 53.8% of sales, up from 47.6% in 2005. Other businesses are chicken (29.5%), pork (10.8%), processed milk, eggs and animal feed. Even though dairy represents the largest percentage of business, dairy exports were much lower than those of the chicken and pork division, representing only 1.8% of dairy total sales (R$1,163 mn/ US$ 630 million) in 2006.

In April 2007, the dairy division rented the CCL plant in Itumbiara, Goias, which manufactures UHT milk, milk powder (400,000 liters/day) and butter. The commitment is for 30 years, allowing it to increase its sales of these three products and reduce the climatic and sanitary risk by splitting its operations between two distinct regions of Brazil. In 2006, Eleva expanded its milk powder capacity at its main plant in Rio Grande do Sul by 600,000 liters/day to reach a total of 2 mn litres/day capacity.

Cheese production in 2006 was 14,998 tonnes—principally Prato and Mozzarella cheeses—up from 11,576 tonnes in 2005. Whey production and sales were as follows:

¾ 2005: 3,783 tonnes, US $6.637 mn, average price: US $1.70/kg ¾ 2006: 4,871 tonnes, US $8.018 mn, average price US $1.64/kg

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Eleva was probably Brazil’s largest producer of whey in 2006, but is now using its plant to spray-dry milk in order to take advantage of high international export prices. The capacity is estimated at 6,000 tonnes. As Eleva uses SWP in its piglet rations, it sporadically purchases SWP as well as selling it.

In June 2007, Eleva was drying whey only for internal purposes to use as piglet feed. This is because it has reduced its cheese production and diverted milk during the winter season for the production of more milk powder for export.

Table 3.3a Eleva Production Volumes, 2005 to 2007

Jan to March Product 2005 2006 2007

Total milk processed, ‘000 liters 841,549 897,965 241,715

Milk powder, tonnes 39,252 28,636 9,002

Cheese, tonnes 11,576 14,998 3,849

UHT milk, ‘000 liters 372,550 426,721 111,091

SCM, ‘000 liters 28,451 23,539 5,338

Other, incl butter, tonnes 35,405 56,767 14,573

Pasteurized milk, ‘000 liters 13,611 13,063 2,749

Source: Eleva

As mentioned above, exports are a small share of the total dairy business at only 1.8% in 2006. Milk powder, cheese and butter are the main export products.

Table 3.3b Eleva Exports 2005 to 2007

Milk Milk Butter powder, powder, Cheese, Cheese, etc, Butter, Year tonnes US$’000 tonnes US$’000 tonnes US$’000

2005 7,524 15,488 46 N/A N/A 1,925

2006 2,546 5,414 975 2,425 N/A 2,073

Jan to March 2007 923 2,665 575 1,479 N/A 849

Source: Eleva

The key dairy products sold by Eleva are as follows:

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Eleva brand:

¾ Long-life milk, 1 liter UHT Tetrabrik: whole, semi-skim, skim, semi-skim with added calcium, whole low lactose, whole with fiber ¾ WMP: instant 400 g can, regular 1.6 kg can, 1 kg and 200 g sachets ¾ SMP: instant 200 g sachet, 400 g can ¾ Pasteurized cream: 8 kg/3.5 kg buckets, 350 g tubs, 400 g sachets ¾ Long-life sterilized cream: 200 g UHT Tetrabrik, regular (25% fat) light (15% fat) ¾ SCM: regular and light in 395 g UHT Tetrabrik and 4.5 kg buckets ¾ Chocolate-flavored condensed milk: 395 g UHT Tetrabrik ¾ Flavored, long-life dairy drink: 1 liter UHT Tetrabrik and 200 ml UHT Tetrabrik ¾ Chilled dairy yogurt whey blends: 200 ml and 1 liter bottles ¾ Cream cheese spread: regular and light 250 g plastic pots ¾ Ready-to-serve savory sauces: 200 g UHT Tetrabrik ¾ Long-life dairy dessert: 1 liter UHT Tetrabrik

Eleva bulk products:

¾ SMP, WMP and SWP: 25 kg ¾ Unsalted butter: 10 kg, 20 kg

El Vaquero:

¾ Mozzarella cheese: 5 kg ¾ Parmesan cheese: 200 g portions

Dobon:

¾ Modified milk powder (spray dried whey and milk): 120 g, 200 g, 400 g sachets ¾ Caramel toffee spread: 4.5 kg buckets, 400 g tubs, light version in 400 g tubs ¾ Cream cheese spread: 4 kg bucket, 250 g plastic pots

U.S Dairy Export Council 53 December 2007 Brazil – Dairy Processing

Santa Rosa:

¾ Butter: 100 g/200 g tablets, salted and unsalted ¾ Pasteurized cream: 400 g sachets, 350 g tubs, 3.5 kg/8 kg buckets ¾ Mozzarella: 400 g, 2 kg, 3 kg vacuum packs ¾ Sliced Mozzarella: 200 g, 2 kg ¾ Prato cheese: 400 g, 2.7 kg, 3.7 kg ¾ Sliced Prato cheese: 200 g, 2 kg ¾ Cream cheese spread: 250 g

• Cooperativa Central Agro-Industrial Ltda (Confepar) Av Arthur Thomas 2389 Gleba Cambé Londrina, PR, CEP 86066-090 Brazil Tel: +55 55 43 3379 1313 Fax: +55 43 3379 1440 Web site: www.confepar.com.br

Confepar is a large cooperative located in northern Paraná state, selling its products under the Polly and Confepar brands.

Confepar operates a 1 mn liter/day milk powder spray drier, which is used to supply both the international and export markets. Exports are the responsibility of Serlac, of which Confepar is one of the six owners. SCM is also exported.

Confepar’s main retail products are sold under the Polly brand:

Polly

¾ UHT milk: 1 liter UHT Tetrabrik – whole milk, semi-skim milk ¾ Pasteurized milk in sachets: type B and type C ¾ Flavored milk and whey dairy drinks (bebida láctea) in sachets: coconut, peach, strawberry, fruit salad ¾ WMP in 400 g sachets ¾ WMP in 25 kg bulk packs

Cidade

¾ Pasteurized milk in sachets: type B, type C

U.S Dairy Export Council 54 December 2007 Brazil – Dairy Processing

Confepar bulk packs

¾ WMP and SMP in 25 kg bags ¾ 5 kg and 20 kg industrial “extra grade” butter

• Cooperativa Central Agropecuaria Sudoeste SUDCOOP Rua Baihia 159 Medianeira, PR, CEP 85884-000 Brazil Tel: +55 45 264 8000 Fax: +55 45 264 8028 W3: www.frimesa.com.br

This coop trades under the brand name Frimesa in both the processed pork and dairy sectors. It operates five dairy plants and one meat plant.

Sudcoop is a diversified dairy producer selling the following product lines under the Frimesa brand:

¾ UHT milk, including calcium/vitamin fortified whole milk ¾ Pasteurized milk, including skim milk ¾ Chocolate milk in UHT Tetrapaks and pouches ¾ Yogurts and dairy drinks ¾ Caramel toffee ¾ Butter ¾ Cream ¾ Cream cheese spread, traditional, light ¾ Cheese: − Prato: 3 kg, 500 g − Mozzarella: 4 kg, 500 g − Gouda: 3 kg, 350 g − Parmesan: 4.5 kg, 360 g, grated 50 g, 100 g − Provolone: 4.7 kg, 360 g

Sudcoop manufactures around 1,800 tonnes of cheese per year, principally Mozzarella (60% of production) and Prato (40%). In 2004, Frimesa exported 46% of its cheese production—principally Mozzarella cheese—to Pizza Hut subsidiaries in South Korea, Chile and other countries. In 2006, it stopped exporting cheese because high milk prices eliminated the profits. U.S Dairy Export Council 55 December 2007 Brazil – Dairy Processing

Frimesa also produces 4,500 tonnes SCM for the local market and export.

• Cooperativa Central de Laticínios do Estado de Sao Paulo (CCL) Rua Gomes Cardim 532 Bras Sao Paulo CEP Brazil Tel: +55 11 3315 6200 Fax: +55 11 3315 6214 Web site: www.ccl.com.br

After the sale of its chilled product division of Leite Paulista to Danone at the end of 2000, CCL continued to produce pasteurized milk, butter, fresh cream, WMP and SMP using the Paulista brand under license. It also manufactured UHT milk and caramel toffee spread using the Long brand.

In April 2007, CCL rented its Itumbiara plant, which produces milk powder, UHT milk and butter, to Eleva Alimentos (Elege). The 12,000 tonnes p.a. of milk powder and butter produced in this plant will now be sold by Eleva. Leite Paulista retains only the Bras, Sao Paulo plant, which produces pasteurized milk and cream. It is the leader in sales of type B pasteurized milk, which is sold in Tetrarex packs and pouches.

Hence, the only CCL products that remain are:

Paulista:

¾ Pasteurized milk: type C in 1 liter sachets; type B in 1 liter sachet and 1 liter tetratop ¾ Pasteurized cream (36% fat): 500 g, 1kg bottles, 10 kg buckets

Pauli

¾ Pasteurized milk, types B & C in 1 liter sachets

Long

¾ UHT milk, 1 liter tetrabrik: whole, semi-skim and skim milk ¾ “Mix” butter/margarine ¾ Caramel toffee spread

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• Cooperativa Central dos Productores Rurais de Minas Gerais (CCPR = Itambé) Rua Itambé 40, Floresta Belo Horizonte, MG CEP 30150-150 Brazil Tel/fax: +55 31 3249 3765 Fax: +55 31 3249 3763 Web site: www.itambe.com.br

Itambé is a central cooperative which is owned by 26 cooperatives. It processes the largest volume of milk of any of the Brazilian- owned dairy processors and is second only to DPA. It operates six processing plants in Minas Gerais and Goiás states to produce the most complete line of dairy products in Brazil.

Itambé has the second highest capacity for milk powder production after DPA, with a modern 1 mn liter per day plant which started production in 2006. Itambé has a total milk powder capacity of 2.65 mn liters per day. It is believed to manufacture more than 27,000 tonnes of SCM per year, principally destined for export.

Both milk powder and SCM are exported through its sister company, Serlac Trading, all over the world. Serlac’s share of Brazilian dairy exports is around 40%, and the major share of that is from Itambé’s production.

The main brand for consumer products and ingredients is Itambé; however, some other brands are used for refrigerated dairy products:

Itambé brand:

¾ Itambé UHT milk: whole milk, skim milk with vitamins, semi- skim with vitamins, whole milk with iron ¾ Itambé NoLac low lactose semi skim milk, 1 liter UHT tetrabrik ¾ Itambé pasteurized milk, type C, 1 liter pouch, 200 ml pouch, whole milk and skim milk with vitamins: 1 liter gable top ¾ Preciosa brand pasteurized milk, 1 liter pouch ¾ Itambé pasteurized cream, tetrapak 500 g ¾ Itambé WMP, SMP in cans and pouches; WMP: 100 g, 200 g sachet, WMP with vitamins, 400 g can, instant WMP with vitamins, 400 g can, instant SMP, 300 g can, instant semi SMP with vitamins, 300 g can

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¾ Itambé butter in tablets: 200 g, 10 g and tubs (spreadable): 200 g and 500 g ¾ Itambé doce de leite caramel toffee spread, 400 g, 800 g, 10 kg cans; with coconut: 800 g, 10 kg cans, with chocolate: 800 g, 10 kg cans ¾ Itambé sterilized cream, 300 g can, 200 g UHT tetrabrik ¾ Itambé SCM, 395 g, 1kg can ¾ Itambé Chef Gourmet evaporated milk, 320 g ¾ Itambynho flavored dairy drink, 200 ml UHT tetrabrik, chocolate, strawberry, ¾ Itambé chocolate dairy drink, 1liter UHT tetrabrik ¾ Itambé chocolate milk shake, UHT, 180 ml tetrabrik ¾ Itambé Vitamina dairy fruit fortified drink, 200 ml, 1liter tetrabrik ¾ Itambé cream cheese spread, 250 g, traditional, light, Cheddar flavor or fine herbs and 20 g portion ¾ Itambé yogurts: Itambaby, Frutambé ¾ Vitambé, Fruito, Fruito Light, Goodi Fruti drinking yogurts, ¾ Itambézinho fromage frais, 8 x 45 g, strawberry, chocolate, flavors/cereals

Itambé has stopped production of cheese, except for cream cheese spread. It uses whey, a by-product from its petit suisse production, in its whey/yogurt chilled drinks, and uses gums and gelatin in its other chilled dairy drinks.

Itambé also produces a diverse line of animal feed for dairy cows and calves with brand names like Lacmaster and Bezelac, as well as milk replacers for calves, piglets, young goats, etc., made with soy flour, SMP, SWP and other ingredients.

• Cooperativa Sul-Rio Grandense do Lacticínios Ltda (Cosulati) Praça 20 de setembro 281 Pelotas, RS CEP 96015-360 Brazil Tel: +55 53 3225 5200 Web site: www.cosulati.com.br

Coop Sul-Rio Grandense is a dairy company manufacturing milk powder and retail liquid dairy products. It is expanding its capacity for milk powder production from 150,000 liters throughput per day to 550,000 liters/day. U.S Dairy Export Council 58 December 2007 Brazil – Dairy Processing

Products are regular and instant WMP and SMP. Retail products are sold under both the Cosulati and Danby brands.

Cosulati plans to produce milk powder for exports and to export this via Hoogtwegt Brazil.

• Embaré Indústrias Alimenticias S.A. Av Brazil 241 Lagoa da Prata, MG CEP 35590-000 Tel: +55 37 3261 3344 Fax: +55 37 3261 1576 Web site: www.embare.com.br

Embaré is a large Brazilian dairy company, processing almost 310 mn liters p.a. and ranked 7th in milk intake volumes in 2006.

Its main product is milk powder, which accounts for around 64% of sales.

The second most important product is doce de leite – Embaré manufactures around 15,800 tonnes/year of which it exports around 9,000 tonnes to more than 40 countries.

In mid-2005, Embaré started up a new plant with the capacity to manufacture 36,000 tonnes of SCM/year for internal use and to sell to the domestic and export markets.

The main dairy products are:

Camponesa brand:

¾ Milk powder, 200 g regular WMP in sachets; 400 g instant WMP in sachets; 200 g SMP in sachets ¾ Sterilized cream (25% fat), 200 g UHT; light (15% fat): 200 g UHT ¾ Butter, 200 g tubs, 500 g tubs ¾ SCM, 270 g, UHT

Embaré brand:

¾ Caramel toffee spread: 300 g, 650 g tubs ¾ Caramel toffee blocks: 200 g; 500 g

U.S Dairy Export Council 59 December 2007 Brazil – Dairy Processing

Embarezinho brand:

¾ Long-life dairy drinks: 200 ml UHT: caramel and chocolate

Embaré is probably the market leader selling milk powder in retail pouches in northeast and northern Brazil.

In addition to traditional dairy products, Embaré produces toffees, including chocolate, coconut, vanilla and caramel flavors, as well as fruit-filled candies.

Embaré is one of the five companies which export milk powder and SCM through Serlac.

• Valedourado (Ilpisa) Av Durval de Góes Monteiro 4746 Tabuleiro do Martins Maceio, AL CEP 57080-000 Tel: +55 82 218 5500 Fax: +55 82 338 1017

Ilpisa operates production plants in three states, processing well over 116 mn liters/year of raw milk in Palmeiro dos Indios, Alagoas, Itapetinga, Bahia and Governador Valadares, Minas Gerais. The MG and BA plants were purchased from Fleischmann Royal Nabisco (Kraft) when Kraft decided to leave the dairy business in Brazil.

Some of Ilpisa’s main products are UHT milk, chocolate dairy drinks, Tampico fruit drinks and SportAde isotonic drinks. Dairy products are sold under the brand name Valedourado:

¾ UHT full cream and skim milk ¾ Milk powder, in sachets, 200 g, 400 g ¾ UHT traditional and light sterilized cream, 200 g, 1kg ¾ Cream cheese spread, 250 g ¾ Butter, tubs, 200 g, 500 g ¾ UHT SCM, 395 g ¾ Yogurts with fruit pulp ¾ Cultured milk (coalhada), skim and full cream, sweetened ¾ UHT chocolate whey milk dairy drinks

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Ilpisa participates in Serlac Trading (see separate entry) as an exporter of SCM and possibly some milk powder.

3.4 Profiles of Key Multinational Processors

The following table is a summary of the activities of key multinationals in the Brazilian dairy sector:

Table 3.4 Key Multinational Dairy Processors in Brazil

Brazilian Company (Parent Company) Type of Business Dairy Products Other Activities

Cargill (Cargill) Manufacturer No dairy retail products; Vegetable oils, acquired the DWP plant from mayonnaise, salad Nestlé in July 2005 dressings, industrial: cacao, maltodextrin, wheat flour, vegetable fats, etc.

Danone (Danone) Manufacturer Yogurts, chilled desserts, Biscuits and mineral fromage frais, yogurt whey water drinks, fermented milk, cream cheese spread (marketed under both Danone and Paulista brand names)

Danvigor (Arla Foods Manufacturer White cheese, spreads None (50%)

DPA Manufacturing (Nestlé Manufacturer, importer WMP, SMP, chilled dairy None (50%); Fonterra (50%)) and exporter products: yogurts, yogurt whey drinks, fromage frais, fermented milk, desserts

Kerry Ingredients (Kerry Manufacturer, importer Whey/milk modified milk The Savory flavors, batter Ingredients) and exporter local milk powder market is and breading coatings around 150,000 tons powders, milk substitutes

Kraft Foods (Kraft Foods) Manufacturer Philadelphia cream cheese, full Chocolate, biscuits, fat and light; Kraft produces no juices, powder juices, other dairy products in Brazil dessert and jello powders, yeast

Mead Johnson (BMS) Manufacturer, importer Nutritional supplements Vitamins and exporter

Nestlé (Nestlé) Manufacturer SCM, sterilized creams, caramel Chocolates, toffee spread, sterilized dairy confectionery, biscuits, cake fillings, ice cream, flavored coffee, breakfast cereals, milk, infant formula, nutritional infant purées and supplements cereals, dog and cat food, stocks, soups, frozen meals, mineral water, pasta, clinical nutritionals

Parmalat (Parmalat) Manufacturer SCM, cream, sterilized dairy None desserts and cake fillings; imported ice cream, UHT milk, flavored milk, (note Parmalat brand for chilled dairy used by Batavia)

U.S Dairy Export Council 61 December 2007 Brazil – Dairy Processing

Brazilian Company (Parent Company) Type of Business Dairy Products Other Activities

Pepsico (Pepsico) Manufacturer Flavored milk (previously Pepsi soft drinks, oats, Quaker) Gatorade, chocolate powder drinks

Polenghi (Bongrain) Manufacturer, importer Cheese: semi-hard, hard, None and exporter cream, blue, soft, processed, etc.

