Modern Beef Production in Brazil and Argentina Carlos Steiger JEL Classifications: Q54, Q13, O13

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2nd Quarter 2006 • 21(2) A publication of the CHOICES American Agricultural The magazine of food, farm, and resource issues Economics Association Modern Beef Production in Brazil and Argentina Carlos Steiger JEL Classifications: Q54, Q13, O13

Perspectives in the demand for meat products look sumer demand will provide new and growing markets for a promising because of increasing incomes around the world variety of meat and dairy products. At the same time, red and changes in consumer preferences favoring meat and meat and poultry meat prices for major exporters will con- dairy products. Within that context, Mercosur countries tinued to be influenced by disease-related trade disrup- seem to be in a good position to take advantage of this tions. favorable scenario. Livestock diseases such as Avian Influenza (AI) (Asia Brazil is a leading player in the beef, poultry, and pork and Europe), foot and mouth disease (FMD) in Brazil and world markets. Focused attention has now been placed on Argentina, and bovine spongiform encephalopathy (BSE) dairy production as well, in order to improve productivity (Europe, North America, and Japan) continue to impact to attain self-sufficiency, or even become a net exporter. global trade and are cause for great concern. Nevertheless Argentina too has been a leading player in the world global meat consumption continues to climb spurring beef market, but has been losing ground because of increased production and growth in exports (Figure 2). domestic policies that favored domestic consumption, and Brazil and Argentina only accounted for 16% of the avoiding inflation, over exports. Argentina has historically global beef trade in 2001, but are forecast to account for been a very minor poultry producer and a net importer, over 35% of that beef trade in 2006. Beef exports from but recently has been able to use favorable exchange rates 2001 to 2005 have increased 25% or 1,280,000 metric to become a net exporter. Dairy continues to be an active tons (Table 1). Brazil’s exports have grown over 1 mmt, as industry with strong exports. The pork sector is neither a result of the fall in United States (US) exports due to the efficient nor large, and remains a minor activity. BSE problem. The goal of this paper is to present an analysis of two In relative terms, Mercosur countries (Brazil, Argen- of South America’s leading livestock economies, Brazil and tina, Uruguay, and Paraguay) have also shown a noticeable Argentina. The analysis will focus on recent trends and increase in market share. In year 2001 these countries rep- future scenarios related to factor endowments, economic resented 19% of world exports, while in year 2005 the policies, and the behavior of the micro economy. share reached 42% of the market.

Trends Brazil Meat consumers have benefited from the increasingly lib- Brazil has expanded its national herd 24% since 1994, eral trade environment and the globalization of meat mar- with consumption per capita rising 13% over the same kets (Figure 1). Within a more free trade environment, the period. The dramatic story though has been the expansion most important variables that will shape the global meat of exports, up over 450% in volume and 385% in value. complex in near term will be positive macroeconomic Brazil is now the world’s leading exporter. This dramatic growth and market disruptions form disease outbreaks change has occurred because of the continued availability (USDA, 2005a,b,c). Macro growth will spur new invest- of natural resources, a favorable exchange rate, and subsi- ments that expand and modernize production, while con- dized credit. The credit program is designed to promote

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2nd Quarter 2006 • 21(2) CHOICES 105 investment in genetics, pasture, machinery, and cold storage capac- 16% ity. Beef Pork 14% Major factors that explain the Poultry All improvement of the productivity of 12% the cattle industry in Brazil were: • Improvement in animal genetics 10% mostly through the use of cross 8% breeding programs in the Center- % traded West region. The adoption rate 6% by beef producers of artificial insemination is about 50% 4% greater than the adoption rate by 2% dairy farmers in Brazil. Cattle- men are using imported bull 0% semen, such as Red Angus,

