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Does Brazil Pose a Threat to the U.S. Pork Industry?
Celso Weydmann and Kenneth Foster
The U.S. agricultural community is familiar with the rise of
Brazil as the chief U.S. competitor in the global soy market,
but it is likely less familiar with Brazilian pork production.
According to U.S. Foreign Agricultural Service (FAS) data, between
1997 and 2002, Brazilian pork production increased by 52 percent,
and Brazilian pork exports increased by 345 percent. Much of the
technical expertise fueling Brazil's rising pork production is
being transferred from North America and Western Europe. These
developments suggest that the Brazilian pork industry might evolve
(similar to soybeans) into a significant rival in the pork export
market.
In recent years, the U.S. has been a net exporter of pork despite
a world pork market that became more competitive as new suppliers
such as Canada and Brazil entered the market. Export markets are
an extremely important activity in the U.S. pork sector because
they have allowed the industry to gain economies of scale without
generating a supply in excess of demand that would otherwise lead
to lower prices. For developing countries like Brazil, pork exports
also have the potential to add value to grain and low cost labor
even though income levels in Brazil currently are insufficient
to sustain a high per capita domestic demand for pork.
In this paper, we examine the current state of the Brazilian
pork industry in order to draw conclusions about the degree to
which Brazil is currently a threat to the U.S. We also identify
the chief constraints that must be overcome in the Brazilian industry
to improve Brazil's competitive position. These constraints serve
as indicators to be watched by decision makers in the U.S as they
determine how to remain competitive in the rapidly changing world
pork market.
Overview of Brazilian Pork Industry
Most of the recent growth in pork exports from Brazil have gone
to Russia. Russia accounted for 57 and 81 percent of Brazilian
pork exports in 2001 and 2002, respectively (source: Brazilian
Association of Pork Processing, Annual Reports). Pork consumption
in Russia has been increasing since 2000, but is still almost
20 percent below consumption levels in 1997. Thus, the Russian
market is likely to continue importing pork from Brazil in the
future, and Russia may be indicative of other potential growth
markets around world such as Eastern Europe, Former Soviet Republics,
Latin America, and Asia, where consumers are more concerned about
price than quality attributes.
Brazilian hog production has traditionally been concentrated
in the Southern part of the country (Figure 1). The three states
in the Southern region (Santa Catarina, Rio Grande do Sul, and
Paraná) all substantially increased their shares of total inventory
during 1990 2002, and Santa Catarina (SC) has maintained the highest
share of the Brazilian hog inventory since 1995. Pork export activity
is also concentrated in Santa Catarina, which accounted for 86
percent of total Brazilian pork exports (by volume) in 2001.
Competitive Strengths in Santa Catarina
Even though corn prices have averaged ten percent or more higher
in Santa Catarina than in other parts of Brazil, the state has
been successful in dominating hog production and pork exports
primarily because it is the only area in Brazil that is considered
free of Foot and Mouth Disease (FMD). Under the WTO, it is possible
for a region within a country to be considered free of disease
and thus eligible to export pork even if other parts of the country
either actively have the disease or are involved in a vaccination
program against it. The disease still constitutes a barrier to
Brazilian exports, however, because the U.S., Japan, and European
Union (EU) refuse to import meat and animals from Brazil as long
as the disease is not completely under control throughout the
country. The states located in the Center West region of Brazil
(states of Distrito Federal, Goiás, Mato Grosso, and Mato Grosso
do Sul) are either FMD infected or considered FMD disease free,
but have active vaccination programs.
Santa Catarina also benefits from its history of pork production,
and the human and physical capital to produce pork, feed, and
pork research are centered in the Southern region. The industry
in Santa Catarina has evolved to one with a high degree of coordination
between farmers and packers that has led to efficiency and quality
improvements (Hennessy & Lawrence, 1999).
Figure 1.
Competitive Weaknesses and Threats in Santa Catarina
Growing concern about the impact of hog production on the environment
constitutes a threat to expanded hog production in Santa Catarina.