Schreiber (Schreiber) Manufacturer, importer Processed cheese in blocks and None and exporter slices

Unilever (Unilever) Manufacturer Ice cream Wide variety of juices, dessert and drink powders, powder soups, bouillon cubes, mayonnaise, soy drinks, etc.

Yakult Manufacturer Fermented milk Tonic drinks, energy drinks (Yakult)

Source: iRIS Consulting analysis

• Cargill Agricola S.A. Av Morumbi 8234 Brooklin Sao Paulo, SP CEP 04703-002 Brazil Web site: www.cargill.com.br Contact: Felipe Rodrigues, Marketing Tel: +55 11 5099 3361 E-mail: [email protected]

Cargill in Brazil is a diversified agro-industrial business. In July 2005, it acquired the Nestlé spray drying plant in Porto Ferreira, SP which has a capacity of 300,000 liters of milk per day. Cargill purchased this in order to spray dry some starch derivatives such as glucose and maltodextrin. As Nestlé previously used this plant to spray-dry DWP, Cargill continues to demineralize concentrated whey, and sells the resulting DWP90 to Nestlé for use in chocolate and infant formula manufacture. The plant was originally sold for concentrating milk and has been adapted to dry concentrated whey at 30% solids. The capacity is for 300,000 liters of concentrated whey. Cargill still uses it to dry maltodextrin and other products.

When the plant was used exclusively for DWP manufacture, it had a capacity to produce around 4,500 to 5,000 tonnes annually. The raw whey concentrate is purchased from local cheese manufacturers, including Barbosa & Marques. Some concentrated U.S Dairy Export Council 62 December 2007 Brazil – Dairy Processing

whey has been purchased from SOORO, but this fell short of the microbiological standards required by Nestlé.

Cargill’s main businesses in Brazil are:

¾ Consumer products: soy, canola, corn and sunflower vegetable oils, olive oil, salad dressings and mayonnaise ¾ Industrial ingredients: corn starches, wheat flour, mandioc flour, lecithin, malt, glucose syrup, vegetable fats, maltodextrin, durum wheat flour, cocoa powders, cocoa butter ¾ Seara chicken and pork operation, one of Brazil’s top three producers, with a diversified line of retail processed meats and chickens and a strong export line

The whey business fits into the Cargill line of ingredients because it is used in chocolate and ice cream together with some of Cargill’s other ingredients.

• Dairy Partners Americas Manufacturing Brazil Ltda (DPA) Av das Nacões Unidas 12495, 5th floor Sao Paulo, SP CEP 04578-902 Brazil Contact: Marcel Barros, Regional Director E-mail: [email protected] Tel: +55 11 5508 7881 Walter Galan, Brazil Manager Tel: +55 11 5508 7736 Elizabeth Oliveira, Assistant

Dairy Partners America Manufacturing is a 50:50 joint-venture between Fonterra and Nestlé. It is present in five countries in Latin America – Brazil, Argentina, Ecuador, Venezuela and Colombia – and is responsible for manufacturing WMP, SMP and refrigerated yogurts and dairy drinks made directly from liquid fresh milk. The company is managed from the Nestlé building in São Paulo.

Refrigerated dairy products are manufactured by DPA Manufacturing in Brazil, Argentina, Ecuador and Venezuela. Milk powder, including retail packs, is manufactured in Brazil, Argentina, Ecuador and Colombia. Products using milk powder, such as infant formula and nutritional products, are packed by DPA Manufacturing on behalf of Nestlé.

U.S Dairy Export Council 63 December 2007 Brazil – Dairy Processing

Refrigerated products and retail milk powder are marketed by Nestlé under Nestlé brand names.

In addition to purchasing fresh milk for its own operations, DPA Manufacturing acquires milk for the Nestlé and ITASA SCM and evaporated milk plants, for UHT chocolate milk and for sterilized cream and cream cheese spread production. DPA is by far the largest purchaser of fresh milk in Brazil, acquiring over 1.7 bn liters in 2006.

DPA is responsible for the sales of bulk and retail packs of milk powder and retail packs of SCM (no evaporated milk is made) to overseas DPA and Nestlé businesses; Fonterra takes care of sales to non-Nestlé companies to avoid problems of customer confidentiality.

In 2006 and 2007, around 55% of the total exports of dairy products from Brazil were manufactured by DPA and Nestlé; principally retail cans of SCM and bulk bags of milk powder, plus some infant formula and children’s modified milk powder. No new DPA plants have been installed in the last few years, but existing plants are being modernized in order to remove production bottlenecks. A plant in Rio Grande do Sul produces a 30% concentrated milk for drying at the other DPA plants.

DPA believes that, even though the first five months of 2007 showed a drop of 2 to 3% in raw milk production compared to 2006, the overall year should show an increase of 3 to 4% over 2006. High farmgate prices are encouraging farmers to increase soy bran and corn feed to produce more milk. DPA sees the dairy business in Brazil as a suppliers’ market, with the farmgate price set by the farmers and processors reacting to the price by determining how much milk they will buy at the predetermined price. When the improved rations result in an increase in milk production over the needs of the domestic and export market, the farm gate prices will start to decrease slowly. DPA expected this to happen from August 2007 onwards.

In DPA’s view, a sensible percentage for the increase in fresh milk production in Brazil is 4 to 5% per year, based on production in the southern states growing at much higher rates, and the growth in the southeast and central west growing at a slower rate. This growth in milk availability in Brazil is much higher than the increase in dairy product consumption in Brazil, and will result in a surplus for export. The farm gate prices will adjust up or down so that exports of milk powder are profitable, maybe in the range US$ 0.25 to US$ 0.30/liter.

U.S Dairy Export Council 64 December 2007 Brazil – Dairy Processing

DPA feels that any prediction of what will happen to dairy in Brazil has become more complicated because there is added competition for the use of land as a result of corn and sugar cane being used to produce ethanol and soy for biodiesel. Even though corn will not be used to produce ethanol in Brazil, the increase in land area used to grow corn to produce ethanol in the U.S. and Argentina has resulted in higher corn prices, and soy is also competing for land so that the price of soy has also increased. The prices of easy-to- cultivate land are being inflated, and dairy is moving to the hilly regions. In DPA’s opinion, other factors are also important:

¾ The increase in production of agricultural products (corn, soy, sugarcane) to produce energy raw materials will increase the supply, and probably depress the price, of by- products suitable for feeding the cows. The result may be a reduction in the feed cost of the cows, which will in part compensate for the higher cost of the land ¾ Land in tropical regions should be rotated, and this can benefit dairy production. Cane could be rotated with other leguminous plants rather than soy, and this could be used as pasture and fodder one year in three or four ¾ Large farms can continue to develop their dairy production, without affecting their other farming activities. In fact, growing sugar cane on the same farm can produce excellent wet or dry feed rations for the cows

DPA estimates that the local milk powder market is around 150,000 tonnes retail and 200,000 tonnes industrial bags (G-100/Terraviva estimated the local production at 3,507 mn LME, which is consistent with these volumes, if infant formula, dairy blends, etc. are added in). The retail market for milk powder is growing slowly at 1% per year but the market for bulk milk powder grows faster, resulting in a domestic milk powder consumption growth of 2 to 3%, compared to much higher increases in domestic consumption for chilled dairy and UHT milk.

DPA feel that production of whey is difficult in Brazil because the cheese plants are small and spread all over the country. It is difficult to acquire enough raw whey in any one region to feed a reasonable 500,000 liter/day SWP drier.

U.S Dairy Export Council 65 December 2007 Brazil – Dairy Processing

• Polenghi Indústrias Alimenticias Ltda Av Ordem e Progresso 661 Casa Verde Sao Paulo CEP 02518-130 Brazil Tel: +55 11 3855 6900 Fax: +55 11 3855 6957

The Brazilian subsidiary of Bongrain, France has changed its name again from BG Brazil to Polenghi, which is the name of its main brand. Polenghi has been re-structuring over the last five years, and has ceased distributing the Bongrain premium cheeses from France. These are now sold through an independent distributor.

The principal business of Polenghi is to manufacture fresh, soft cheeses, processed cheese slices and spreadable cream cheeses in Brazil, and to import specialty cheeses with Brazilian brand names duty-free from its sister plants Bonprole, Uruguay and Santa Rosa (now Milkaut, Argentina). These cheeses are designed to give the impression that they are all made locally in Brazil.

Polenghi is the largest manufacturer of sliced processed cheese in Brazil and exports to McDonalds and Burger King in Latin America are a growing business. Polenghi markets its cheese products using the same brand names as were used by the companies which Bongrain acquired over the years.

3.5 Dairy Industry Investment

Government interest rates in Brazil are among the very highest in the world. The SELIC Treasury bond rate paid by the Central Bank on government short-term borrowing has decreased monthly to reach 12.5% in May 2007, but it is still very much higher than the current inflation rates of 3 to 4% for the previous 12 months. The interest rates charged by the commercial banks are very much higher because they include federal taxes, so that processors either try to negotiate loans in R$ at around 8.75%/year from the BNDES federal development bank or loans in US$.

Perdigão (which owns Batávia) and Eleva Alimentos (Avipal, Elegê) both publish financial reports on the internet. None of the other large dairy companies are quoted on the stock exchange; many are cooperatives owned by farmers and others are private, family-owned companies.

There are no limitations to foreign investment in farms or dairy processors. Interestingly, several New Zealand farmers have invested in farms with

U.S Dairy Export Council 66 December 2007 Brazil – Dairy Processing

irrigated strip pastures and shade for cows during the middle of the day in the states of Bahia and Goiania.

The formation of a new company in Brazil is complicated and time consuming, requiring specialized lawyers and accountants. However, this applies to both foreign and Brazilian-owned companies because of the three-level structure of federal, state and municipal government and due to the various approvals required for manufacturing, warehousing, planting, etc. Transfer of funds from overseas and registration of the capital is one of the simplest operations in business.

U.S Dairy Export Council 67 December 2007 Brazil – Milk Pricing

4.0 MILK PRICING

4.1 Trends in Milk Pricing

There has been considerable variation in the price of raw milk in Brazil during recent years, with several broad phases:

Decline—2001 to 2002

After reaching a peak in September 2000, the price of raw milk decreased to reach a low in the summer of 2001 to 2002, when dairy products (UHT milk, cheese and milk powder) imported from Argentina and Uruguay became available in the southern states of Brazil at lower prices than the sales price of local products.

Recovery—2002 to 2005

When import duties for milk powder and cheese were increased in 2002 and the Real devalued against the dollar between 2002 and 2004, locally manufactured dairy commodities could be sold at competitive prices compared to imported products, and food processors looked for increased supplies of Brazilian milk. Local prices for fresh milk started increasing, and this continued until the first half of 2005.

Increased Revaluation of the Real—2005 to 2007

During the first five months of 2005, farmgate milk prices increased by a national average of 8.52%. Farmers were happy with the increase, so they improved the feed for their cows and produced more milk.

In 2005, rising prices led end user food companies to start sourcing their dairy products from Argentina and Uruguay once again. Brazil developed a surplus, farm gate prices dropped, imports decreased and exports started up once more.

In 2006, the steady revaluation of the real again made imports slightly lower cost to the non-dairy food processors; local production and imports increased simultaneously with exports increasing. With increased raw milk prices in the winter of 2006, Frimesa and some other cheese exporters stopped exporting. They are still waiting for a more favorable exchange rate to restart exports, even at the higher international cheese prices.

In the second quarter of 2007, the high international prices for milk powder, SCM and evaporated milk, and the fact that Argentina had dropped out of the export market because of government export levies, encouraged exporters to a strong return to exports, and the period of U.S Dairy Export Council 68 December 2007 Brazil – Milk Pricing

seven months to July 2007 showed an export surplus compared to a dairy trade deficit in 2006.

The following table gives a longer-term historical perspective on monthly prices in certain key states.

Table 4.1a Farm Milk Price Trends, Selected States, 2000 to 2007

R$/L deflated Month of Actual prices in by the IPCA Year payment Actual prices in R$/L R$/US$ US$/L index 2000 Jan R$ 0.27 R$ 1.805 $0.15 R$ 0.43 Feb R$ 0.28 R$ 1.776 $0.16 R$ 0.43 Mar R$ 0.28 R$ 1.742 $0.16 R$ 0.43 Apr R$ 0.29 R$ 1.770 $0.16 R$ 0.45 May R$ 0.30 R$ 1.828 $0.17 R$ 0.47 Jun R$ 0.32 R$ 1.809 $0.18 R$ 0.50 Jul R$ 0.34 R$ 1.798 $0.19 R$ 0.52 Aug R$ 0.37 R$ 1.810 $0.21 R$ 0.56 Sep R$ 0.37 R$ 1.840 $0.20 R$ 0.56 Oct R$ 0.34 R$ 1.880 $0.18 R$ 0.51 Nov R$ 0.30 R$ 1.951 $0.16 R$ 0.45 Dec R$ 0.29 R$ 1.964 $0.15 R$ 0.43 2001 Jan R$ 0.28 R$ 1.956 $0.15 R$ 0.42 Feb R$ 0.28 R$ 2.005 $0.14 R$ 0.42 Mar R$ 0.30 R$ 2.093 $0.14 R$ 0.44 Apr R$ 0.32 R$ 2.197 $0.15 R$ 0.47 May R$ 0.34 R$ 2.299 $0.15 R$ 0.50 Jun R$ 0.35 R$ 2.376 $0.15 R$ 0.51 Jul R$ 0.35 R$ 2.473 $0.14 R$ 0.50 Aug R$ 0.32 R$ 2.513 $0.13 R$ 0.45 Sep R$ 0.29 R$ 2.671 $0.11 R$ 0.41 Oct R$ 0.27 R$ 2.738 $0.10 R$ 0.37 Nov R$ 0.26 R$ 2.540 $0.10 R$ 0.37 Dec R$ 0.26 R$ 2.366 $0.11 R$ 0.36 2002 Jan R$ 0.27 R$ 2.381 $0.11 R$ 0.37 Feb R$ 0.28 R$ 2.418 $0.12 R$ 0.38 Mar R$ 0.31 R$ 2.346 $0.13 R$ 0.41 Apr R$ 0.33 R$ 2.321 $0.14 R$ 0.44 May R$ 0.35 R$ 2.483 $0.14 R$ 0.47 Jun R$ 0.37 R$ 2.723 $0.13 R$ 0.49 Jul R$ 0.38 R$ 2.944 $0.13 R$ 0.50 Aug R$ 0.38 R$ 3.102 $0.12 R$ 0.50 Sep R$ 0.38 R$ 3.348 $0.11 R$ 0.49 U.S Dairy Export Council 69 December 2007 Brazil – Milk Pricing

R$/L deflated Month of Actual prices in by the IPCA Year payment Actual prices in R$/L R$/US$ US$/L index Oct R$ 0.38 R$ 3.798 $0.10 R$ 0.49 Nov R$ 0.39 R$ 3.582 $0.11 R$ 0.49 Dec R$ 0.42 R$ 3.647 $0.11 R$ 0.51 2003 Jan R$ 0.42 R$ 3.438 $0.12 R$ 0.51 Feb R$ 0.42 R$ 3.595 $0.12 R$ 0.50 Mar R$ 0.44 R$ 3.441 $0.13 R$ 0.51 Apr R$ 0.45 R$ 3.112 $0.15 R$ 0.52 May R$ 0.47 R$ 2.962 $0.16 R$ 0.54 Jun R$ 0.49 R$ 2.881 $0.17 R$ 0.56 Jul R$ 0.49 R$ 2.882 $0.17 R$ 0.56 Aug R$ 0.48 R$ 3.003 $0.16 R$ 0.55 Sept R$ 0.49 R$ 2.924 $0.17 R$ 0.55 Oct R$ 0.48 R$ 2.860 $0.17 R$ 0.54 Nov R$ 0.47 R$ 2.891 $0.16 R$ 0.53 Dec R$ 0.45 R$ 2.937 $0.15 R$ 0.51 2004 Jan R$ 0.42 R$ 2.875 $0.15 R$ 0.47 Feb R$ 0.41 R$ 2.920 $0.14 R$ 0.45 Mar R$ 0.42 R$ 2.905 $0.15 R$ 0.46 Apr R$ 0.44 R$ 2.906 $0.15 R$ 0.49 May R$ 0.47 R$ 3.100 $0.15 R$ 0.51 Jun R$ 0.52 R$ 3.133 $0.16 R$ 0.56 Jul R$ 0.56 R$ 3.033 $0.18 R$ 0.60 Aug R$ 0.57 R$ 3.003 $0.19 R$ 0.60 Sept R$ 0.55 R$ 2.894 $0.19 R$ 0.59 Oct R$ 0.55 R$ 2.852 $0.19 R$ 0.58 Nov R$ 0.54 R$ 2.786 $0.19 R$ 0.56 Dec R$ 0.53 R$ 2.718 $0.20 R$ 0.55 2005 Jan R$ 0.53 R$ 2.697 $0.20 R$ 0.55 Feb R$ 0.53 R$ 2.597 $0.21 R$ 0.55 Mar R$ 0.54 R$ 2.704 $0.20 R$ 0.56 Apr R$ 0.57 R$ 2.578 $0.22 R$ 0.58 May R$ 0.59 R$ 2.452 $0.24 R$ 0.59 Jun R$ 0.59 R$ 2.422 $0.24 R$ 0.60 Jul R$ 0.57 R$ 2.363 $0.24 R$ 0.57 Aug R$ 0.51 R$ 2.301 $0.22 R$ 0.51 Sept R$ 0.48 R$ 2.294 $0.21 R$ 0.48 Oct R$0.47 R$2.256 $0.21 Nov R$0.45 R$2.210 $0.20 Dec R$ 0.43 R$ 2.285 $0.19 U.S Dairy Export Council 70 December 2007 Brazil – Milk Pricing

R$/L deflated Month of Actual prices in by the IPCA Year payment Actual prices in R$/L R$/US$ US$/L index 2006 Jan R$ 0.42 R$ 2.273 $0.18 Feb R$ 0.43 R$ 2.162 $0.20 Mar R$ 0.45 R$ 2.152 $0.21 Apr R$ 0.48 R$ 2.129 $0.22 May R$ 0.49 R$ 2.178 $0.23 Jun R$ 0.50 R$ 2.248 $0.22 Jul R$ 0.50 R$ 2.189 $0.23 Aug R$ 0.50 R$ 2.155 $0.23 Sept R$ 0.50 R$ 2.168 $0.23 Oct R$ 0.50 R$ 2.148 $0.23 Nov R$ 0.50 R$ 2.158 $0.23 Dec R$ 0.50 R$ 2.150 $0.23 2007 Jan R$ 0.49 R$ 2.138 $0.23 Feb R$ 0.50 R$ 2.096 $0.24 Mar R$ 0.52 R$ 2.088 $0.25 Apr R$ 0.54 R$ 2.032 $0.27 May R$0.59 R$1.981 $0.30 Jun R$0.62 R$1.931 $0.32 Jul R$0.68 R$1.882 $0.36 Source: CEPEA Notes: 1) Weighted average cost of raw milk acquired by processors in the five main dairy states (Goiás, Minas Gerais, Paraná, Rio Grande de Sul, São Paulo); delivered in the period between the 15th of one month up to the 14th of following month; payment 15-25th second month. 2) Commercial dollar exchange rates: average of daily Ptax: purchase and sell rates; Banco Central. 3) Deflated prices represent the selling price of milk divided by the IPCA inflation in the period counting back from September 2005. It shows the adjustment in raw milk prices compared to the IPCA inflation index. There is, therefore, no US$ equivalent.