Angus, Simmental, and Limou- 1961 1963 1965 1967 1969 1971 1973 1975 1977 1979 1981 1983 1985 1987 1989 1991 1993 1995 1997 1999 2001 sin, to cross with the domestic Figure 1. Evolution of global trade of key meat commodities. Nelore breed. Source: Goldsmith, P.D., and Cordier, J. (2006). Managing non-linear risk: Is distance an advantage or a liability? Presented at the workshop Multi-functionality: Implication for Market, Trade, and Environ- • Higher enrollment in the pro- ment. University of Illinois at Urbana-Champaign, March 1-3. gram MODERAGRO, which replaced the program PRO- 45 4.0% PASTO. MODERAGRO Supply Annual change 40 3.5% includes funds for soil erosion Decade ave. and conservation of lands and is 3.0% 35 expected to reach approximately 2.5% 30 US$390 million at a subsidized 2.0% interest rate of 8.5% per year. 25 1.5% (Commercial rates are more than 1.0% 14%.) Each producer may bor- kg/cap 20 0.5% row up to US$50,000. 15 • The Agriculture and Livestock 0.0% 10 Plan expects to allocate US$19.2 -0.5% billion of rural credit, of which 5 -1.0% US$5.1 billion is designated for 0 -1.5% the beef sector.

• The program MODERINFRA 1961 1963 1965 1967 1969 1971 1973 1975 1977 1979 1981 1983 1985 1987 1989 1991 1993 1995 1997 1999 2001 allows producers to build or Figure 2. Global meat supply. rebuild silos and warehouses on Source : FAS/USDA Livestock and Poultry: World Markets and Trade. their farms and can also be used to modernize irrigation. This fund is limited to US$43,000 per (Brazilian Beef Processors and product as natural (grass-fed beef as livestock producer. Exporters Association), an associa- opposed to grain-fed beef), environ- • MODERFROTA is a program tion of the largest beef processors, mental, and healthy. ABEIC has an aimed at the modernization of packers, and exporters. Since 2001, agreement with APEX valued at farm machinery. US$2.4billion ABIEC initiated an aggressive pro- US$1.6million for market promo- has been allocated to this promotion program approved by the tion, 50% of which are APEX funds. gram. National Export Promotion Agency ABIEC targets markets world- Also significant has been the aggres- (APEX) to promote the brand: Bra- wide, but their primary focus is the sive marketing efforts of ABIEC zilian Beef. They emphasize the

106 CHOICES 2nd Quarter 2006 • 21(2) Table 1. Beef exports of selected countries. 2001 2002 2003 2004 2005(p) 2006(f) Brazil 748 881 1,175 1,628 1,800 1,800 Argentina 169 348 386 623 680 720 Australia 1,399 1,366 1,264 1,394 1,470 1,480 India 370 417 439 499 620 675 Canada 575 610 384 559 615 640 New Zealand 496 486 558 606 575 615 Uruguay 145 262 325 410 460 470 European Union 502 485 388 358 250 220 China 60 44 43 61 75 90 Ukraine 98 181 202 108 85 90 United States 1,029 1,110 1,142 209 285 290 Other 81 85 34 43 37 48 Total 5,672 6,275 6,340 6,498 6,952 7,138 Source : FAS/USDA Livestock and Poultry: World Markets and Trade (2001-2004), Annual Issues.

European Union (60% of Brazilian domestic demand as incomes rise. by leveraging its grass-fed production exports.) Other markets include the The average slaughter age has fallen model, it is still vulnerable to supply Middle East, Russia, Asia, Chile, and from 54 months to 38 months of age shocks. The industry is still chal- the United States. as a short-term response to brisk lenged by periodic outbreaks of foot For the last two decades, the cat- demand. If the herd is unable to and mouth disease. The most recent tle industry has moved towards the expand, either due to competition event occurred in October 2005 in Center-West region. It is now home with other crops such as sugar and the Paraguayan border State of Mato to over one-third of Brazil’s herd. But soybeans and the associated higher Grosso do Sul. Only with Brazil recently, cattle production has begun land prices, there will be pressure on achieving FMD free status without to move North because of the expan- domestic inflation because of the vaccination will it be possible for sion of soybean production, which inelasticity of beef demand. exporters to access higher-value mar- has raised land prices in the Center- There is still room for production kets such as the United States. West. Raising cattle in the North is and export growth. For example, the 10% more profitable than in other majority of Brazilian cattle are tradi- Argentina regions in Brazil because of lower tional breeds, with a fraction being Argentinean beef production has land prices. Once timber is har- improved cross-breeds. Despite showed a stable but sometimes erratic vested, there is competition from improved genetics, Brazil produces production pattern. There has been other land uses such as crop produc- predominantly lower-value, slower- export volatility during the 1990s, tion. growing, and less well-muscled grass- the financial crisis of 2001, and an In 2006, production is forecast to fed beef. outbreak of FMD in 2003 and 2006. reach 8.85 million metric tons (mmt) Brazil recognizes the need to not Exports in 2006 are expected to be and surpasses the current record pro- just increase quantity, but also quality up 325% over 2001 levels because of duction of 8.7 million metric tons. of its beef products, especially in spe- a competitive rate of exchange after The increase in production is pulled cialty and niche markets. While Bra- the devaluation of the peso, the from the demand side due to contin- zil is the world leader in beef exports change in sanitary status after the ued expansion of the export market by quantity, Australia is the world’s World Organization for Animal because of BSE outbreaks in North leader in beef exports by value. Aus- Health identified Argentina as a America; aggressive marketing efforts tralia is able to sell into some of the country with an FMD zone without by Brazilian packers; competitive premium markets. vaccination, and the increased export prices due to favorable While Brazil has capitalized on demand in world markets. The early exchange rates; and an increase in the perceived minimize risk on BSE 2006 outbreak of FMD in the prov-