Testa et al. (1996) estimated that only 20 percent of the 20,000
hog producers had some control of hog waste management in. Also,
85 percent of streams and rivers in the region are contaminated
by fecal coliform (Takitane & Souza, 2000), and in many counties
there is no new land available to spread manure if the hog inventory
expands (Talamini et al., 1999). The rolling topography also contributes
to the potential for water contamination due to runoff from manure
storage and land that has received a manure application.
An European Commission on Food and Veterinary issues concluded
that Santa Catarina cannot export pork to the EU because it does
not comply with some EU requirements (European Commission, 2002)
such as contingency plans for FMD and CSF (Classical Swine Fever)
outbreaks, system failures in the certification of meat to preclude
the distribution and use of veterinary drugs that are prohibited
in Europe, and the lack of reliable traceability systems.
Potential for Expansion in Other Brazilian States
The price of corn is generally lower in the Center West region,
and those states have large land areas suitable for manure disposal.
The state of Paraná is the largest producer of corn in Brazil,
and is located close to the domestic population centers of São
Paulo and Rio de Janeiro. State governments in the Center West
region also offer incentives to hog farmers, and large operations
that can achieve economies of scale are more feasible than in
the south. Some factors such as low population density, cheap
land price, flat topography, dry weather, and soils deficient
in nitrogen and phosphorus suggests a low cost to comply with
environmental regulation in the Center West as well.
Typically, capital is a limiting resource to the expansion of
intensive pork production in a developing country such as Brazil.
However, because hog production technology and management systems
are extremely transferable, foreign investors have shown interest
in investing in pork production in Brazil. This investment has
waned somewhat with the decline in the Brazilian economy's performance
in the past two years, but is expected to resume when growth resumes
in the economy at large. An important implication of the outside
investment capital is that it will undoubtedly encourage the adoption
of modern production, marketing, and management systems across
the entire industry in Brazil leading to expanded production capacity
in non traditional states.
Comparison of Brazil and the U.S. Pork Industries
Hayes (1998) developed some estimates of farm costs of production
for hogs in various countries. His analysis showed that Brazilian
costs at the farm level were slightly higher than those in the
U.S. and Canada but still among the lowest in the world. However,
the competitive position of different exporting countries cannot
be determined by looking only at farm level costs of production.
An accurate across country assessment requires a focus on the
profit margin of the entire pork sector because slaughter weights
and other product attributes may differ.
Low labor costs benefit the Brazilian industry both at the farm
and the slaughter levels, making profit in the entire pork chain
competitive with that in other major producing countries. However,
Brazilian exports are lower in unit value than U.S. pork exports
due primarily to the status of FMD and CSF in the country and
the inability of Brazil to access higher valued markets. Elimination
of FMD and CSF from Brazil could open higher valued export markets
in the future, leading to greater head to head competition between
Brazil and the U.S. for the high valued markets such as Japan.
Some Drivers of Future Pork Trade
Some Drivers of Future Pork Trade
Brazil and other similar new entrants into pork production do not currently constitute a threat to the U.S. pork industry's export markets. However, there are a variety of scenarios that could unfold in the future to change that assessment. The following paragraphs endeavor to discuss the primary events or factors that could lead to a world market where Brazil would constitute a threat to U.S. pork exports. These factors constitute a "watch list" for producers and exporters in both countries to collect information about and to factor into their strategies.
Animal Health
Japan, Western Europe, and North America comprise the largest
markets for high value pork. These countries also impose very
strict standards concerning the health status of animal herds
in the exporting countries. The EU also bans imports from countries
that cannot certify that meat is free of antibiotics, synthetic
hormones, or other growth promoters. This restriction essentially
prohibits the importation of meat from outside the EU because
no other country is able to comply with that standard. In addition,
these markets are quickly moving toward full traceability of meat
products from the farm of origin to the consumer in an effort
to safeguard human food safety and to certify various quality
attributes about the product and how it was produced. Consequently,
the first indicator that Brazil might begin to penetrate these
markets will likely be the certification, by OIE, that Brazil
is free of FMD and CSF.
Another consideration in assessing Brazil's potential to penetrate
high value pork markets is the length of time that it takes to
eradicate FMD. Haley and Jones (1996) suggested it takes at least
five years from a FMD outbreak before a country can resume trade.