Most processors now announce the farmgate price to farms at the end of the previous month and payment is made on the 15th of the subsequent month. Farms are not interested in signing contracts for regular milk collection, and collection can be cancelled by either party at short notice. As volumes per farm are small, milk collection is made every two days.

Both DPA and Itambé started in mid-2005 to pay price differentials for farm milk with a lower TCC, lower somatic cell count, low temperature storage in the farm tank, higher fat content, higher protein content and higher average volume per delivery. DPA calculates prices using both a discount for poor quality and a bonus for better quality, whereas Itambé

U.S Dairy Export Council 71 December 2007 Brazil – Milk Pricing

and most other dairies only pay a bonus for better quality. The bonus amounts to around 15% of the final published milk prices.

A study by the Clinica de Leite compared the total cell count (TCC) for milk supplied to processors, which paid a bonus for low TCC and low somatic CC. Over 12 months between 2006 and 2007, the 11 processors which paid a bonus for lower cell counts received milk with an average TCC of 93,000 cells/ml compared to an average of 435,000 cells/ml for the 191 processors not paying a quality bonus. This shows that extra profit for farmers is a more important tool than legislation in improving milk quality.

In addition to the price for regular volumes of milk, some milk is purchased on the spot market. The volumes of milk purchased spot are shown in table 4.1b. In summer, the spot price is lower than the regular price, but at other times of the year, when milk is in short supply as in winter 2007, the spot prices are higher. Most of the dairies owned by cooperatives do not purchase much milk on a spot basis. Batávia is expected to participate more strongly in the spot market in 2007, now that it is operated by Perdigão.

Table 4.1b Milk Volumes Purchased on the Spot Market, 2004 to 2006 2004 2005 2006 Regular Regular Regular supplier Spot supplier Spot supplier Spot farms, ‘000 purchases, farms, ‘000 purchases, farms, ‘000 purchases, Processor liters ‘000 liters liters ‘000 liters liters ‘000 liters DPA 1,136,327 372,740 1,246,000 462,000 1,247,000 455,000 Parmalat 288,744 117,944 388,117 203,730 418,800 193,270 Nilza 14,500 182,000 Eleva 659,522 58,185 737,782 103,767 756,002 141,963 CCL 300,943 37,494 254,057 106,067 219,507 96,538 Itambé 765,000 64,500 982,000 23,000 970,000 69,000 Danone 116,119 84,618 134,575 61,824 164,622 57,283 Confepar 141,439 47,869 210,543 51,690 238,495 49,987 Embaré 222,606 33,792 250,867 55,382 262,052 47,401 Grupo Vigor 164,224 32,201 171,009 20,913 136,814 41,007 Lat Morrinhos 238,768 13,934 233,310 66,134 309,661 28,437 Líder 141,052 10,430 184,240 18,439 209,876 16,659 Sudcoop 234,316 26,783 234,876 31,385 217,915 8,080 Centroleite 229,135 0 258,195 10,073 262,652 476 Batávia 209,893 0 224,561 0 241,601 0 Source: CNA, Embrapa

U.S Dairy Export Council 72 December 2007 Brazil – Milk Pricing

4.2 Regionality and Seasonality in Pricing

Prices for farm milk vary between the main dairy states, partly because dairy processors in Minas Gerais and Goiás (DPA, Itambé and Danone) compete to purchase quality milk and are prepared to pay an average 10% above farmgate prices, as their plants are close to the largest markets for dairy products in Sao Paulo and Rio de Janeiro.

Table 4.2a Delivered Cost of Type C Farm Milk in the Key Dairy State by Month, 2005 to 2007, R$/liter

Rio Santa Sao Minas Grande Catarin Brazil Month / year Paulo Goiás Gerais Paraná do Sul a Bahia total May 2005 0.614 0.610 0.587 0.567 0.570 0.487 0.590 June 2005 0.623 0.606 0.590 0.566 0.567 0.499 0.593 July 2005 0.582 0.567 0.583 0.521 0.553 0.500 0.568 Aug 2005 0.523 0.503 0.531 0.481 0.486 0.461 0.499 0.509 Sept 2005 0.507 0.496 0.501 0.445 0.454 0.434 0.460 0.484 Oct 2005 0.486 0.485 0.484 0.425 0.453 0.417 0.461 0.469 Nov 2005 0.452 0.452 0.469 0.404 0.428 0.420 0.447 0.447 Dec 2005 0.435 0.406 0.448 0.397 0.421 0.411 0.404 0.427 Jan 2006 0.428 0.379 0.425 0.398 0.448 0.420 0.407 0.418 Feb 2006 0.451 0.403 0.444 0.402 0.442 0.414 0.391 0.432 March 2006 0.461 0.454 0.454 0.417 0.454 0.427 0.401 0.449 April 2006 0.499 0.475 0.484 0.463 0.467 0.430 0.420 0.477 May 2006 0.522 0.490 0.497 0.485 0.479 0.446 0.420 0.494 June 2006 0.526 0.497 0.502 0.473 0.489 0.445 0.423 0.498 July 2006 0.543 0.499 0.504 0.489 0.471 0.446 0.438 0.501

Aug 2006 0.555 0.506 0.503 0.493 0.459 0.460 0.447 0.503 Sept 2006 0.546 0.508 0.513 0.491 0.456 0.445 0.451 0.502

Oct 2006 0.541 0.506 0.514 0.485 0.457 0.459 0.471 0.502

Nov 2006 0.535 0.508 0.510 0.483 0.466 0.467 0.464 0.502 Dec 2006 0.523 0.492 0.506 0.482 0.467 0.458 0.457 0.496

Jan 2007 0.511 0.479 0.504 0.470 0.468 0.446 0.449 0.489 Feb 2007 0.519 0.494 0.522 0.470 0.476 0.450 0.444 0.501 March 2007 0.550 0.522 0.542 0.480 0.487 0.473 0.447 0.521 April 2007 0.573 0.552 0.560 0.500 0.506 0.482 0.454 0.542

May 2007 0.618 0.606 0.598 0.547 0.563 0.490 0.459 0.585 June 2007 0.651 0.655 0.631 0.604 0.600 0.550 0.474 0.624

July 2007 0.710 0.705 0.690 0.684 0.668 0.602 0.503 0.684 Av 27 mths 0.66 0.66 0.64 0.61 0.61 0.55 0.48 0.63 Av diff to 37.8% 36.9% 33.6% 27.8% 27.5% 14.3% 0.0% 31.8% Bahia price U.S Dairy Export Council 73 December 2007 Brazil – Milk Pricing

Rio Santa Sao Minas Grande Catarin Brazil Month / year Paulo Goiás Gerais Paraná do Sul a Bahia total (lowest)

Source: Cepea Note: Includes freight and social taxes

CEPEA conducts a price analysis for around 65 to 70% of the milk purchased by the inspected processors in Brazil. Data is obtained on a monthly basis from 89 central cooperatives and 310 companies in the seven principal dairy states (including Santa Catarina, from third quarter 2005), out of a total of 1,317 officially inspected dairy processors.

Table 4.2b shows the value the farmer receives per liter and the cost per liter paid by processors, including INSS social tax and freight. INSS is the social welfare organization providing health care and pensions. In order to increase its receipts and cover workers which are not officially registered, part of the value of each invoice issued by “small companies”—including the farms—is paid as an INSS tax. The tax is unrelated to profits or payroll so that it becomes a tax on the invoice, paid a month or two after issuing the invoice.

Table 4.2b Sample Milk Prices Farmgate vs. Delivered, June/July 2007

2005 Delivered Ranking in production cost to Average production volume, processors, farmgate State Region volume mn liters R$/liter price, R$/liter RS North East No 2 1,490 R$ 0.590 R$ 0.481 RS Metropolitan Porto Alegre R$ 0.585 R$ 0.436

Average Rio Grande do Sul R$ 0.594 R$ 0.490 SC West Santa Catarina No 5 1,108 R$0.598 R$0.555

SC Vale de Itajaí R$0.525 R$0.480 SC Average Santa Catarina R$0.579 R$0.540

PR Central East Parana R$ 0.722 R$ 0.606 PR West Parana No 6 746 R$ 0.606 R$ 0.543 PR North Central Parana R$ 0.636 R$ 0.499

Average Paraná state R$ 0.641 R$ 0.585 SP São José do Rio Preto R$ 0.674 R$ 0.655 SP Greater São Paulo R$ 0.660 R$ 0.630 SP Vale do Paraíba Paulista R$ 0.669 R$ 0.625 Average São Paulo state R$ 0.680 R$ 0.639

MG Triângulo Mineiro/ Upper Paranáíba No 1 1,690 R$ 0.651 R$ 0.629 MG South, South West Minas Gerais No 4 1,120 R$ 0.700 R$ 0.561 U.S Dairy Export Council 74 December 2007 Brazil – Milk Pricing

2005 Delivered Ranking in production cost to Average production volume, processors, farmgate State Region volume mn liters R$/liter price, R$/liter MG Vale do Rio Doce R$ 0.665 R$ 0.688

Average Minas Gerais R$ 0.660 R$ 0.616 GO Central Goias R$ 0.660 R$ 0.627 GO South Goias No 3 1,259 R$ 0.668 R$ 0.632 Average Goiás state R$ 0.665 R$ 0.630 BA Central South Bahia R$ 0.461 R$ 0.450 BA South Bahia R$ 0.538 R$ 0.526 Average Bahia state R$ 0.485 R$ 0.474 Average seven states R$ 0.646 R$ 0.596

Source: Cepea Note: Lowest delivered prices are highlighted.

U.S Dairy Export Council 75 December 2007 Brazil – Local Market Considerations

5.0 LOCAL MARKET CONSIDERATIONS

5.1 Consumption Trends

Brazilians consume a lot of meat as their source of protein. Dairy products (milky coffee, hot chocolate, sliced cheese, yogurts, dairy drinks, cake) are served principally at breakfast time—the main consumption occasions for adults in particular. Coffee, tea and other beverages at other times are normally drunk without milk. The main ways in which Brazilians consume dairy products are therefore in:

• Milky coffee for breakfast • Sliced cheese or creamy cheese spread with French bread rolls at breakfast • Milky chocolate drinks at breakfast and during the day for children • Yogurts, when served, are also mainly a breakfast dish

Children eat desserts made from condensed milk, fromage frais, fermented milk drinks, cheese spreads and processed cheese in fast food at various times of the day, but these are less popular with adults. Two meals which use melted cheese are pizzas and Italian pasta dishes, both of which are now widely sold frozen and are increasingly popular as lower cost eating out options.

As Brazilians generally use hot or boiled sweetened milk at breakfast with coffee or chocolate beverages, there is no hygiene problem with consuming raw milk rather than pasteurized or UHT milk. This explains why there continues to be a large market for low price alternatives to processed milk to the poorer people in the villages—not only raw milk but also modified milk powders (blends of milk powder, SWP, and frequently sugar, maltodextrin, etc.).

Nevertheless, local sales of consumer dairy products are slowly increasing with the increase in population. Moreover, the spending power of the domestic population is gradually rising, which also encourages higher purchase levels of dairy products. Priority purchases tend to be:

• Liquid milk: UHT or pasteurized • Mozzarella cheese and Prato cheese • Creamy cheese spread (requeijão) • Yogurts, chilled dairy drinks, fermented milk U.S Dairy Export Council 76 December 2007 Brazil – Local Market Considerations

• UHT chocolate drinks • Chilled desserts • Milk powder and modified milk (containing SWP) mainly in the northeast and northern states, where liquid milk can be difficult to obtain

Chilled dairy, fermented milk and UHT flavored milk are considered non- essential, and purchases increase and decrease with the family income.

In most of Brazil, milk is available as UHT and pasteurized, with the sales of the UHT carton milk around three times larger than that of pasteurized milk. There is now some ultra-pasteurized milk in plastic bottles sold at a premium price by Parmalat, both as skim and whole milk. Milk powder is principally used as a source of liquid milk in north-eastern and northern Brazil (where the quality of fresh milk has been less reliable), for younger children, and in the social distribution programs throughout Brazil, with WMP selling many times more than SMP.

Many of the municipal social programs in Brazil depend on the distribution of milk to poor families. This distribution is principally of pasteurized milk except where transportation is difficult – here it is replaced by milk powder or sometimes modified milk powder. The city of São Paulo is an exception, where the distribution is in the form of sachets of milk powder to poor children who go to school.

Distribution happens principally at the municipal level, so the overall volume of such programs is obscure. However, as an example, the Viva Leite program in the municipalities in São Paulo state distributes around 130 mn liters of milk annually to children under the age of seven and to some older pensioners.

In addition to the distribution to poor families, some public schools are now providing food to pupils either before or during their period of study at school (school lunches), and even occasionally during the after school period, when the children are kept at school for extra activities. Milk is used to make milky drinks and desserts such as cakes and puddings.

5.2 Long-Term Trends

Brazilian milk consumption per capita was estimated by the government at 141.7 liters LME in 2006, but this includes all formal and informal milk and should be reduced by around 4 kg to exclude the milk consumed by animals on the farm, and the waste at the processing plants.

U.S Dairy Export Council 77 December 2007 Brazil – Local Market Considerations

In any case, consumption is up approximately 30% from 1990, although the levels have fluctuated considerably, taking a step-change upwards in 1995 (a boom year with reduced inflation, higher spending and cheaper imports as a result of the currency revaluation). There has been a 14% increase in consumption since 2000, which may be explained by increases in government social programs, including subsidized financing for family farms producing milk for sale and own use, and the increase in purchasing power of a larger number of poorer Brazilians as a result in real increases in the minimum salary.

This level of consumption is well below that of Europe and North America, as well as Argentina and Uruguay, but this does not imply large latent demand due to the consumption practices outlined above. Brazilians consume more full meals with meat than people in other countries and less snacks which include dairy ingredients.

Dairy economists have noted that there are large variations in dairy consumption between the regions, with the south and southeast consuming more, and the rest of the country much less per capita. It was commented upon that a higher salary worker in the northeast region might consume closer to 50 kg dairy per capita per year, whereas in the south, consumption is much closer to the 200 kg level.

Table 5.2 Per Capita Milk Consumption Trends, 1990 to 2007, mn liters LME

Consumption Local Total liters/per Population production Imports Exports availability capita (1/7/year)

1990 14,484 906 15,390 105.0 146,592,579

1991 15,079 1,313 16,392 109.9 149,094,266

1992 15,784 276 16,060 106.0 151,546,843

1993 15,591 632 16,223 105.4 153,985,576

1994 15,784 1,250 17,034 108.9 156,430,949

1995 16,474 3,200 19,674 123.8 158,874,963

1996 18,515 2,450 20,965 130.0 161,323,169

1997 18,666 1,930 20,596 125.8 163,779,827

1998 18,694 2,270 20,964 126.1 166,252,088

1999 19,070 2,410 21,480 127.3 168,753,552

2000 19,767 1,800 42 21,525 125.7 171,279,882

2001 20,510 808 84 21,234 122.2 173,821,934

U.S Dairy Export Council 78 December 2007 Brazil – Local Market Considerations

Consumption Local Total liters/per Population production Imports Exports availability capita (1/7/year)

2002 21,644 1,468 142 22,970 130.2 176,391,015

2003 22,254 554 173 22,635 126.5 178,985,306

2004 23,475 350 385 23,440 129.1 181,586,030

2005 (e) 24,572 781 611 24,742 134.3 184,184,264

2006 (e) 25,709 781 781 25,709 137.4 187,157,000

2007 (e) 26,700 781 781 26,700 139.9 190,818,000

Sources: National Census of 2000; Production – IBGE, Ministerio de Agricultura (MAA); Import export: SECEX: MDIC; Notes: Up to 2004: LME calculated by CNA, CBCL, Embrapa. 2005 and 2006, 2007 LME estimated by Terra Viva .