2nd Quarter 2006 • 21(2) CHOICES 107 ince of Corrientes will dampen the industry, which is very optimistic export demand for Argentina. The demand somewhat. about the future. question is how judiciously are farm- There is no accurate stock num- Argentina will also take advan- ers able to expand supply to take ber in Argentina, and most sources tage of the decreases in production in advantage of the current environ- estimate the national herd to be the European Union (EU), which ment? Although Argentine exporters between 50-55 million head. became a net importer of beef in are close to full capacity, there is still Recently, crop production was very 2003. EU beef consumption has room for further export expansion in profitable as a result of the devalua- rebounded from the BSE-induced the future. Investment in the sector, tion, high world grain and oilseed decline. Total beef production in the especially adding capacity, has not prices, and the efficiency of produc- EU though will continue to trend been significant over the last decade, ing and processing Roundup Ready® downward in 2006 to 7.8 mmt. even though there was an important soybeans. Soybean production is up Increases in the beef herd of New flow of foreign investment in the over 400% since 1996, while agricul- Member States (NMS) have not off- Argentine food sector. However, tural land has increased less than 1%. set EU total decreases. exporters can still tap some unused Though farmers shifted much pas- The decoupling of payments capacity and shift some production tureland to crop production, they did under the reform to the CAP (Com- from the local market to exports. not reduce the size of their herds. mon Agricultural Policy) reduced Some companies have been buying Cattle production methods had to cow numbers (and, hence, beef pro- idle processing plants and refitting adjust. Feeder cattle production duction) and caused an increase in them to serve export customers. became more intensive by utilizing prices. Though the NMS are net beef An important change in Argen- higher energy rations. However, cow- exporters, dairy quotas under the tina’s cattle sector in the past couple calf production became less intensive accession agreement have forced the of years has been the utilization of as brood cows were placed on lower culling of dairy cattle and, as a result, corn as feed. Before, alfalfa pastures quality pastures. raised the supply beef. However, any were the most common source of The slaughter in 2006 is pro- increase in beef production in the feed. Many owners are now able to jected to be somewhat lower than the NMS will be short-lived as EU poli- increase their herd sizes as cattle are previous year due to poorer herd effi- cies are likely to increase grain prices placed on more marginal land and in ciency. However, the average carcass and, hence, production costs in the smaller lots are being fed inexpensive weight is expected to increase as a NMS. and highly productive corn. Domes- result of a recent measure imple- The European Union is the larg- tic corn prices were also below world mented by the Argentine Govern- est market in terms of value for prices because of export taxes that ment prohibiting the slaughter of Argentine beef exports. Europeans translated into lower prices at the cattle weighing less than 300 kilos. are importing large volumes of out- farm level. As a result, the feed lot Beef consumption in Argentina is of-quota beef and paying the very industry expanded significantly. Cat- the highest in the world, though high duties on the high-value chilled tle feeders copied the vibrant domes- there has been a steady decrease from cuts. The Russian Federation is the tic dairy industry and incorporated the record levels of the early 1990s largest market in terms of volume. the use of corn silage and corn grain (80 kg/cap) to current levels of 60 Their declining domestic supply, plus into cattle rations. This production kg/cap. Much of the decrease has the European Union’s lack of export technique was especially profitable to simply been due to the lack of buying surpluses has forced the Russians to farmers and ranchers located far from power following the 2001 financial look to South America for its beef. the ports where freight costs per kilo crisis. High world oil prices will generate were reduced and added value could Argentine beef exports in 2006 income for the Russian Federation be added to corn. were forecast to reach 720,000 tons, which will allow it to continue A second recent event in Argen- one of the highest levels in history. importing large volumes of beef. tina has been the use by the govern- An improved sanitary status, the All the factors together (competi- ment of consumers’ inelastic demand opening of new markets, and strong tive exchange rate, improved sanitary for beef as a means to control domes- foreign demand for beef are creating status, new markets open, growing tic inflation and maintain political more opportunities for the local world demand, and FMD outbreak stability. The Argentine government in Brazil) mean a positive shift in has stated that its goal is to provide