However, they were referring to the Taiwanese case that followed
a stamping out policy rather than a vaccination program like the
one followed in Brazil. The use of a vaccination program would
typically extend the period, but Brazil has several years of its
program already completed. The development of marker vaccines
that would allow the differentiation between vaccinated animals
and those that actively carry FMD or CSF would constitute another
major step toward verifying Brazil's disease free status. Thus,
watching the progress of research in this area will be important
for decision makers who might be affected by Brazil's growth in
the world pork market.
Traceability and Product Quality
The markets in the countries importing high valued pork are
mature in the sense that there is little prospect for large growth
in per capita consumption. Thus, the future expansion in these
markets will tend to be in terms of quality attributes and product
differentiation. Becoming FMD and CSF free could potentially open
the Japanese and U.S. markets to Brazilian pork, but now that
Denmark is able to export meat from animals that have not received
antibiotics, it is possible that the Japanese market will make
this a requirement for all suppliers in the near future.
It is doubtful that Brazil would be in a position to comply with
this requirement for many years. Even with segregated early weaning,
all in all out, and multi site production systems, the vast majority
of U.S. farms still routinely administer low levels of feed grade
antibiotic to hogs. Denmark's relative success with anti biotic
free production hinges on the use of Specific Pathogen Free (SPF)
technology in the breeding stock industry. This is a very costly
technology and one that requires substantial organization within
the industry. The Brazilian industry is still dominated by small
family farms, but the trend in expansion is toward coordinated
large scale production. Brazil is still a number of years away
from being in a position to coordinate SPF technology to the degree
that would allow anti biotic free production.
Growth Markets
A second group of importing countries purchases lower valued
pork for food processing. This group consists mainly of Russia,
Philippines, Korea, Hong Kong, and China, and price rather than
quality is the most important factor that determines the source
of imported meat. The countries in this group are also more willing
to accept meat from countries that are not completely free of
FMD and CSF because they typically already suffer from the diseases
themselves and have no significant meat export potential themselves.
Unlike the first group of countries, this group has substantial
potential to increase total demand for pork. These countries are
typified by relatively low incomes and large populations but with
potential for long term growth in wealth and thus demand for meat.
Consequently, product innovation and differentiation will be less
important to meeting the demand for protein in these countries.
Brazil has already demonstrated that it can penetrate these markets
with its success in Russia. With the current status of FMD and
CSF in Brazil, it is likely that continued expansion into such
markets and its domestic market will be the focus of the Brazilian
pork sector. However, because these markets represent low unit
values, there will be increased incentive as the industry expands
in Brazil to make the improvements necessary to address the needs
of the high value markets. Brazil may find itself in a unique
position in that the Center West region does not have a strong
existing industry. New investment can thus be tailored to fit
the needs of antibiotic free production, and traceability systems
can be implemented from the ground up. This is in contrast to
the U.S., where existing facilities were not designed with these
production and marketing practices in mind and would require substantial
additional investment or incur inefficiencies in order to be implemented.
Consequently, the evolution of governance structure in the pork
industry may be a very good indicator of Brazil's future ability
to switch from low valued markets like Russia to higher valued
markets like Japan. For example, a vertically integrated structure
or one that has a very high degree of coordination between the
producer and the packer would indicate a situation where developing
traceability and certification programs, and eradication of FMD
to meet high value market demands would be easier.
Conclusions
Although Brazilian pork production and exports have been rapidly increasing in recent years, the extent to which they can penetrate import U.S. pork export markets is limited by the existence of Foot and Mouth Disease in Brazil. However, a similar assessment of the Brazilian soybean industry might have been made in the 1970's, and today Brazil is a competitor in the soybean complex. Already low labor and construction costs in Brazil coupled with a reasonably favorable climate give it some competitive potential. Modern pork production and management technologies are extremely mobile, and already large scale production systems that mimic U.S. and Western European technologies are being implemented in Brazil. Thus, the status of Brazilian production bears observation by decision makers in other Western Hemisphere pork exporting countries such as the U.S. Formulating strategies to maintain a competitive advantage over new entrants such as Brazil requires continued focus on production and processing efficiency as well as a renewed focus on product development and differentiation to meet changing demands in high valued pork markets.
References
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Out in Brazil From 4 to 14 March 2002 In Order to Evaluate Animal
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