5.3 Economic Growth Drivers

Table 5.3 Key economic indicators, 2004 to 2008

2008 2004 2005 2006 2007 (est) (forecast) GNP (R$) R$1.942 R$2.148 R$2.3 R$2.524 R$2.734 Av R$ per US$ 1.9737 1.9187 End of year R$ per US$ 2.654 2.340 2.137 1.9075 1.9231 % change GNP (US$) 5.7% 2.9% 3.7% 4.8% 4.3% Average Unemployment 9.5% 9.2% (%) (IBGE) Selic end of year 11.3% 10.3% Inflation indices IPCA 7.60% 5.69% 3.14% 4.04% 4.18% IGP-M 12.42% 1.20% 3.85% 4.49% 4.08%

Sources: (1) IBGE (2) Forecast supplied by Andima (Comitê de Acompanhamento Macroeconômico da Associação Nacional das Instituições do Mercado Financeiro)

The GNP is forecast to grow at around 4.5% p.a. for the next few years, resulting in a growth in earnings per capita of around 3.0% p.a.

As a result, domestic consumption of dairy products is expected to gradually increase, especially among the lower paid.

U.S Dairy Export Council 79 December 2007 Brazil – International Trade

6.0 INTERNATIONAL TRADE

6.1 Export Products and Key Exporters

DPA, the Nestlé/Fonterra JV throughout the Americas, claims to be responsible for approximately 55% of the total exports of dairy products from Brazil. Predominantly, these are milk powder and SCM (no evaporated milk), plus some infant formula and children’s modified milk powder.

The other main exporting group is Serlac, which up until September 2007 was a joint-venture of five dairy manufacturers (Itambé, Ilpisa, CCL, Confepar and Embaré), and a trading company—SerTrading—with most of the volume coming from Itambé. In September, 2007, Itambé purchased the participation of the other four dairy manufacturers, and is now the sole partner of SerTrading. The principal exports are WMP, SMP, SCM and evaporated milk. The other four partners are expected to go on exporting as individual companies.

Other exporters are Frimesa with Mozzarella cheese and Cedrense, which exports cheeses.

Many processors see good prospects in increasing production and exporting their surplus, and hence have invested in plant expansions and modifications to manufacture for export. Many new or expanded milk powder and SCM plants have recently started up, providing additional capacity for export.

Brazil is planning to give priority to exporting WMP and retail SCM. Secondary options are Mozzarella cheese for pizzas, SMP, retail canned sterilized cream and retail evaporated milk. Some companies are exporting milk replacer powders, based on fat filled milk powders mixed with maltodextrin, whey and sometimes sugar. The skim milk and whey are spray dried together with the other ingredients to produce a homogeneous powder “dairy blend.” Mercosur is beginning to classify this product under a separate classification in “1901” so that the volumes can be better understood.

There has been only limited interest in exporting “added value” products, although there are some good hard cheeses in Brazil which have been offered in the export market, albeit in small quantities.

6.2 Export Levels and Trends As Brazil became self-sufficient in milk production in 2002 to 2003 for most of its domestic production, some companies began production for export, starting with long shelf life items in wide demand in the international market. U.S Dairy Export Council 80 December 2007 Brazil – International Trade

Exports have increased regularly for the last five years, but the domestic consumption of dairy products has not allowed Brazil to build up a surplus for export, and the dairy trade balance in 2006 was slightly negative in favor of imports. This does not include doce de leite, which has become a significant dairy export item.

Key exports are SCM, milk powders (WMP, semi-SMP, SMP and modified milk powders), canned sterilized cream, processed cheese, Mozzarella cheese and butter (rather than butteroil).

Table 6.2a Dairy Exports by Product, 2003 to 2007

Jan to 2003, 2004, 2005, 2006, July 2007, Product tonnes tonnes tonnes tonnes tonnes SCM 29,806.6 31,297.2 32,537.7 49,046.1 14,174.8 WMP 2,635.1 20,522.1 20,505.0 13,946.0 10,997.6 Cheese 3,169.7 6,400.1 10,987.2 7,576.0 4,114.0

Of which: Uncured Mozzarella 389.8 2,411.5 4,944.7 2,391.1 1,140.2 Processed cheese exc powder 1,551.0 2,098.6 2,498.6 2,996.5 1,990.2 Hard cheese < 36% moisture 861.7 973.0 1,655.2 896.4 122.2 Other cheese 42.8 137.9 552.2 680.9 465.3 Semi-hard cheese, 36-46% moisture 57.8 351.8 875.4 252.8 179.2 Other fresh cheese incl. requejão 266.6 427.3 461.1 358.3 216.9 Infant formula 4,572.6 8,575.6 7,089.2 9,323.4 3,988.2 SSMP 44.3 1,336.3 2,401.9 3,316.5 4,465.3 SMP 2,801.6 1,745.5 4,128.2 3,493.9 2,254.7 Non-UHT cream 1,509.9 2,910.9 1,494.9 4,906.2 2,849.8 Evaporated milk 0.3 345.3 613.5 3,402.2 1,402.5

Fermented milk and some BMP 2,109.9 2,318.5 1,795.1 1,491.9 1,062.3 Butter 79.8 97.6 1,616.4 1,250.6 1,340.7

Sweetened WMP 61.3 24.5 1,294.8 7.2 69.5 Caramel toffee spread 339.5 505.5 402.8 350.6 146.2 Butteroil 1,576.3 970.2 199.9 294.8 43.4

UHT whole milk 177.1 50.5 350.3 43.5 15.6

Source: SECEX Aliceweb

The extremely fast growth in certain export categories is well illustrated in the following table, giving a longer-term perspective:

U.S Dairy Export Council 81 December 2007 Brazil – International Trade

Table 6.2b Exports of Dairy Products from Brazil, 2002 to 2007

Change 2002, 2005, 2006, 2002 to Product tonnes tonnes tonnes 2006, %

Evaporated milk 84.7 613.5 3,402.2 3,916.8%

Blue cheese 0.3 9.3 11.8 3,833.3%

Other cheese 18.1 540.0 665.3 3,575.7%

Infant formula, modified milk 294.7 7,089.2 9,323.4 3,063.7%

WMP+semi-SMP 1,076.9 22,906.9 17,262.5 1,503.0%

Mozzarella 257.0 4,944.7 2,391.1 830.4%

Semi-hard cheese 38.3 875.4 252.8 560.1%

Butter and dairy spreads 369.6 1,616.4 1,250.9 238.4%

Processed cheese 1252.2 2,498.6 2,996.5 139.3%

Other soft cheese and fresh cheese 151.1 461.2 358.3 137.1%

Hard cheese 401.4 1,655.2 896.4 123.3%

SCM 23,045.5 32,537.7 49,046.1 112.8%

Natural milk constituents 11.5 14.6 20.1 74.8%

Cream powder 102.7 100.5 170.3 65.8%

SMP 2,707.0 4,128.2 3,493.9 29.1%

Cream 4,321.2 1,532.2 4,950.0 14.6%

Grated and powder cheese 3.6 2.7 3.8 5.6%

Butteroil, other dairy fats 0 199.9 294.8 NA

Semi-skim & whole fluid milk 72.0 350.3 71.1 -1.3%

Caramel toffee spread 380.6 402.8 350.6 -7.9%

Skim fluid milk 9.1 21.7 5.4 -40.7%

Ice cream 762.1 278.7 213.3 -72.0%

Fermented milk and some BMP 5,903.7 1,795.1 1,491.9 -74.7%

Sweetened dairy powders and concentrates 196.0 1,504.7 15.4 -92.1%

Whey, modified whey 13.9 8.1 0.7 -95.0%

Yogurt 87.0 48.6 0.2 -99.8%

Source: SECEX Aliceweb

Despite the growth in export trade, for many products imports still far exceed exports. The main products showing a large trade surplus are:

• SCM

U.S Dairy Export Council 82 December 2007 Brazil – International Trade

• Canned sterilized cream • Infant formula or modified milk powders • Evaporated milk • Mozzarella cheese • Processed cheese

Smaller surpluses exist in:

• Caramel toffee spread • Butter, as opposed to butteroil • Buttermilk powder or fermented milk

WMP and SMP, which are being exported from Brazil in significant volumes, were also imported in even larger volumes from Argentina and Uruguay in 2006.

Some of the other principal imports are SWP, DWP, lactose, UHT milk, MPCs and semi hard cheeses

Brazil continues to import large volumes of SWP and other whey derivatives, which reduces the trade balance.

U.S Dairy Export Council 83 December 2007 Brazil – International Trade

Table 6.2c Import/Export Balance by Product, 2000 to 2007

2007, 7 Product Imp / Exp 2000, tonnes 2001, tonnes 2002, tonnes 2003, tonnes 2004, tonnes 2005, tonnes 2006, tonnes months

Skim fluid milk Export 0.0 0.3 9.1 62.7 42.1 21.7 5.4 10.6

Skim fluid milk Import 5,681.9 2,410.3 2,033.4 257.9 0.4 96.7 1,251.5 663.1

Semi-skim & whole fluid milk Export 0.2 0.0 72.0 177.3 50.5 350.3 71.1 18.7

Semi-skim & whole fluid milk Import 89,372.8 36,077.4 25,503.8 1,650.9 570.3 1,944.1 14,070.6 3,125.6

Cream Export 359.6 1,709.6 4,321.2 1,563.2 2,971.9 1,532.2 4,950.0 2,870.7

Cream Import 868.4 635.2 22.5 22.5 101.3 53.7 191.4 61.6

SMP Export 15.6 486.6 2,707.0 2,801.6 1,745.5 4,128.2 3,493.9 2,254.7

SMP Import 30,330.4 10,639.9 17,602.1 6,734.7 4,059.6 5,181.2 9,107.2 2,925.4

WMP + semi SMP Export 188.3 502.2 1,076.9 2,679.4 21,858.4 22,906.9 17,262.5 15,462.9

WMP + semi SMP Import 105,115.8 41,420.9 95,297.3 31,836.1 20,313.4 28,079.1 30,001.7 13,628.5

Cream powder Export 6.6 10.2 102.7 89.9 37.5 100.5 170.3 118.2

Cream powder Import 13.8 6.0 0.0 50.4 0.0 0.0 0.0 0.0

Sweetened dairy powders and Export 18.7 25.7 196.0 199.5 27.3 1,504.7 15.4 76.3 concentrates

Sweetened dairy powders and Import 3,326.7 1,311.5 909.1 780.4 786.0 888.8 730.8 0.0 concentrates

Evaporated milk Export 1.6 1.7 84.7 0.3 345.3 613.5 3,402.2 1,402.5

Evaporated milk Import 90.6 53.8 18.5 0.0 0.0 0.0 0.0 0.0

SCM Export 4,543.6 7,395.3 23,045.5 23,023.8 22,531.1 32,537.7 49,046.1 14,174.8

SCM Import 155.5 34.1 16.8 0.0 10.9 4.0 110.0 0.0

Yogurts Export 423.2 235.4 87.0 88.1 59.6 48.6 0.2 1.4

U.S Dairy Export Council 84 December 2007 Brazil – International Trade

2007, 7 Product Imp / Exp 2000, tonnes 2001, tonnes 2002, tonnes 2003, tonnes 2004, tonnes 2005, tonnes 2006, tonnes months

Yogurts Import 38.7 81.3 0.6 0.0 0.0 0.0 0.0 0.0

Buttermilk powder, fermented Export 824.8 3,742.6 5,903.7 2,109.9 2,318.5 1,795.1 1,491.9 1,062.3 milk

Buttermilk powder, fermented Import 377.1 268.4 15,264.6 6,787.9 833.4 678.3 628.9 829.0 milk

Whey, modified whey Export 17.8 25.7 13.9 3.4 6.5 8.1 0.7 0.9

Whey, modified whey Import 32,613.3 29,261.2 33,167.6 25,117.9 22,812.6 29,942.1 28,437.3 14,356.7

Natural milk constituents Export 13.4 7.8 11.5 26.5 5.8 14.6 20.1 6.4

Natural milk constituents Import 10,515.4 8,186.2 3,463.4 819.0 1,209.7 1,832.2 2,110.2 882,7

Butter and dairy spreads Export 98.5 2,294.2 369.6 79.8 97.6 1,616.4 1,250.9 1,340.7

Butter and dairy spreads Import 10,350.5 1,785.7 7,545.0 3,169.6 641.6 202.8 777.7 222.4

Butter oil, other dairy fats Export 0.0 664.2 0.0 1,576.3 970.3 199.9 294.8 43.4

Butter oil, other dairy fats Import 2,546.7 888.7 3,732.6 340.0 499.8 383.9 451.7 623.2

Mozzarella Export 241.3 136.8 257.0 389.8 2,411.5 4,944.7 2,391.1 1,140.2

Mozzarella Import 3,881.3 679.4 2,739.0 1,392.4 28.5 99.5 1,230.2 233.3

Other fresh, uncured cheese and Export 221.4 205.1 151.1 266.6 427.3 461.2 358.3 216.9 soft cheese

Other fresh, uncured cheese and Import 1,635.2 556.1 664.6 785.9 511.5 339.3 262.1 158.6 soft cheese

Hard cheese Export 13.9 34.0 401.4 861.7 973.0 1,655.2 896.4 122.2

Hard cheese Import 2,288.0 2,742.4 885.9 968.5 939.6 936.3 1,512.0 722.3

Semi-hard cheese Export 25.3 63.5 38.3 57.8 351.8 875.4 252.8 179.2

Semi-hard cheese Import 4,873.0 2,648.4 5,238.3 2,048.9 1,828.2 1,175.9 2,231.8 677.1

Blue cheese Export 0.0 0.0 0.3 0.5 1.6 9.3 11.8 10.6 U.S Dairy Export Council 85 December 2007 Brazil – International Trade

2007, 7 Product Imp / Exp 2000, tonnes 2001, tonnes 2002, tonnes 2003, tonnes 2004, tonnes 2005, tonnes 2006, tonnes months

Blue cheese Import 347.9 346.9 347.0 276.2 272.0 294.1 337.9 236.6

Other cheese Export 1.2 6.9 18.1 42.8 137.9 540.0 665.3 447.3

Other cheese Import 2,122.4 521.1 469.2 261.3 177.3 124.0 247.0 252.5

Processed cheese Export 1,909.0 1,813.2 1,252.2 1,551.0 2,098.6 2,498.6 2,996.5 1,990.2

Processed cheese Import 303.5 310.7 163.4 95.8 120.8 122.9 116.6 104.7

Grated and powder cheese Export 3.4 10.1 3.6 9.4 4.7 2.7 3.8 7.4

Grated and powder cheese Import 267.2 223.3 246.3 160.6 166.9 221.2 225.3 165.6

Lactose Export 13.4 3.3 18.5 24.9 52.6 76.5 3.0 11.7

Lactose Import 5,949.0 7,544.2 6,918.2 8,058.0 9,891.4 12,073.3 13,734.4 6,106.5

Caseins Export 14.2 0.0 12.6 8.2 11.2 1.5 0.0 0.0

Caseins Import 832.9 849.2 899.1 549.7 884.0 106.3 614.4 442.5

Caseinates Export 0.0 1.6 37.0 0.0 5.3 0 0.7 0.4

Caseinates Import 1,540.1 1,840.7 1,256.8 1,368.0 1,060.9 223.7 602.3 555.3

Whey proteins, > 80% protein Export 0.0 0.1 0.0 0.0 0.5 1.5 13.3 0.0

Whey proteins, > 80% protein Import 107.2 225.8 678.3 1,292.8 287.3 205.2 821.3 591.0

Infant formula Export 105.4 113.8 294.7 4,572.6 8,575.6 7,089.2 9,323.4 3,988.2

Infant formula Import 180.4 75.1 51.1 22.2 0.0 93.3 161.8 114.4

Caramel toffee spread Export 174.4 204.5 380.6 339.5 505.5 402.8 350.6 146.2

Caramel toffee spread Import 276.8 222.1 92.2 37.0 80.3 114.3 199.5 262.1

Ice cream Export 2,095.0 3,136.2 762.1 446.7 742.2 278.7 213.3 98.8

Ice cream Import 1,397.3 913.7 1,016.5 228.1 385.3 1,408.0 1,989.2 1,957.7 Source: SECEX Aliceweb U.S Dairy Export Council 86 December 2007 Brazil – International Trade

Brazil continues to import large volumes of SWP and other whey derivatives which reduces its trade balance.

6.3 Key Export Destinations

Key export destinations by product category in 2006 were as follows:

• SMP: Venezuela, Algeria • WMP: Algeria, Cuba, Venezuela, Senegal, South Africa and Israel • SCM: Angola, Venezuela, U.S., Trinidad and Tobago, Tunisia, Equatorial Guinea, Argentina, Peru, Chile, Lebanon and Paraguay. (Brazil has an economic advantage over many other potential suppliers of SCM, as it has available low-cost sugar and economic steel and aluminum cans for retail products) • Fermented milk: Argentina • Butter: Yemen • Mozzarella: South Korea, Taiwan • Processed cheese: Argentina, Chile • Hard cheese: U.S. (there is a quota for hard cheese exports from Mercosur to the U.S. which allows the cheese to enter the U.S. without duty; historically this quota was filled by Uruguay and Argentina) • Semi-hard cheese: U.S., Cuba • Infant formula: these are believed to be Nestlé exports to sister companies in Colombia, Dominican Republic, Argentina, Ecuador, Chile and Paraguay; there was also a large export to Iraq in 2004 • Cream: Philippines • Semi SMP: Cuba, South Africa, Chile and Algeria • Sweetened MP: Algeria

6.4 Future Milk Availability for Export

The Brazilian calculation of GNP was altered in early 2007 to more correctly include the informal economy. The revised figures are shown in Table 6.4a.

U.S Dairy Export Council 87 December 2007 Brazil – International Trade

Table 6.4a Brazilian GNP trends, 1999 to 2007

% change in dairy Increases in consumption per Increase in Year GNP/year capita population 2000 4.3% -1.1% 2001 1.3% -2.6% 2002 2.7% 6.8% 2003 1.1% -2.7% 2004 5.7% 2.3% 2005 2.9% 4.8% 2006 (pr) 3.7% 3.3% 2007 (e) 4.1% 1.6% Average 3.2% 1.5% 1.014% Forecast 2007-2010 4% 2.96% 1.014%

Source: IBGE; MAPA / Conab

More and more Brazilian forecasters are predicting that the increase in GNP in the next five years will be higher than it has been in the last five years—closer to an average of 4% rather than 3%—as a result of increases in spending power resulting from growth in real terms in the minimum salary. This affects the purchasing power of a large number of pensioners, public employees and rural workers.