108 CHOICES 2nd Quarter 2006 • 21(2) beef at reasonable prices. In 2005, question is whether in the future it Longer term, the Brazilian beef the government implemented mea- will be possible for Brazil to keep the industry faces serious challenges as sures to discourage beef exports in same growth rates. While there is still well as it attempts to develop in the order to increase domestic supply. In plenty of room to increase the indus- Center-West region. The agrarian November 2005, the government try’s productivity and quality, the reform movement calls for very dif- suspended export tax rebates on 200 industry is extremely heterogeneous, ferent land use priorities in the Cer- mostly food products.1 Export uncoordinated, and strategically not rado and drier regions of the Amazon rebates were designed to return to well defined (Zylbersztajn & Pinehro compared to those of commercial exporters 2.7% for beef cuts and 5% Machado). The future portends agriculture. Top priorities include for thermo-processed products. The greater segmentation of meat environmental preservation, land for government raised export taxes on demand towards more sophisticated the landless, and preservation of beef cuts from 5% to 15% (a 200% quality attributes. Therefore, all play- lands held by indigenous peoples. increase). This has dimmed the once ers in the Brazilian beef chain will The impacts are greater competition favorable outlook for beef exports. have to adapt and improve coordina- for land, higher land prices, and tion in order to meet the changing increases in costs of production. The The Future needs of final demand. prevalence of large landowners in the United States beef exports are going There is a good opportunity at Center-West and the high cost of to recover from the BSE incidents present, while prices are high, for land in the traditional eastern agri- and will add another important organizational change in Brazil’s beef cultural regions could generate con- player to the global beef scene. Even and meat system. There is an oppor- ditions potentially conducive to though the US exports are oriented tunity to add value to the beef the social unrest (Matthey, Fabiosa, & to Japan and Korea, and not direct country produces by moving from a Fuller). International organizations competitors with Mercosur, the low cost/low value-only industry to a continue to apply pressure on the added supply will negatively impact more modern industry that competes Brazilian government and corpora- prices. This is less of a concern to at multiple levels. The industry needs tions to limit deforestation in Brazil. Argentina and Brazil beef producers to be able to exploit niche and high- So, in Brazil there is a potential because they have some of the lowest value opportunities, while still being conflict that would prevent the con- costs of production in the world. The a reliable low cost commodity sup- tinued expansion of larger, more real challenge will not come from plier. commercial, operations. Brazil’s sub- greater price competition, but market An immediate challenge is the sidization of small farms may increase access. Brazil and Argentina need to overvaluation of the Brazilian Real. rather than decrease in the coming improve their quality control and Unfavorable exchange rates have years. Such policies give priority to traceability to comply with Europe’s directly reduced the competitiveness social objectives rather than effi- increasingly rigid standards. This will of Brazil’s low value commodity ciency objectives, and as a result require relatively greater investment exporters. Another important issue is could limit the rate of growth of the in the processing sector than for the the need to improve the coordination beef industry. farming sector. Delivering a fully of private firms and government In Argentina, the future of the traceable product though will be a agencies regarding sanitary problems beef and meat sector will heavily challenge for all. such as FMD. Foot and Mouth dis- depend on government policies. Poli- Up until now, Brazil has shown ease not only cuts off key markets, cymakers are torn between serving dramatic increases in production that but causes deleterious fluctuations domestic consumers that have the have allowed the country to keep per for those in the chain with fixed asset highest per capita meat consumption capita consumption constant, while investments. Also, national and pro- in the world and helping the industry still increasing exports. Now the prietary export promotion programs to service growing world-wide are challenged to counter the effects demand. of FMD, while marketing the health- In 2006, for example, the govern- 1. The measure was relaxed in May ful aspects of Brazilian grass-fed beef. ment banned beef exports, reducing 2006 releasing large quantities of The implications with respect to forecasts for the year by 200,000 meat into the marketplace from FMD are the same for both Brazil metric tons. This measure caused a cold storage. and Argentina. decline of about 20% in the price of