This was expected to increase the dairy consumption per capita; however, the sharp inflation in domestic dairy prices in the second quarter may have the opposite effect of reducing per capita consumption. In July 2007, the prices of UHT milk, cheese and milk powders were around 60 to 70% higher than those of four months earlier.

The general opinion among the dairy industry and private sector economists is that higher farmgate prices will encourage Brazilian raw milk production to increase at an average rate of 4% minimum per year. The 2007 situation is close to equilibrium between supply and demand, and the increase in the domestic consumption will be around 3% p.a. based on increases in population and increased consumption per capita.

In the first seven months of 2007, Brazil has shown a small trade surplus, and this is expected to continue until the end of 2007 and into 2008. How fast the surplus will grow depends on various factors:

• Climate in the principal dairy regions of the country—drought and cold winter weather will both reduce production U.S Dairy Export Council 88 December 2007 Brazil – International Trade

• International prices—if these remain high, farmers will be encouraged to feed their cows well and maximize yields. If current price levels continue for some time (and it is not an absolute price that is important, but the relationship between the milk price and the prices of corn, soy bran, land rental, sugar cane, etc.), then farmers will call in specialized consultants to improve their pasture and feed management, reproduction techniques and genetics, resulting in even more significant milk yield increases • Domestic product prices—if these remain high, domestic dairy consumption will remain stable and possibly decrease, releasing more product for export; if they decrease again in spring and summer 2007, the consumption among the poor will continue to increase, reducing the availability for export

Three scenarios are being studied:

Table 6.4b Possible Scenarios for Brazil’s Future Milk Availability for Export

% change in % change in milk domestic Availability of supply consumption surplus milk in 2015 Optimistic 5% 3% 5.6 bn liters/year Probable 4% 3% 2.7 bn liters/year Pessimistic 3.5% 3% 1.3 bn liters/year

Source: iRIS Consulting analysis

Brazil is self-sufficient in all commodity dairy products, and imports should be very small. However, with milk production high between October and January and much lower between April and July, processors manufacture for export when milk is abundant and let the end users import in the low season. This applies principally to WMP, SMP, and possibly semi-hard cheese.

6.5 Dairy Imports

6.5.1 Import Volumes and Products

Imports of almost all dairy products and ingredients decreased after 2003 when local supply became sufficient to supply most local dairy ingredient requirements, as outlined above. Around this time, some companies such as Itambé and DPA (Nestlé/Fonterra) started to export.

U.S Dairy Export Council 89 December 2007 Brazil – International Trade

This drastic reversal of the previous import situation is illustrated in the following tables—first a topline summary by HS code, then a more detailed, longer-term breakdown.

Table 6.5.1a Total Imports by Broad Classification, 2003 to 2006

HS 2003, 2004, 2005, 2006, 2007, 7 mo, Code Product tonnes tonnes tonnes tonnes tonnes

0401 Liquid milk and cream 1,931 672 2,095 15,525 3,850

0402.1 SMP 6,735 4,060 5,181 9,107 2,925

0402.2 WMP & semi SMP 31,836 20,313 28,079 30,002 13,629

0402.2x Other milk, cream powder & 1,931 797 893 841 0 concentrates

0403 Buttermilk 6,788 834 678 629 829

0404.1 Modified whey, WPC 25,118 22,813 29,942 28,437 14,357

0404.9 MPCs 819 1,210 1,832 2,110 883

0405.1 Butter, dairy spread 3,170 642 203 778 222

0405.9 AMF, dairy fat 317 500 384 452 623

0406 Curd and cheese 5,989 4,046 3,313 6,163 2,551

1702.1 Lactose 8,058 9,891 12,073 13,734 6,106

3501.1 Casein 550 884 106 614 443

3501.9 Caseinates 1,368 1,061 224 602 555

3502.2 WPCs, MPCs, prot > 80% 1,293 287 205 821 591

Source: Aliceweb, SECEX

One dairy product with growing imports is premium ice cream such as Haagen Dazs, Parmalat, Movenpick and some Argentinean premium brands. These are sold through their own stores. General Mills, which owns Haagen Dazs, has indicated that it is studying an investment in Uruguay to manufacture its ice cream to supply customers in Latin America (Brazil and Mexico).

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Table 6.5.1b Key Import Trends, 2000 to 2006

2001, 2002, 2003, 2004, 2005, 2006, % change Product tonnes tonnes tonnes tonnes tonnes tonnes 2006vs2000

Skim fluid milk 2,410.3 2,033.4 257.9 0.4 96.7 1,251.5 -48.1%

Semi-skim & whole fluid milk 36,077.4 25,503.8 1,650.9 570.3 1,944.1 14,070.6 -61.0%

Cream 635.2 22.5 22.5 101.3 53.7 191.4 -69.9%

SMP 10,639.9 17,602.1 6,734.7 4,059.6 5,181.2 9,107.2 -14.4%

WMP + semi SMP 41,420.9 95,297.3 31,836.1 20,313.4 28,079.1 30,001.7 -27.6%

Cream powder 6.0 0.0 50.4 0.0 0.0 0.0 -100.0%

Sweetened dairy powders and 1,311.5 909.1 780.4 786.0 888.8 730.8 -44.3% concentrates

Evaporated milk 53.8 18.5 0.0 0.0 0.0 0.0 -100.0%

SCM (likely to be product 34.1 16.8 0.0 10.9 4.0 110.0 222.6% return)

Yogurt 81.3 0.6 0.0 0.0 0.0 0.0 -100.0%

Buttermilk powder 268.4 15,264.6 6,787.9 833.4 678.3 628.9 134.3%

Whey, modified whey 29,261.2 33,167.6 25,117.9 22,812.6 29.942.1 28,437.3 -2.8%

Natural milk constituents 8,186.2 3,463.4 819.0 1,209.7 1,832.2 2,110.2 -74.2%

Butter and dairy spreads 1,785.7 7,545.0 3,169.6 641.6 202.8 777.7 -56.4%

Butteroil, other dairy fats 888.7 3,732.6 340.0 499.8 383.9 451.7 -49.2%

Mozzarella 679.4 2,739.0 1,392.4 28.5 99.5 1,230.2 81.1%

Other soft cheese and fresh 556.1 664.6 785.9 511.5 339.3 262.1 -52.9% cheese

Hard cheese 2,742.4 885.9 968.5 939.6 936.3 1,512.0 -44.9%

Semi-hard cheese 2,648.4 5,238.3 2,048.9 1,828.2 1,175.9 2,231.8 -15.7%

Blue cheese 346.9 347.0 276.2 272.0 294.1 337.9 -2.6%

Other cheese 521.1 469.2 261.3 177.3 124.0 247.0 -52.6%

Processed cheese 310.7 163.4 95.8 120.8 122.9 116.6 -62.5%

Grated and powdered cheese 223.3 246.3 160.6 167.0 221.2 225.3 0.9%

Lactose 7,544.2 6,918.2 8,058.0 9,891.4 12,073.3 13,734.4 82.1%

Casein 849.2 899.1 549.7 884.0 106.3 614.4 -27.6%

Caseinates 1,840.7 1,255.8 1,368.0 1,060.9 223.7 602.3 -67.3%

Whey proteins, > 80% protein 225.8 678.3 1,292.8 287.3 205.2 821.3 263.7%

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2001, 2002, 2003, 2004, 2005, 2006, % change Product tonnes tonnes tonnes tonnes tonnes tonnes 2006vs2000

Total Dairy 151,548.80 224,183.30 94,825.40 68,007.50 55,266.50 109,804.30 -27.5%

Infant Formula 75.1 51.1 22.2 0.0 93.3 161.8 115.4%

Caramel toffee spread 222.1 92.2 37.0 80.3 114.3 199.5 -10.2%

Ice cream 913.7 1,016.5 228.1 385.3 1,408.0 1,989.2 117.7%

Source: SECEX sistema ALICE

In 2004, many specialists predicted that raw milk production would be so high in 2005 that imports of most dairy ingredients would be negligible. However, in 2006, imports were higher than in 2003, 2004 and 2005. When Brazilian processors increased their prices of industrial dairy ingredients, many of the large dairy purchasers resorted to imports to put pressure on local suppliers to decrease their prices.

At the same time, many exporters chose to continue exporting in spite of low margins so as not to lose their clients, waiting for the economic situation to change.

In 2006, imports of UHT milk, Mozzarella, hard and semi-hard cheese and even butter and ice cream began to increase. Due to this sequence of events, Brazil remains a large dairy importer as well as a significant dairy exporter.

The only dairy products which are not yet manufactured in Brazil are:

• Premium international cheeses (premium European cheese eg blue-vein, Gruyere, Emmenthal, Maarsdam, Regianito, Brie, Camembert, processed cream cheese, fondue kits, cream cheese). Goat cheeses, Provolone, Gouda and Edam are all produced to a reasonable second quality in Mercosur • Industrial ingredients such as MPC, WPC and lactose, which are available from Argentina at zero duty • Casein, caseinates and high-protein MPIs and WPIs, which have to be imported from other continents. (Caseins and caseinates are produced in Uruguay, but are normally exported only to Japan and Mexico so that no product is available for export to Brazil)

U.S Dairy Export Council 92 December 2007 Brazil – International Trade

• Premium ice creams, such as Haagen Dazs from France and Parmalat ice cream from Italy, which are sold in their own ice cream stores in major cities

The main dairy ingredients being imported are the industrial grades of WMP, semi-SMP, SMP, and large volumes of SWP, DWP, whey permeate and lactose.

6.5.2 Key Countries of Origin

Some of the main countries of origin for Brazilian dairy imports are:

• UHT milk: Uruguay and Paraguay • SMP: Argentina, Uruguay • WMP: Argentina (Sancor, Mastellone, Milkaut), Uruguay (Conaprole) • Sweetened semi-SMP: Argentina • BMP: Uruguay • SWP, DWP: Argentina (Mastellone, Leones / Remotti, Verónica, Tregar,), France (Euroserum), U.S., Poland, Uruguay (Conaprole), and in 2004, the Netherlands (Friesland Foods Domo) • WPC35: Argentina (Saputo, Milkaut) • Whey permeate: U.S., Poland • Other milk constituents (MPCs): Argentina (Milkaut), New Zealand (Fonterra), France • Butter: Argentina • Butteroil: Argentina • Blue cheese: Argentina (principally Sancor and Santa Rosa) • Hard cheese: Argentina (principally parmesan types from Sancor and Milkaut); Uruguay • Semi-hard cheese: Uruguay (principally gruyere from Bonprole in Uruguay, Argentina, Netherlands: (Gouda, PrimaDonna and Maasdam) • Soft cheese: Uruguay and France (mostly brie and camembert) • Processed cheese: Switzerland • Mozzarella: Uruguay, Argentina U.S Dairy Export Council 93 December 2007 Brazil – International Trade

• Grated cheese: Argentina • Cheese powder: Uruguay (Lactosan) • Other cheese: Netherlands, France • Lactose from many countries: U.S., New Zealand (Fonterra), Argentina (Milkaut), Netherlands (Friesland Foods Domo), Germany (Meggle), Canada (Saputo) • Casein from Uruguay, New Zealand (Fonterra), Poland, • Caseinates from, New Zealand (Fonterra), the Netherlands (DMV) and France, Germany • WPC-80, WPI from Argentina, U.S. and New Zealand • Infant Formula/modified milk from Paraguay

Imports of whey products in 2007 continue at similar levels to 2006, with Mastellone of Argentina, Euroserum of France and Polish suppliers increasing their market share, at the expense of the U.S. and Conaprole, Uruguay.

Because of the reduction in cheese production in Argentina in 2007, Argentina’s share of exports of whey derivatives, lactose and WPCs (>80%) have all decreased.

Table 6.5.2a Key supplier countries of whey/lactose to Brazil, 2004 to 2007

Jan to July Av price 2004, 2005, 2006, 2007, 2006, Category / country of origin tonnes tonnes tonnes tonnes US$/kg

SWP, DWP, WPC<80% Argentina: Mastellone, Remotti, 9,087 10,777 11,482 6,009 0.96 France: Euroserum 3,578 5,424 5,693 3,650 1.15 U.S. 1,659 6,073 4,663 1,781 0.56 Poland 1,376 2,527 1,808 1,716 0.73 Uruguay: Conaprole 4,909 2,538 2,540 548 0.78 Australia 3 1,186 1,239 394 2.67 Finland: Valio 357 612 459 153 0.91 Germany 246 256 230 54 1.37 Spain 224 300 70 0 0.91 Netherlands: Domo 1,370 225 100 25 0.56 Canada 5 19 145 10 1.29 Belgium 0 5 9 15 1.35 WPC, > 80% U.S. 50 37 337 274 4.61 Argentina: Milkaut 100 114 379 226 4.62 U.S Dairy Export Council 94 December 2007 Brazil – International Trade

Jan to July Av price 2004, 2005, 2006, 2007, 2006, Category / country of origin tonnes tonnes tonnes tonnes US$/kg

New Zealand: Fonterra 137 54 106 86 4.49 Lactose U.S. 1,547 6,448 7,813 2,361 0.67 New Zealand: Fonterra 905 1,310 1,435 1,313 1.20 Argentina: Milkaut 1,409 1,613 1,367 850 0.82 Netherlands: Holstein Domo 866 704 1,098 845 1.01 Germany: Meggle 1,118 941 839 615 1.86 Canada: Saputo 3,100 940 580 0 0.65 France 918 118 600 72 0.94

Source: SECEX, Aliceweb

Imports of milk powders decreased from both Argentina and Uruguay in 2007, because of the milk shortage caused by floods in both countries in the second quarter and abnormally cold weather in July. The reduction in sales is more significant for Uruguay than for Argentina.

Table 6.5.2b Key Countries of Origin for Milk Powder Imports, 2004 to 2007

Jan to July Change 2004, 2005, 2006, 2007, 2007 vs. Product / country of origin tonnes tonnes tonnes tonnes 2006, %

WMP / SSMP

Argentina: Sancor, Mastellone 14,805 17,915 22,676 10,947 -17.2%

Uruguay: Conaprole 5,425 9,675 7,180 2,650 -36.7%

SMP

Argentina: Sancor, Mastellone 2,087 3,219 5,564 2,557 -21.2%

Uruguay: Conaprole 1,837 1,950 3,543 352 -83.0%

BMP

Uruguay: Conaprole 475 475 424 750 203.2%

New Zealand: Fonterra 338 180 190 72 -35.0%

Source: SECEX Aliceweb

U.S Dairy Export Council 95 December 2007 Brazil – International Trade

In 2007, the relative prices of cheese imported from the Netherlands and France has decreased compared to Brazilian and Mercosur cheese, and the EU share of imports has increased, even though imports from Uruguay and Argentina are still very much higher.

Table 6.5.2c Key Supplier Countries of Cheese to Brazil, 2004 to 2007

2004, 2005, 2006, 2007, 7 mo, Category/Supplier tonnes tonnes tonnes tonnes

Uruguay: Bonprole 1,324 1,182 2,639 863 Argentina: Santa Rosa, Sancor 1,614 1,178 2,318 762 Netherlands 492 346 542 400 France 208 212 284 185 Switzerland 208 185 128 134 Italy 137 111 156 114 Denmark 23 23 42 20 Germany 7217 15 New Zealand 105 0 0 38 U.S. 6 14 9 2 Others 17

Source: SECEX, Aliceweb

Table 6.5.2d Key Suppliers of UHT Liquid Milk to Brazil, tonnes, 2004 to 2005

Category /Supplier 2004, tonnes 2005, tonnes 2006, tonnes Paraguay 185 1,881 4,068 Uruguay: 0 159 11,254 Conaprole Argentina 379 0 0

Source: SECEX, Aliceweb

Even though casein is manufactured in a new facility by Saputo in Argentina, and Conaprole has also restarted production of casein and caseinates, Brazil still continues to import casein and caseinates principally from the Netherlands, Poland and New Zealand. Volumes for use in processed food are increasing:

• Casein: 2005: 106; 2006: 614; 2007 (7 m): 443

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tonnes • Caseinates: 2005: 224; 2006: 602; 2007(7 m): 555 tonnes

Table 6.5.2e Key Suppliers of Casein/Caseinates to Brazil, 2004 to 2005

Category/Supplier 2004, tonnes 2005, tonnes 2006, tonnes 2007, 7 m, tonnes Casein

Uruguay 0 1 201 New Zealand 250 48 150 129 Poland 10 40 285 40 France 9 1 24 24 Ukraine 243 15 47 15 China 93 0 12 15 Netherlands 179 0 70 8 Russia 0 0 7 Australia 64 0 2 2 Ireland 20 0 0 0 All caseinates Netherlands 175 116 233 283 New Zealand 619 78 155 202 France 104 7 77 42 Denmark 5 20 66 20 Argentina 6 3 9 4 Germany 131 0 60 0

Source: SECEX, Aliceweb

If a particular product is manufactured in Argentina and Uruguay, the Mercosur producers generally have an advantage in supplying Brazil. This is because their products enter Brazil duty-free and delivery is less than a week, thus reducing the need for a high local inventory. In the case when products are not manufactured in Mercosur, supplies then have to come from outside. This brings the EU, New Zealand, the U.S. and sometimes Canada and Australia into direct competition.

Non-Mercosur suppliers have lost sales to Brazil in the last five years, principally because it is difficult to compete with Mercosur- based manufacturers which export to Brazil duty-free. As local

U.S Dairy Export Council 97 December 2007 Brazil – International Trade

production of SWP, DWP, BMP, WPC, casein and caseinates increases, these import markets are expected to decrease, leaving declining prospects for exporters targeting the Brazilian market.

For many years, New Zealand has had the advantage in supplying Brazil because Fonterra has sold through its local subsidiary with a technical sales department and a local stock in Brazil. However, in 2005, Fonterra shut down its local warehouse and now sells only on an independent or through independent distributors.

6.6 Export Drivers and Constraints

6.6.1 Trade Access—Mercosur and ALADI

• Mercosur (Argentina, Brazil, Paraguay, Venezuela and Uruguay)

There are some trade agreements which favor the importation of dairy products at low or reduced duty. The principal agreement is the Mercosur multilateral trade agreement with Argentina, Uruguay and Paraguay. Imports of dairy ingredients are duty-free from these countries, and other taxes charged at the border (COFINS, PIS, ICMS) are similar to those charged on local production of dairy.

Brazil is the main beneficiary of Mercosur, as it has a positive trade balance with its neighbors. Argentina specifically is upset that it has had a negative trade balance with Brazil for several years, and is considering other options. Uruguay has gone out on its own and signed a series of trade agreements with countries such as Mexico, and continues to try and negotiate a FTA with the U.S.

The USA is trying to establish an Americas trade zone—the FTAA—to include all the countries in the Americas in one trade zone like NAFTA. However, the outlook for this is not positive, as even large industrial countries like Brazil do not see the benefit and are concerned that their markets will be dominated by lower-cost items imported from the U.S.

Another problem is that Latin America wants a series of openings to export its agricultural products to the U.S., whereas the U.S. wants protection for agriculture and openings only for industrial products and services. There are signs that the U.S. may be changing its approach and starting to negotiate a series of trade agreements with smaller groups of countries in the region so that eventually it

U.S Dairy Export Council 98 December 2007 Brazil – International Trade

can force Brazil to enter because other options for exports have been removed.

The present strategy is to force the U.S. to negotiate with Mercosur rather than with the individual countries, but this is jeopardized as not even Argentina and Brazil agree about the terms of negotiation, and Uruguay and Paraguay would be happy to sign individual FTAs.

The EU is also interested in a trade agreement with Mercosur. In recent years, many EU countries have increased their investments in Argentina and Brazil. However, the principal stumbling block continues to be agricultural produce; the EU wants to control imports in order to maintain higher prices inside the EU, and the Mercosur countries want to increase exports of agricultural or agroindustrial products.

To date, Brazil has not signed many bilateral agreements, but the importance of these agreements is recognized by the present government, and negotiations have taken place with Mexico, Chile and Bolivia, and are in progress with some Asian and African countries.

Mercosur functions as an economic union with a common external tariff and zero duty for goods moving between member countries, Chile dairy exports to Mercosur have also had zero tariff from 1 January 2006. Imports into Brazil from outside Mercosur/Chile are subject to a Common External Tariff (CXT), with rates shown in the following table. However, exceptional external tariffs are applied by each country separately for a number of product classifications. Brazil has chosen to apply a 27% import duty to all milk powder, SCM, whey products and some cheeses such as mozzarella (0406.10.10), semi-hard cheese (0406.90.10) and hard cheese (0406.90.20), and these exceptional tariffs (which were heavily lobbied for by the agricultural association CNA) have recently been renewed up to 2008.

The introduction of such rates follows experiences such as the threat to local milk production perceived in the late 1990s when U.S. suppliers started promoting the use of SWP as a low-cost dairy ingredient replacing SMP and WPC in many food applications so that usage of SWP increased and imports of whey, principally from the U.S., increased rapidly.

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Table 6.6.1a Mercosur Common External Tariff (CXT), Dairy Products

Items with higher tariffs % duty into Brazil only

0401.10.10 UHT (Ultra High Temperature) 14 milk

0401.10.90 Other 12

0401.20.10 UHT (Ultra High Temperature) 14 milk

0401.20.90 Other 12

0401.30.10 Cream 12

0401.30.21 UHT (Ultra High Temperature) 14 cream

0401.30.29 Other cream 12

0402.10.10 SMP of an arsenic, lead or copper 16 9 content, taken separately, of less than 5 ppm

0402.10.90 Other SMP 16 9

0402.21.10 WMP full cream milk 16 9

0402.21.20 Semi-SMP 16 9

0402.21.30 Cream powder 16

0402.29.10 Sweetened WMP 16 9

0402.29.20 Sweetened semi-SMP 16 9

0402.29.30 Cream powder 16

0402.91.00 Not containing added sugar or 14 other sweetening matter evaporated milk

0402.99.00 SCM 14 9

0403.10.00 Yogurt 16

0403.90.00 Fermented milk, buttermilk 16 U.S Dairy Export Council 100 December 2007 Brazil – International Trade

Items with higher tariffs % duty into Brazil only

0404.10.00 Whey and modified whey, 14 9 whether or not concentrated or containing added sugar or other sweetening matter

0404.90.00 MPCs 14

0405.10.00 Butter 16

0405.20.00 Dairy spreads 16

0405.90.10 Butteroil 16

0405.90.90 Other 16

0406.10.10 Mozzarella 16 9

0406.10.90 Other fresh cheese 16

0406.20.00 Grated or powdered cheese, all 16 kinds

0406.30.00 Processed cheese, not grated or 16 powdered

0406.40.00 Blue-veined cheese 16

0406.90.10 Of a moisture content, by weight, 16 9 of less than 36.0% (hard cheese)

0406.90.20 Of a moisture content, by weight, 16 9 of 36.0% or more but less than 46.0% (semi-hard cheese)

0406.90.30 Of a moisture content, by weight, 16 of 46.0% or more but less than 55.0% (soft cheese)

0406.90.90 Other cheese 16

1702.11.00 Containing by weight 99% or 16 more lactose, expressed as anhydrous lactose, calculated on the dry matter

1702.19.00 Other 16

1901.10.10 Modified milk and IF 16

U.S Dairy Export Council 101 December 2007 Brazil – International Trade

Items with higher tariffs % duty into Brazil only

1901.90.20 Cream with a basis of cooked 16 milk with added sugar (dulce de leche)

2105.00.10 Ice cream in immediate 18 containers holding not more than 2 kg

2105.00.90 Other ice cream 16

3501.10.00 Casein 14

3501.90.19 Caseinates 14

3502.20.00 Milk albumin, including 14 concentrates of two or more whey proteins

Source: http://www.desenvolvimento.gov.br/sitio/secex/ negInternacionais/ acoComerciais/mercCan.php

While it provides little direct support for the dairy sector in Brazil, the government applies anti-dumping tariffs against supplies from countries where there is government support, such as the EU.

In the first year after Argentina and Uruguay devalued their currency against the dollar and dairies in these countries became desperate to export to Brazil at any price just to obtain the foreign exchange, Brazil claimed that milk powder was being dumped in its country. To prevent this “dumping,” Brazil established a minimum export price for both countries.

Since February 2001 in the case of Argentina, and since April 2001 in the case of Uruguay, the minimum FOB import price of milk powder from these countries must be equal to or higher than the lowest internet published price for milk powder exports from the EU, Australia or New Zealand. This is to make sure that neither Argentina nor Uruguay export milk powder to Brazil at lower than international prices.

U.S Dairy Export Council 102 December 2007 Brazil – International Trade

Additional anti-dumping measures taken by Brazil against low import prices for milk powder include:

¾ Camex Resolution No. 02 (18 February, 2005): Bulk WMP, semi-SMP and SMP exported by Argentina must be sold at a minimum FOB export price, no lower than the minimum average FOB, Oceania price published in the last two issues of USDA Dairy Market News; and if lower than US$ 1,900/tonne, a small surcharge will be charged. Valid for three years until 2008 ¾ Camex Resolution No. 09 (5 April, 2005): Bulk WMP, semi-SMP and SMP exported by Uruguay must be sold at a minimum FOB export price, no lower than the minimum average FOB, Oceania price published in the last two issues of USDA Dairy Market News; and if lower than US$ 1,900/tonne, a small surcharge will be charged. Valid for three years until 2008 ¾ Camex Resolution No. 4 (15 February, 2007) confirmed the anti-dumping charges will continue until February 2012 − Milk powder exported by all EU companies is subject to an anti-dumping tariff of 14.8% percent of CIF price, resulting in a total import duty of 41.8% − Milk powder exported by New Zealand attracts an anti-dumping tariff of 3.9% percent of CIF price, resulting in a total import duty of 30.9%

Brazil imports dairy commodities from Mercosur when the cost is favorable, which occurred in 2005 and 2006. Mercosur also supplies small quantities of some specialty dairy products (such as copies of European blue vein cheese, Parmesan, Gruyere, Cheddar, butter and other semi-hard cheeses) at competitive prices and zero duty.

However local selling prices are generally slightly lower than those in neighboring Mercosur countries—hence Argentina’s Mastellone ships its WMP, SMP and fortified milk powders in bulk for repackaging in its wholly owned subsidiary in Brazil, Leitesol. Some imported retail products are still sold in Brazil, but they are sold at a premium to local equivalents, arguably because the quality and flavor are better. Some examples are butter, specialty cheeses such as brie, camembert and blue-vein cheeses, Gruyere, Emmenthal, U.S Dairy Export Council 103 December 2007 Brazil – International Trade

Gouda and mature, stronger-flavor cheeses, such as Reggianito and Grana Padano; however, the volumes are small compared to the volumes of locally produced equivalents.

The import duty is the key difference between supplying from Argentina or from elsewhere. As Argentine product goes through a different port (i.e. a land border), the port storage takes longer, since the laboratories are not as adjacent to the facility as is the case with the sea ports. Therefore, the border storage costs for Argentine product are higher, though conversely the marine tax is avoided.

ICMS is calculated at the same rate for products of any origin, as a percentage of total delivered cost including port costs, charges, storage, etc. The PIS/COFINS tax is an invoice tax in Brazil which applies to almost every invoiced good or service. Until 2005, imports escaped this charge, but this situation was amended so that imported products lost this area of cost advantage.

Brazil and Argentina are reasonably in agreement that they will not reduce import duties for industrial items until there has been some change in the import barriers for agricultural products. Consequently, Brazil is increasingly interested in international agreements which will open access to its agricultural and agro industrial exports. It continues to participate in G-20 meetings to prepare a strong anti-EU and U.S. position in the WTO DOHA talks, and in the BRIC ( Brazil, Russia, China, India, South Africa) meetings with the EU and the U.S.

• ALADI (Argentina, Bolivia, Brazil, Chile, Colombia, Ecuador, Mexico, Paraguay, Peru, Uruguay and Venezuela)

The Asociación Latinoamericana de Integración, or ALADI, was established by the Treaty of Montevideo (August 1980) and became operational in March 1981. It seeks economic cooperation among its 11 members. This agreement includes Chile, but Chile is almost self-sufficient in most dairy products. However, exports to Chile enter the country duty-free, thus freeing up Chilean-origin products for export to Mexico.

U.S Dairy Export Council 104 December 2007 Brazil – International Trade

In the early 2000s, the Mercosur countries signed a series of agreements offering and receiving import duty reductions when exporting to ALADI countries. Most of these agreements offer a percentage discount to the normal import duty, a percentage which increases a few percent on 1 January of each year:

A notable such agreement is the Acordo Nº 59 with Venezuela, Colombia and Ecuador. These three countries offer preferential tariffs for imports of some dairy products from Mercosur (Brazil, Argentina, Uruguay, Paraguay). These are reductions below the standard import duties of 15% (0401) or 20% (0402, 0406), and these reductions increase on 1 January every year. The percentage reductions from Brazil and Argentina are either 20% or 30% in 2006, 27% or 38% in 2007, and from Uruguay are 39% (2006) and 45% (2007).

The quota for 0402 shipments also increases annually. All imports will be duty-free by 2018, and many products are quota-free and exempt from duty well before 2018.

The following table shows the reduction in duty from the ALADI common external tariff for exports to Venezuela (the largest dairy importer within ALADI) and Colombia (relatively self-sufficient in dairy).

U.S Dairy Export Council 105 December 2007 Brazil – International Trade

Table 6.6.1b ALADI Acordo Nº 59 – increasing export access for Mercosur states

Importer Colombia Colombia Colombia Colombia Colombia Colombia Venezuela Venezuela Venezuela Venezuela Venezuela Venezuela

Exporter Argentina Argentina Brazil Brazil Uruguay Uruguay Argentina Argentina Brazil Brazil Uruguay Uruguay

2006 2007 2006 2007 2006 2007 2006 2007 2006 2007 2006 2007

0401.1000 20% 27% 20% 27% 20% 27% 20% 27% 20% 27% 20% 27%

0401.2000 20% 27% 20% 27% 20% 27% 20% 27% 20% 27% 20% 27%

0401.3010 20% 27% 20% 27% 20% 27% 20% 27% 20% 27% 20% 27%

0401.3020 20% 27% 20% 27% 20% 27% 20% 27% 20% 27% 20% 27%

Maximum 1,591 1,639 318 tonnes 328 tonnes 1,485 1,530 4,200 + 6%/year 3,900 + 6% /year 5,900 t + 6%/yr imports of all tonnes tonnes tonnes tonnes tonnes tonnes 0402 ......

0402.1000 20% 27% 20% 27% 20% 27% 20% 27% 20% 27% 20% 27%

0402.2110 20% 27% 20% 27% 20% 27% 20% 27% 20% 27% 20% 27%

0402.2120 20% 27% 20% 27% 20% 27% 20% 27% 20% 27% 20% 27%

0402.2910 20% 27% 20% 27% 20% 27% 20% 27% 20% 27% 20% 27%

0402.2920 20% 27% 20% 27% 20% 27% 20% 27% 20% 27% 20% 27%

0402.9110 20% 27% 20% 27% 20% 27% 20% 27% 20% 27% 20% 27%

0402.9120 20% 27% 20% 27% 20% 27% 20% 27% 20% 27% 20% 27%

0402.9910 20% 27% 20% 27% 20% 27% 20% 27% 20% 27% 20% 27%

U.S Dairy Export Council 106 December 2007 Brazil – International Trade

Importer Colombia Colombia Colombia Colombia Colombia Colombia Venezuela Venezuela Venezuela Venezuela Venezuela Venezuela

Exporter Argentina Argentina Brazil Brazil Uruguay Uruguay Argentina Argentina Brazil Brazil Uruguay Uruguay

2006 2007 2006 2007 2006 2007 2006 2007 2006 2007 2006 2007

0402.9920 20% 27% 20% 27% 20% 27% 20% 27% 20% 27% 20% 27%

0403.1010 30% 38% 30% 38% 39% 45% 30% 38% 30% 38% 39% 45%

0403.1090 30% 38% 30% 38% 39% 45% 30% 38% 30% 38% 39% 45%

0403.9010 30% 38% 30% 38% 39% 45% 30% 38% 30% 38% 39% 45%

0404.1010 20% 27% 20% 27% 20% 27% 30% 38% 30% 38% 39% 45%

0404.1020 20% 27% 20% 27% 20% 27% 20% 27% 20% 27% 20% 27%

0404.9010 20% 27% 20% 27% 20% 27% 30% 38% 30% 38% 39% 45%

0404.9020 20% 27% 20% 27% 20% 27% 20% 27% 20% 27% 20% 27%

0405.1000 20% 27% 20% 27% 20% 27% 20% 27% 20% 27% 20% 27%

0405.2000 20% 27% 20% 27% 20% 27% 20% 27% 20% 27% 20% 27%

0405.9010: 20% 27% 20% 27% 20% 27% 20% 27% 20% 27% 87% 90% AMF

0405.9010: 20% 27% 20% 27% 20% 27% 20% 27% 20% 27% 39% 45% butter oil

0405.9090 20% 27% 20% 27% 20% 27% 20% 27% 20% 27% 20% 27%

U.S Dairy Export Council 107 December 2007 Brazil – International Trade

Importer Colombia Colombia Colombia Colombia Colombia Colombia Venezuela Venezuela Venezuela Venezuela Venezuela Venezuela

Exporter Argentina Argentina Brazil Brazil Uruguay Uruguay Argentina Argentina Brazil Brazil Uruguay Uruguay

2006 2007 2006 2007 2006 2007 2006 2007 2006 2007 2006 2007

0406.1010 20% 27% 20% 27% 20% 27% 30% 38% 30% 38% 39% 45%

0406.1090 20% 27% 20% 27% 20% 27% 20% 27% 20% 27%

0406.2000: 63% 69% 20-56% H2O

0406.2000: > 79% 83% 69% H2O

0406.2000: 87% 90% hard, not Parmesan, Romano

0406.2000: 87% 90% except Parmesan, Romano

0406.2000: 63% 69% blue

0406.2000: 30% 38% 30% 38% 39% 45% 20% 27% 20% 27% 39% 45% other

0406.3000 20% 27% 20% 27% 20% 27% 20% 27% 20% 27% 20% 27%

0406.4000 63% 69% 63% 69% blue, roquefort

0406.4000 30% 38% 39% 45% 30% 38% 30% 38% 39% 45% other

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Importer Colombia Colombia Colombia Colombia Colombia Colombia Venezuela Venezuela Venezuela Venezuela Venezuela Venezuela

Exporter Argentina Argentina Brazil Brazil Uruguay Uruguay Argentina Argentina Brazil Brazil Uruguay Uruguay

2006 2007 2006 2007 2006 2007 2006 2007 2006 2007 2006 2007

0406.9000: 20% 27% 20% 27% 63% 69% 50-56% H2O

0406.9000: > 20% 27% 20% 27% 79% 83% 69% H2)

0406.9000 87% 90% 87% 90% hard, exc Parmesan, Romano

0406.9000 20% 27% 20% 27% 20% 27% 20% 27% 20% 27% 40% 50% other

Source: http://www.desenvolvimento.gov.br/sitio/secex/negInternacionais/acoComerciais/mercPeru.php Note: There are numerous different annexes, agreements depending on the actual country combinations involved, so the above is exemplary only.

U.S Dairy Export Council 109 December 2007 Brazil – International Trade

6.6.2 Pricing and Currency Issues

For much of 2003 and 2004, exports of dairy products such as milk powder, SCM and mozzarella cheese were profitable. However as the Real has been strengthening against the US$ and the Euro from 2005 onwards, the profitability of export business from Brazil decreased and companies which were previously exporting stopped foreign sales to avoid losing money. Frimesa and Cedrense stopped or reduced exports of cheese in mid-2006 and are waiting for the Real to devalue to around US$ 1.00/R$2.15 before returning to the export market.

Companies exporting milk powder, SCM and evaporated milk are continuing to export in 2007, encouraged by the very high global prices, which means that even with high local raw milk prices and a low US$/R$ exchange rate, there are still profits to be made. They are watching out for any increase in supply from countries like Australia, which will allow milk powder prices to decrease and reduce the export profitability.