2nd Quarter 2006 • 21(2) CHOICES 109 live cattle. Surprisingly, the drop in prices that are well above world ence on Globalization, Produc- producer prices was not fully trans- prices and subsequent dumping, tion, and Competitiveness of ferred to retail prices, thus limiting which drives prices down. This has Livestock Products, Braunsweig, the government’s efforts to fight been historically problematic in low Germany, 19 pages. inflation. The impact on the industry purchasing power countries like Rus- Matthey, H., Fabiosa, J., & Fuller, F. was immediate and very negative. sia, which is both a customer for the (2004). Brazil: The future of mod- More than 8,000 workers in the EU’s excess production as well as ern agriculture? MATRIC (Mid- export processing plants were fired. Mercosur beef. west Agribusiness Trade Research Argentina’s credibility as a reliable The Common Agricultural policy and Information Center) Briefing supplier was damaged as export con- in Europe and agricultural policies in paper, Ames, Iowa. 25 pages. tracts had to be broken. These events Japan are designed in part to slow or United States Department of Agri- were taking place at the same time prevent the continued decline in the culture (USDA). (November the Institute for Argentine Beef Pro- number of farms in these countries. 2005a). Argentine government motion was attending fairs around By retaining small family-owned takes measures to discourage beef the world promoting the Argentine farms, rural economies are strength- exports. GAIN (Global Agricul- brand. ened and certain environmental goals ture Information Network ) The future direction of Argen- are achieved in Europe. However, Report, AR 5035, Washington, tina’s role as a major beef exporter is these policies have the indirect effect D.C. uncertain because of Argentina’s his- of hindering the expansion of the United States Department of Agri- tory of government intervention in large-scale, low-cost farms typically culture (USDA). (August the industry to serve policy objec- found in Mercosur countries. 2005b). Argentina livestock and tives. In the short run, Argentina will The next meeting of the Doha products. GAIN (Global Agricul- not increase its global share of Round of the World Trade Organiza- ture Information Network) exports because the government’s pri- tion is going to discuss those issues Report, AR 5027, Washington, ority is to control inflation. Even regarding the decrease of tariffs and D.C. though the government has allowed other protectionist measures. But United States Department of Agri- the industry to partially resume experience has shown that little culture (USDA). (August 2005c). exports after the decline in live cattle progress has been achieved so far. So Brazil livestock and products. prices, the Argentine image as a reli- there is not much optimism in Mer- GAIN (Global Agriculture Infor- able supplier has been hurt. cosur countries regarding trade liber- mation Network) Report, BR The expansion of Mercosur beef alization in world beef markets. 5622, Washington, D.C. exports would benefit from trade lib- eralization and elimination of farm For More Information Carlos Steiger ([email protected]) is domestic support policies around the Zylbersztajn, D., & Pinheiro an Agricultural Economist and Director of the Agribusiness Program, globe. Support programs are creating Machado, C. (July 2001). Com- as well as Dean of the Business artificially high beef production in petitiveness of meat agrifood chain School, University of Belgrano, Bue- regions like the EU. This causes the in Brazil. Invited paper, Confer- accumulation of meat stocks at target nos Aires, Argentina.

110 CHOICES 2nd Quarter 2006 • 21(2)