High international prices for milk powder allow the Brazilian farmers to feel justified in selling their raw milk at a higher price, and this has caused an inflation in the second quarter of 2007 in dairy product prices in the local market. If the inflation in local prices of milk powder, UHT milk and cheese continues, economists fear a retraction in local sales and a temporary reduction in the dairy product consumption per capita.

6.6.3 Quality Issues

There are two major quality issues:

• Raw milk has a high bacteria and somatic cell count • Many of the processing plants are old and have not been modernized, even after changing ownership

Raw milk quality is gradually being improved by new standards placed on milk supplied to the inspected dairies, but the base was so low that it will take many years before the Brazilian quality reaches the same quality level as is now available in Argentina and Uruguay. This may not be too important for SCM or evaporated milk, but it does slightly lower the export price which can be obtained for milk powder.

The use of old plants is being tackled by the industry. The older plants are being deactivated, and Niro is studying many projects for U.S Dairy Export Council 110 December 2007 Brazil – International Trade

expanding and modernizing old plants. Surprisingly, this is not happening in DPA, which is managed by ex-Nestlé employees more interested in improving profits by reducing fixed assets investment and obtaining better average prices through quality improvement. DPA is rumored to be looking at second-hand equipment from Fonterra New Zealand instead of new equipment. The milk powder plant with the most modern technology is the new Itambé plant in Minas Gerais. A similar “latest technology plant” is being installed by CCGL in Rio Grande do Sul.

6.6.4 Export Logistics and Costs

The principal export plants are not well situated for this purpose, and containers have to be transported some distance by road before reaching convenient export ports. Additionally, Brazilian ports are still inefficient and expensive compared to those in many countries because of restrictive labor practices (i.e. trade unions resisting cuts in their labor force and modernization measures). Many of the roads in states other than São Paulo are in poor condition, and this makes transportation slower and more costly.

The Brazilian Government has been holding back on investments in roads, ports, electricity, etc. to reduce its budget deficit. However, it has recently announced a program to repair many of the more important highways in 2006, mainly to show good results in an election year. There are also constant risks of power cuts due to lack of investment in generation and emergency distribution by a privatized industry which cannot obtain government permission to increase prices.

Conversely, Brazil is a low-cost manufacturer of cans and cardboard boxes for SCM, as well as bags for milk powder, and this gives it a small cost advantage compared to some other countries.

Geographically, Brazil also is better located than Argentina, Uruguay and Chile, which are at the end of the South American continent and have less frequent shipping lines and longer shipping times to importer countries.

6.6.5 Foot and Mouth Disease (FMD)

In October 2005, foot and mouth disease was confirmed in a small area of Mato Grosso do Sul state and on one farm in Paraná state. While the outbreak was located in Mato Grosso do Sul state, it was ascertained that the animals had become infected during a visit to an animal auction in Paraná state. The Ministry decided to check all animals which had been at the auction, and reported to the U.S Dairy Export Council 111 December 2007 Brazil – International Trade

international authorities that the animals from one farm in Paraná seemed to be positive for FMD. Thus, two states had animals which were suspected of having FMD. It was concluded that the Paraná animals (a herd of 1,800) did not have the disease, and the Paraná state and farmer in question did not kill the animals. However, Brazil could not cancel its communication to the overseas FMD authority, and the animals were eventually killed in mid 2006 (those on the farms in Mato Grosso do Sul had already been slaughtered).

The source of the disease has not been identified, but is thought to be caused by non-domestic animals. Many countries have prohibited imports of beef from these states and some neighboring states such as São Paulo.

There has been a serious effect on beef exports and movement of dairy products within Brazil.

Dairy exports are theoretically permitted from all states which are not adjacent to Paraná or Mato Grosso do Sul, like Goiás (Nestlé, CCL), Minas Gerais (Itambe, Nestlé), Rio Grande do Sul (Eleva), but the final decision of course rests with the importer.

The main result of the scare is that all the countries in southern Latin America are likely to cooperate in eliminating FMD from their own and neighboring countries like Bolivia, which may not have the funds to do so themselves.

Although exporting from Brazil is largely unhampered by bureaucratic complications, Brazil does not have an export culture for dairy products, and the processors and traders have had to establish a tradition for Brazil as a supplier of good-quality dairy in Africa, Arab and Asian countries. This FMD outbreak is therefore damaging this newly-gained reputation for a quality dairy herd and quality dairy products.

Exports are still a very small percentage of the sales of dairy products of most companies. Total exports represent about 4.6% of total dairy production in terms of LME. Terra Viva produces an approximate estimate of exports as a percentage of total production by product.

U.S Dairy Export Council 112 December 2007 Brazil – International Trade

Table 6.6.5 Estimate of Share of Exports as % of Production, 2003 to 2006

2002, mn 2003, mn 2004, mn 2005, mn 2006, mn liters liters liters liters liters Official production LME LME LME LME LME Pasteurized milk 1,480 1,500 1,550 1,700 1,735 UHT milk 4,200 4,225 4,402 4,800 5,012 Milk powder 2,700 2,770 2,870 3,507 3,778 Cheese 3,760 3,830 3,930 4,150 4,230 Yogurt 239 309 378 415 420 SCM 340 417 488 570 590 Other, incl. cream 483 662 885 1,033 1,057 Sub-total official milk 13,202 13,713 14,503 16,175 16,822 EXPORTS Pasteurized milk 0 0 0 0 0 UHT milk 4 2 4 2 2 Milk powder 39 52 195 243 285 Cheese 21 32 64 110 152 Yogurt 7 2 3 2 2 SCM 93 119 126 133 175 Other 17 83 110 122 165 Total 181 290 502 612 781 Pasteurized milk 0.0% 0.0% 0.0% 0.0% 0.0% UHT milk 0.1% 0.0% 0.1% 0.0% 0.0% Milk powder 1.4% 1.9% 6.8% 6.9% 7.5% Cheese 0.6% 0.8% 1.6% 2.7% 3.6% Yogurt 2.9% 0.6% 0.8% 0.5% 0.5% SCM 27.4% 28.5% 25.8% 23.3% 29.7% Other 3.5% 12.5% 12.4% 11.8% 15.6% Total 1.4% 2.1% 3.5% 3.8% 4.6%

Source: Terraviva

6.6.6 New Plants

Several companies have plans to install new capacity to process milk, intending to export a large part of their production.

The most recent milk powder plant to start up is the 1 mn liters per day Itambé plant, which has had difficulty in obtaining enough milk and currently runs at only 600,000 liters/day, increasing to 800,000 U.S Dairy Export Council 113 December 2007 Brazil – International Trade

liters per day in the spring and summer. Itambé believes that in summer 2008, there will be enough milk to operate at full capacity.

Even though DPA (Nestlé) has made several announcements about new milk powder plants (in Rio Grande do Sul and Bahia), they have not yet gone ahead with any new investment. Several of the second-tier companies have plans to install spray driers, but are finding it difficult to obtain financing.

The main investment identified by Niro spray driers is that of CCGL, a cooperative in Rio Grande do Sul which sold its industrial plant to Eleva (Elege) some years ago and now plans to go back into processing. Its ambitious plans include equipment for 1 mn liters per day for milk powder, another 1 mn liters per day for cheese and eventually a third 1 mn liters per day plant for drying whey, etc. The first plant, using very modern technology, will start up in 2008. Coop members are being assisted to increase milk yields per hectare by three-fold to supply the plants.

Other investments are under way, either at the project stage or financing stage:

• Consulato, which is considering a drier to produce casein or caseinates • Embaré, interested in an 800,000 liters per day spray drier for milk, but financing has been difficult • Barbosa & Marques, spray drier for whey • Sooro to dry whey from its whey concentrate plant • Cemil • Marajoara

6.6.7 Quality

Farmers and processors are becoming aware that quality products are produced from quality milk, and processors are starting to pay small premium prices to farms selling milk with lower cell counts and higher fat content. Both Nestlé and Itambé started in mid-2005 to pay a bonus for farm milk with a lower TCC, lower somatic cell count, low temperature storage in the farm tank and higher fat content, with payment per kg of dairy fat.

U.S Dairy Export Council 114 December 2007 Brazil – International Trade

Although most children go to school in Brazil, education is not a priority of either the authorities or the parents. Schools are poorly equipped and neither parents nor teachers are good at motivating their children of the value of learning at school. Many farm workers have not completed more than a few years at school, and they end up badly paid and bringing up their children also with a poor rural education. Trained, educated managers and staff on the farms would have to earn good salaries, and farms generally save money by employing less qualified staff.

6.7 Dairy Exports by Key Product

6.7.1 SMP/WMP

Brazil exported 17,228 tonnes of WMP over the 15 months to March 2007, from a base of just 2,635 tonnes in 2003. This segment’s huge growth was supported by modest increases in sales of other milk powders.

Table 6.7.1a Exports of Milk Powder by Product, 2003 to 2007

2003, 2004, 2005, 2006, Jan to July Product tonnes tonnes tonnes tonnes 2007, tonnes

Full cream milk powder 2,635.1 20,522.1 20,505.0 13,946.0 10,997.6

Skim milk powder 2,801.6 1,745.5 4,128.2 3,493.9 2,254.7

Semi-skim MP 44.3 1,336.3 2,401.9 3,316.5 4,465.3

Sweetened semi-SMP / WMP 61.3 24.5 1,501.2 7.3 69.5

Infant formula, modified MP 4,572.6 8,575.6 7,089.2 9,323.4 3,988.2

Source: SECEX AliceWeb

The main reason for the reduced exports in 2006 was the FMD outbreak at the end of 2005 and the steadily devaluing dollar, which reduced the profitability of exports, and de-motivated companies from making that extra effort to sell overseas.

Countries which increased or maintained imports in 2006 compared to 2005 were Venezuela, where FMD is also a problem, and Cuba.

The main countries importing WMP from Brazil in the 27 months to March 2007 were Algeria, Cuba, Venezuela and Senegal. Algeria and Venezuela are also the largest purchasers of Brazil’s SMP.

U.S Dairy Export Council 115 December 2007 Brazil – International Trade

Table 6.7.1b Brazilian Exports of WMP by Key Destination, 2003 to 2006 Country 2003, tonnes 2004, tonnes 2005, tonnes 2006, tonnes Venezuela 0.0 2,179.1 1,231.0 4,050.0 Cuba 0.0 0.0 3,775.0 3,273.0 Algeria 940.0 4,983.0 5,079.8 1,938.5 Senegal 0.0 1,644.0 2,755.2 567.0 Israel 0.0 1,851.0 912.0 324.0 Syria 225.0 302.6 South Africa 100.0 200.0 1,550.0 300.0 Congo 0.0 350.0 397.0 204.0 Mauritania 0.0 774.0 789.9 191.6 Sierra Leone 191.0 175.0 Nigeria 30.0 347.0 310.3 160.0 Angola 86.4 506.2 171.4 99.2 Gabon 153.0 96.0 Ghana 0.0 106.0 143.0 81.0 Arab Emirates 250.0 16.0 86.0 57.0 Congo Republic 0.0 75.0 236.6 27.0 Chile 625.0 0.0 432.0 0.0 Dominican Republic 0.0 250.0 300.0 0.0 Cameroon 25.0 228.0 190.4 0.0

Source: SECEX Alice Net

Table 6.7.1c Exports of SMP by Key Destination, 2003 to 2006

Country 2003, tonnes 2004, tonnes 2005, tonnes 2006, tonnes Venezuela 955.7 2,264.3 Mexico 0 379.9 Nigeria 0 244.0 Algeria 0.0 400.0 2,212.0 224.0 Dominican 0 100.0 Republic South Africa 0 100.0 Angola 451.4 6.5 31.6 19.2 Jordan 100.0 3.0 South Korea 0.0 994.5 480.0 0 Egypt 0.0 0.0 100.0 0

U.S Dairy Export Council 116 December 2007 Brazil – International Trade

Country 2003, tonnes 2004, tonnes 2005, tonnes 2006, tonnes Mauritania 0.0 0.0 100.0 0 Senegal 43.2 0.00 50.0 0 Iraq 2,325.0 0.0 0 0

Source: SECEX Alice Net Note: Brazil has two customs classifications for SMP: 0402.1010 SMP <5ppm As (arsenic) 0402.1090 SMP, others (either with a higher As concentration or sweetened SMP)

6.7.2 SCM and Evaporated Milk

SCM (retail and food service) has been the major export category for the last few years, and is distinct from the other main categories in that the annual volumes have continued to increase in spite of the revaluation of the Brazilian Real. The main destinations are Angola, Venezuela, U.S., Trinidad and Tunisia.

Evaporated milk is also a growing export product, principally exported to Haiti.

Table 6.7.2a SCM and Evaporated Milk Exports, 2003 to 2007

Jan to 2003, 2004, 2005, 2006, July 2007, Product tonnes tonnes tonnes tonnes tonnes

Sweetened condensed milk 29,806.6 31,297.2 32,537.7 49,046.1 14,174.8

Evaporated milk 0.3 345.3 613.5 3,402.2 1,402.5

Source: SECEX AliceWeb

Table 6.7.2b Exports of SCM by key destination, 2003 to 2006

Country 2003, tonnes 2004, tonnes 2005, tonnes 2006, tonnes Angola 13,257.8 9,427.2 10,726.2 15,097.1 Venezuela 1,719.4 2,706.7 4,395.3 15,006.4 U.S. 4,576.3 4,279.8 4,206.7 3,045.1 Tunisia 401.4 401.3 1,505.1 2,228.1 Trinidad and Tobago 2,650.1 4,454.7 2,627.7 2,087.9 Chile 42.1 556.2 360.5 1,203.5 Peru 162.6 1,118.4 Equatorial Guinea 0.0 255.5 487.7 998.8

U.S Dairy Export Council 117 December 2007 Brazil – International Trade

Country 2003, tonnes 2004, tonnes 2005, tonnes 2006, tonnes Argentina 0.0 512.6 850.9 739.9 Algeria 154.8 636.5 Granada 172.0 76.4 349.8 605.7 Paraguay 976.8 751.7 790.3 598.4 Haiti 268.4 196.8 237.6 561.3 Cuba 316.4 151.7 219.7 553.0 Kuwait 43.7 123.4 506.3 540.6 Lebanon 358.5 653.2 734.5 494.5 Belize 515.2 363.1 559.8 477.9 Honduras 133.8 222.4 211.0 257.1 Bahamas 290.8 146.1 270.9 239.2 Cayman Islands 57.3 133.0 152.1 230.3 Libya 1.8 267.6 267.6 190.7 Mauritius 134.5 2,238.7 134.4 181.1 United Arab Emirates 712.9 515.3 18.4 180.2 Arab Emirate 18.4 180.2 Syria 0 173.2 Bolivia 429.5 642.8 634.3 143.7 Dutch Antilles 87.5 136.5 Gabon 0.0 41.1 274.5 136.2 New Zealand 90.1 129.7 Azerbaijan 72.7 114.7 Surinam 100.7 106.6 Oman 129.8 100.1 Seychelles 172.9 60.4 Cameroon 405.6 385.8 71.5 46.6 Congo 95.2 23.3 South Africa 96.0 20.1 Barbados 190.2 113.1 29.1 19.1 Iran 0.0 57.3 344.0 0 Tanzania 344.2 38.2 38.2 0 Mozambique 300.3 0.0 1.7 0 Morocco 114.7 343.4 0 0 Senegal 324.9 58.3 0 0 Source: SECEX Alice Net

U.S Dairy Export Council 118 December 2007 Brazil – International Trade

Table 6.7.2c Exports of Evaporated Milk by Key Destination, 2003 to 2006

Country 2003, tonnes 2004, tonnes 2005, tonnes 2006, tonnes Haiti 0 2,383.0 Bahamas 116.9 179.3 Cuba 0 171.4 Mauritania 0 134.0 Belize 39.0 116.9 South Africa 0 77.9 Libya 331.2 71.1 Antigua & Barbados 39.0 68.1 St Vincent 39.0 37.0

Source: SECEX Alice Net

6.7.3 Cheese

Cheese exports have grown significantly, primarily with Mozzarella and processed cheese. Mozzarella is the most popular cheese in Brazil—it is produced in rectangular 3 to 4 kg blocks that are hard enough to slice and used in sandwiches, pizzas and Italian cooking. After Brazil applied an import duty of 27% on imported Mozzarella from outside Mercosur, imports decreased and exports grew.

Table 6.7.3a Cheese Exports, 2003 to 2007

Jan to July 2003, 2004, 2005 , 2006, 2007, Product tonnes tonnes tonnes tonnes tonnes Processed cheese, except powder 1,551.0 2,098.6 2,498.6 2,996.5 1,990.2 Uncured mozzarella 389.8 2,411.5 4,944.7 2,391.1 1,140.2 Semi-hard cheese, 36% – 46% moisture 57.8 351.8 875.4 252.8 179.2 Hard cheeses, < 36% moisture 861.7 973.0 1,655.2 896.4 122.2 Other fresh cheeses, incl. requeijão 266.6 427.3 461.2 358.3 216.9 Other cheese 42.8 137.9 540.0 665.3 447.3 Total 3,169.7 6,400.1 10,975.1 7,560.4 4,096.0

Source: SECEX AliceWeb Note: Excludes blue vein cheese and grated cheese as export volumes are minimal.

U.S Dairy Export Council 119 December 2007 Brazil – International Trade

As explained earlier in this section, the 2006 drop was largely due to the FMD outbreak in late 2005 and a devaluing US$.

Processed cheese is exported by both mainly to Argentina, Chile and other countries in Latin America. Most of the Mozzarella exports are going to South Korea and Taiwan.

Hard cheese is exported to the U.S. . Table 6.7.3b Exports of Mozzarella by Key Destination, 2003 to 2006

Country 2003, tonnes 2004, tonnes 2005, tonnes 2006, tonnes South Korea 0.0 1,693.8 3,662.7 1,226.9 Taiwan 125.0 185.9 443.9 486.1 Saudi Arabia 0.0 0.0 24.6 275.2 Chile 250.0 439.8 504.8 144.9 Lebanon 0 50.2 Japan 2.0 47.1 30.9 34.3 U.S. 19.0 29.2 Trinidad and Tobago 0.0 0.0 110.0 22.0 Australia 49.4 0 Dominican Republic 0.0 0.0 44.0 0

Source: SECEX Alice Net

Table 6.7.3c Exports of Processed Cheese by Key Destination, 2003 to 2006

Country 2003, tonnes 2004, tonnes 2005), tonnes 2006, tonnes Argentina 824.7 1,067.5 1,253.9 1,416.2 Chile 258.8 402.6 602.3 707.0 China 0.0 2.5 142.7 229.4 U.S. 0.2 200.1 Paraguay 245.7 290.2 149.5 137.2 Uruguay 86.0 108.2 102.8 114.0 Colombia 0 71.4 Japan 1.4 43.9 Peru 5.3 33.1 78.8 17.3 South Korea 21.9 15.0 Iraq 0.0 109.4 135.4 0

U.S Dairy Export Council 120 December 2007 Brazil – International Trade

Country 2003, tonnes 2004, tonnes 2005), tonnes 2006, tonnes Mexico 119.4 0.0

Source: SECEX Alice Net

6.7.4 Other – Cream and Butter

Some other exports:

• Canned cream to the Philippines and the U.S. • Butter to Yemen, Turkey, Saudi Arabia, Egypt and Georgia • Butteroil to Canada • Fermented milk to Argentina and Uruguay • Caramel toffee spread to the U.S. and the Dominican Republic • Ice cream to Paraguay, Argentina and Peru

Table 6.7.4 Exports of cream, butter, dairy fat, BMP and caramel toffee spread, 2003 to 2007

2003, 2004, 2005 , 2006, Jan to July Product tonnes tonnes tonnes tonnes 2007, tonnes Cream 1,563.2 2,971.9 1,532.2 4,950.0 2,870.7 Butter and dairy spreads 79.8 97.6 1,616.4 1,250.9 1,340.7 Butteroil, other dairy fats 1,576.3 970.3 199.9 294.8 43.4 Buttermilk, fermented milk 2,109.9 2,318.5 1,795.1 1,491.9 1,062.3 Caramel toffee spread 339.5 505.5 402.8 350.6 146.2 Ice cream 446.7 742.2 278.7 213.3 98.8

Source: SECEX Alice Net

Ice cream is now an important import product, with 1,958 tonnes entering Brazil in the first seven months of 2007, mainly from Argentina, France (Haagen Dazs) and the U.S.

U.S Dairy Export Council 121 December 2007 Brazil – Strategic Summary

7.0 STRATEGIC SUMMARY

7.1 Milk Production

• Brazil has a large dairy industry, with milk production of around 25.7 mn tonnes estimated for 2006. This is up 11 mn tonnes from 1990

¾ The only official statistics are based on tax receipts, and as tax avoidance is common, milk production is not known accurately and may well be higher

• Various organizations such as CNA (Confederação da Agricultura e Pecuária do Brasil = National Agricultural Confederations) and the Embrapa federal dairy research company have been involved in determining the 25.7 mn tonne estimate

¾ The OECD, in its Agricultural Outlook to 2014, provides an estimate for 2005 of 24.1 mn tonnes, not significantly different from the above figure

• The growth rate from 1990 to 2006 was 3.7%, and 4.4% from 2000 to 2006, based on Brazilian National Statistics (IBGE)

¾ This data includes a movement from the un-inspected to the inspected sector, from 60 to 65% of total milk from 1994 to 2006 ¾ It is possible that some of the growth comes from a greater move to inspected milk than estimated by IBGE ¾ OECD figures are not significantly different for 1999 to 2003

• The main feed is pasture; forage is supplemented by silage and dry grain concentrates in the winter. Concentrates are fed when other sources of food are not available; supplements or mineral and vitamin concentrates are fed to the high-yielding cows. The majority of cows are not fed significant quantities of concentrates, except in periods of drought • Although definitive numbers on the head count of cows being milked are not known except for the year of the agricultural census in 1995, experts estimate that the number of cows being milked has slowly increased over the last twenty years. Statistics show a sharp decrease in 1996 because the criteria used to count cattle were changed. The new criteria only count the actual number of cows being used to produce milk for sale (excluding those used to produce milk for use in farm). The herds on many farms in Brazil U.S Dairy Export Council 122 December 2007 Brazil – Strategic Summary

are very small compared to other countries; however, there is some consolidation as farms are getting larger and herd sizes are increasing • DPA, the joint venture between Nestlé and Fonterra, is the largest dairy company in Brazil, and has seen its milk supply per farm almost double from 2000 to 2006 • The intensive feeding of dairy cows has not been shown to be consistently profitable in Brazil, and dairy farms operating intensive systems are moving their cows to regions where they can be put out to tropical pasture and fed with fresh forage in the rainy season and corn silage in the drier season. Concentrates are supplied as an emergency measure or if milk prices are very high, justifying the additional cost of the purchased rations

¾ A cost survey by CEPEA, however, shows that for larger farms producing more than 1,000 liters of milk per day, concentrate costs represent 31% of total costs, a larger proportion than for lower-producing farms. Therefore, it seems that scale is enabling larger farms to provide more concentrate feeding • Milk prices in July 2007 were around $US 0.36 per liter, with spot prices were much higher • When planting and harvesting can be mechanized, the preferred use of the land is agricultural crops or sugar cane, not dairying. Dairying is appropriate in hilly areas with good soil so that pasture grows efficiently

Conclusions

• Although Brazil has a large dairy industry, gaining in-depth insight into milk production is not easy owing to the lack of reliable statistics, although growth seems to have been consistently high since at least 1990 • Despite the abundance of what would be considered cheap feed by international standards, the Brazilian dairy industry is pasture- based. Concentrates are fed, but mainly in times of drought or if milk prices are particularly high

¾ One thought is that the reported lack of profitability of dairying based on a higher proportion of concentrate feed is due to a lack of appropriate technology or scale rather than fundamental economics. It should also be noted according to the comment above that larger farms seem to be providing more concentrate U.S Dairy Export Council 123 December 2007 Brazil – Strategic Summary

¾ If larger farms are able to profitably increase concentrate feeding, and as there is a trend for farms to become larger, more concentrate feeding is likely. This may be the driver to what seems a very high growth rate in total milk production since 1990

• The OECD projects milk production to reach 29.6 mn tonnes by 2014. This is a compound annual growth rate of only 2.33% from the OECD’s 2005 estimated production. Researchers believe that this is conservative and that an average annual growth rate of 4% p.a. should be possible

7.2 Domestic Consumption

• In 2007, Brazil has a large population of 190.8 mn and a per capita consumption of 140 kg dairy products per annum. According to official statistics from IBGE, the population is forecast to grow by 1.014% per annum to 196.7 mn in 2010 and 206.9 mn in 2015

¾ Per capita consumption is slightly higher than that in Chile, but below the levels found in Argentina and Uruguay. Interestingly, domestic consumption of dairy products is focused very much on liquid milk, with very low consumption of manufactured products such as cheese and butter

− Reportedly, the traditional Brazilian diet does not incorporate dairy products to the extent of other Latin American countries, being more heavily focused on meat − The trend towards fast food has introduced cooked cheese into the Brazilian diet: cheeseburgers, pizzas and Italian pasta dishes are very popular among the young and are beginning to be important in adult food

• Government social programs such as school feeding programs and contributions to the zero hunger fund for poor people consume around 1 bn liters per of milk every year, a volume that is likely to increase • The OECD projects Brazil’s population to increase by 1.05% CAGR

Conclusions

• The wide discrepancy in wealth distribution in Brazil negatively affects consumption of dairy products

U.S Dairy Export Council 124 December 2007 Brazil – Strategic Summary

• The cultural dependence on meat consumption also holds back dairy product consumption • The local market and consumption levels would be reduced if government welfare programs were scaled back

7.3 International Trade

• Traditionally, Brazil has been a large importer of dairy products. In very recent years, however, exports have grown from a small base, to reach around 109,165 tonnes in 2006, dominated by SCM (49,046 tonnes) and milk powders (20,756 tonnes). In the same period, imports were 116,579 tonnes, dominated by whey products (28,437 tonnes) and milk powders (39,109 tonnes). • Brazil has a mercantilist outlook which may encourage dairy exports and discourage imports

7.4 Projections

Note: An assumption is made that present domestic demand is equal to domestic milk production. Given the near balance in trade, this is a reasonable approximation, even if exports were mainly of milk powder while imports were mainly of whey products.

It is reasonable to estimate an average increase in raw milk production of 3.5% to 4.0% per annum—and some experts predict growth as high as 5% per year—if milk powder prices continue to be high and farmers give priority to producing maximum yields of milk.

However, local consumption is also increasing as a result of the federal and state governments distributing more milk to the poorer parts of the population. In 2007, approximately 1 bn liters per year of pasteurized milk were being distributed in welfare programs.

The figures in this section relate to net trade, as it is believed imports and exports of milk powder and cheese are likely to continue to be significant volumes.

U.S Dairy Export Council 125 December 2007 Brazil – Strategic Summary

Conclusions

• The growth rate reported by the IBGE for total milk production from 1990 to 2006 is high by world standards, but can be explained as follows:

¾ Starting from a very low standard, improvements in the genetics of the dairy cows, and overall feed management provide significant yield increases. This investment has been stimulated by increases in farm gate prices relative to cost of feed ¾ Large and small dairy companies, cooperatives and government organizations have started to offer good technical information in seminars and on the internet ¾ The productivity of the cows is reduced by poor reproduction management which leads to longer than necessary periods between calving, which reduces the percentage of the herd producing milk well below the ideal 82% ¾ Considering the IBGE data for 2005, the average production of milk per cow per year in the seven principal dairy states (MG, GO, SP, PR, RS, SC and BA) is 1,382 liters per milking cow per year, ranging from 2,153 liters per year for Santa Catarina down to 543 liters per year per cow in Bahia state. A well-managed dairy farm should be able to breed cows which would produce a minimum of 9 liters per day during lactation, and be available for milking at least 70% of the time. This would result in an average production of 2,300 liters per cow per year. There is therefore a very significant potential to increase yields with basic management improvements, and an increase of 4 to 5% per year is not impossible ¾ As the base line of average yields is so low, it is predicted that an average increase in raw milk production in the range of 3.5 to 4.0% per annum is achievable • Domestic demand is driven by an increasing population as well as improvements in income distribution, with larger increases in income at the bottom of the salary pyramid than at the top

¾ Population growth is estimated by the IBGE to be a little over 1.014% per annum, with a total population of 187,157,000 on July 1, 2006 ¾ Cepea reports the per capita consumption of dairy products, excluding consumption by animals on the farm and wastage during transportation, increased from 105 kg in 1990 to

U.S Dairy Export Council 126 December 2007 Brazil – Strategic Summary

around 140 kg in 2007, equivalent to 33% in 17 years. The increase in per capita consumption has been around 13.8% in the period of 2000 to 2007. Both these values are consistent with an increase in per capita consumption close to 1.7% per annum ¾ Combining the two factors, we might predict an increase in total country demand for dairy products in tonnes per year at a little over 2.7% per year, but this will be negatively affected by the large increase in retail prices of dairy products in 2007

• Given that the raw milk production increase of 3.5 to 4.0% per annum exceeds the increase of domestic consumption of 2.7 to 3.0% per annum, it is likely that Brazil will develop a significant surplus of milk to manufacture for export in the next five years

¾ An increase in raw milk availability of a minimum of 0.5% per year would result in a surplus that is growing by almost 10,000 tonnes of WMP per annum available to export. If raw milk production grows even faster and these increases are not accompanied by an increase in domestic demand, the annual increase in the surplus could exceed 20,000 tonnes WMP per annum

¾ This is dependent on international prices remaining high

Table 7.4 Scenarios for Brazil’s future milk availability for exports

Additional availability for exports in 2020, LME and Scenario Factors WMP equivalent 1 – Optimistic Production increases by 5% p.a. 12.0 mn litre LME Consumption increases by 3% p.a. 1,501,336 tonnes of WMP 2 – Probable Production increases by 4% p.a. 5.6 mn litres LME Consumption increases by 3% p.a. 703,816 tonnes of WMP 3 – Pessimistic Production increases by 3.5% p.a. 2.7 mn litres LME Consumption increases by 3% p.a. 340,862 tonnes of WMP

Source: iRIS Consulting analysis

U.S Dairy Export Council 127 December 2007 Brazil – Strategic Summary

• Brazil is likely to be a net exporter of dairy products in the future

¾ Owing to poor income distribution, economic growth does not result in increases in consumption across the entire population ¾ The Brazilian diet remains highly focused on meat rather than dairy products ¾ Per capita consumption is likely to remain lower than in Argentina and Uruguay, as Brazil has a much larger proportion of ethnic groups that are not traditional dairy consumers

U.S Dairy Export Council 128 December 2007 Brazil-Appendix I: Milk Production and Delivery Statistics by State

APPENDIX I: MILK PRODUCTION AND DELIVERY STATISTICS BY STATE

Total milk production per state 1990-2005

1995, 1990, mn mn 2000, mn 2002, mn 2004, mn 2005, mn Regions and states liters liters liters liters liters liters PR 1,160 1,577 1,799 1,985 2,395 2,519 SC 650 815 1,003 1,193 1,487 1,556 RS 1,452 1,711 2,102 2,330 2,365 2,468 South 3,262 4,103 4,904 5,508 6,247 6,543

MG 4,291 4,763 5,865 6,177 6,629 6,909 ES 281 363 378 375 406 418 RJ 390 432 469 447 467 465 SP 1,961 1,982 1,861 1,746 1,739 1,744 South East 6,923 7,540 8,573 8,745 9,241 9,536

MS 399 455 427 472 491 499 MT 214 307 423 467 551 596 GO 1,072 1,450 2,194 2,483 2,538 2,649 DF 14 27 36 37 39 35 Central West 1,699 2,239 3,080 3,459 3,619 3,779

MA 127 145 150 195 287 321 PI 58 56 77 75 76 79 CE 294 292 332 341 363 368 RN 107 106 145 158 201 210 PB 153 139 106 118 138 149 PE 313 213 292 388 398 527 AL 149 200 218 225 243 236 SE 100 66 115 112 157 191 BA 744 668 725 752 843 890 North East 2,045 1,885 2,160 2,364 2,706 2,971

U.S Dairy Export Council I December 2007 Brazil-Appendix I: Milk Production and Delivery Statistics by State

1995, 1990, mn mn 2000, mn 2002, mn 2004, mn 2005, mn Regions and states liters liters liters liters liters liters RO 158 202 422 644 646 692 AC 21 30 41 104 109 80 AM 37 49 37 40 43 44 RR - 11 10 8 7 6 PA 231 308 380 582 639 697 AP 2 3 4 3 3 4 TO 106 104 156 186 215 220 North 555 707 1,050 1,567 1,662 1,743

Brazil 14,484 16,474 19,767 21,643 23,475 24,572

Source: IBGE Note: At the time of the fieldwork, 2006 figures were not yet available

Raw milk deliveries to processors by state, 2000-2006

Tonnes

State 2000 2002 2004 2006

Minas Gerais 3,329,695 3,634,385 4,172,142 4,693,154

Rio Grande do Sul 1,556,944 1,569,595 1,663,492 2,252,632

Goiás 1,454,712 1,613,289 1,710,585 2,164,527

São Paulo 2,132,671 2,383,167 2,408,591 2,106,656

Paraná 945,927 1,070,740 1,236,680 1,409,554

Santa Catarina 479,279 554,518 682,761 991,067

Rondonia 384,455 456,783 537,764 580,303

Rio de Janeiro 438,313 382,830 361,315 417,134

Mato Grosso 184,897 244,052 277,966 333,710

Bahia 252,322 223,713 226,323 284,208

Espirito Santo 147,829 200,112 222,846 234,675

U.S Dairy Export Council II December 2007 Brazil-Appendix I: Milk Production and Delivery Statistics by State

Tonnes

State 2000 2002 2004 2006

Para 137,855 181,512 204,118 230,497

Mato Grosso do Sul 174,232 191,286 209,654 220,374

Pernambuco 69,839 94,522 83,642 152,042

Ceará 94,880 86,852 86,323 138,753

Alagoas 89,091 89,312 106,790 103,159

Rio Grande do Norte 74,680 80,300 76,194 77,347

Tocantins 45,080 59,924 77,614 70,956

Sergipe 8,817 19,271 33,140 67,681

Maranhão 22,024 30,634 44,249 44,721

Paraiba 7,978 9,594 34,093 42,642

Piauí 11,342 12,433 15,448 21,378

Distrito Federal 55,574 23,228 11,174 15,679

Acre 8,167 9,228 10,995 10,073

Amazonas 0 0 599 760

Roraima 1,138 27 299 197

Total 12,107,741 13,221,307 14,494,797 16,663,872

Source: IBGE

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Percentage of milk processed by official dairies, by state, 2006

% of total purchased by official dairy % of total milk processors, by produced in Brazil, Region state, 2006 by state, 2005 Minas Gerais Southeast 28.2% 28.1% Rio Grande do Sul South 13.5% 10.0% Goiás Centralwest 13.0% 10.8% São Paulo Southeast 12.6% 7.1% Paraná South 8.5% 10.3% Santa Catarina South 5.9% 6.3% Rondonia Centralwest 3.5% 2.8% Rio de Janeiro Southeast 2.5% 1.9% Mato Grosso Centralwest 2.0% 2.4% Bahia Northeast 1.7% 3.6% Pará North 1.4% 2.8% Espirito Santo Southeast 1.4% 1.7% Mato Grosso do Sul Centralwest 1.3% 2.0% Pernambuco Northeast 0.9% 2.1% Ceará Northeast 0.8% 1.5% Alagoas Northeast 0.6% 1.0% Rio Grande do Norte Northeast 0.5% 0.9% Sergipe Northeast 0.4% 0.8% Tocantins Northeast 0.4% 0.9% Paraiba Northeast 0.3% 0.6% Maranhão Northeast 0.3% 1.3% Piauí Northeast 0.1% 0.3% Distrito Federal Centralwest 0.1% 0.1% Acre Centralwest 0.1% 0.3% Roraima North 0.0% 0.0% Amazonas North 0.0% 0.2%

Source: IBGE – Pesquisa Trimestral do Leite Note: When the percentage of the total Brazilian milk is much higher than the percentage used by registered dairies, this implies that the quantity used by small unregistered cheese producers or on the farms is higher in these states.

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