U.S. Approves Six Brazilian Pork Plants: What is the Trade Impact?
Published: Jan 19, 2012
Recently the United States recognized the Brazilian state of Santa Catarina as foot-and-mouth disease (FMD) free. This is a decision that was not without controversy – primarily because FMD is always an extremely sensitive trade issue, but also because it was part of a settlement stemming from a WTO case on cotton subsidies that went against the United States.
While the decision applies to both pork and beef, it should be noted that Santa Catarina is primarily a pork-producing region with little capacity for raising or processing beef. In fact, Santa Catarina and two other southern states - Rio Grande do Sul and Parana - account for more than 60 percent of Brazil’s total pork production. Not surprisingly, the first plants to be approved under the new FMD-free status are all pork plants: one Brazil Foods plant, two Seara plants, two Cooperative Central Oeste plants and Sul Valle Alimentos. Brazil Foods is the country’s largest pork producer and pork exporter while Marfrig, which owns Seara, holds the second-largest export market share.
The direct impact of Brazilian pork entering the U.S. market is not likely to be significant primarily because Brazil is likely to find it difficult to displace Canada, the largest source of pork imports today. According to Global Trade Atlas data through November, the United States had nearly a five-to-one pork export/import ratio in terms of value ($5.526 billion to $1.208 billion) and a six-to-one ratio in terms of volume (2.04 million metric tons to 335,119 metric tons). Canada is by far the largest supplier of pork to the United States, with chilled/frozen imports through November totaling 221,665 metric tons - down 10 percent from the same period in 2010. This consisted mostly of chilled cuts, with unit values of $3.80/kg for chilled bellies and $3.46/kg for chilled spare ribs. U.S. imports from the second-largest supplier, Denmark, totaled 27,820 metric tons of frozen pork- down 4 percent from a year ago, though the average per-unit value was up 8 percent to $4.53/kg. Imports from Mexico were up 29 percent but still totaled only 4,176 metric tons at an average unit value of $3.78/kg.
Brazil’s ability to expand pork exports to the United States, and to the rest of the world, will largely depend on the competitiveness of its industry. Brazilian pork producers were challenged by relatively high feed costs and a strong currency during 2011. Drought conditions are currently impacting crops in South America, with USDA lowering Argentina’s corn production estimate by 3 million metric tons and Brazil’s soybean production by 1 million metric tons. This could mean high feed prices for Brazilian producers again this year. (More than seventy percent of Brazil’s corn is utilized for feed, with poultry accounting for the largest share, followed by pork.) On the other hand, the Brazilian real has devalued by around 13 percent since last summer, which will be supportive of exports. But Brazil’s GDP growth is also expected to be a solid 3.5 percent this year, indicating continued strong domestic demand.
Actual cost-of-production data can be difficult to come by, but a recent study commissioned by Saskatchewan Pork found that in 2010 the total cost of production in Canada was about $1.54/kg, compared to $1.43 for both the United States and Brazil. The European Union’s average cost was about $2.12/kg, with France reporting the region’s lowest cost at $1.86/kg. Southern Brazil had the lowest costs of any region in the survey, but not by a wide margin. Costs for that region came in at about $1.38/kg. Data for January-October 2011 indicate pork production costs in Santa Catarina averaged about $1.47/kg, slightly higher than corresponding costs of production in the United States.
“Brazil – and especially southern Brazil - competes well in terms of cost, and duties on imports of pork to the U.S. are zero for all countries,” said USMEF Economist Erin Borror. “But Brazil may still have a difficult time competing with Canada and Mexico due to those countries’ proximity to the U.S. market and their ability to supply chilled product. Any inroads that Brazil makes in the U.S. market are likely to be the result of seasonal or structural shortages of specific cuts that push prices up to levels that permit Brazil to compete with product from the U.S., Canada or Mexico.”
The biggest impact of the U.S. decision to recognize Santa Catarina as FMD-free may in fact come further down the road, if Brazil can parlay it into expanded access to markets such as Japan, South Korea and Mexico.
“The Brazilian pork industry definitely views the U.S. decision as an important tool for gaining access to Korea and Japan,” said Jessica Julca, USMEF-South America manager. “Brazil has been reaching out to these countries, but with little response.”
Japan, Korea and Mexico are all extremely important export markets for the U.S. pork industry, so the potential entry of a new competitor is something that bears watching. On the other hand, there is no guarantee that the U.S. decision will have any influence on regulatory officials in these countries. Brazil had similar hopes when the European Union took a regionalized approach on its FMD status, but that decision didn’t open any new doors to Brazilian beef or pork.
While often characterized as a looming export powerhouse, Brazil’s pork exports have been essentially flat over the past several years. Its 2011 exports were down 4 percent in volume to 509,145 metric tons, but up 7 percent in value to about $1.4 billion. Russia, Hong Kong and the Ukraine are Brazil’s three largest markets, with most other key destinations located in South America and Africa. Other than the Hong Kong/China region, Singapore is Brazil’s only significant Asian market. Production has grown by an average of 3 percent annually over the past eight years, bolstered by a corresponding increase in domestic demand. Still, Brazil’s annual per capita pork consumption is relatively low at just 13 kg, compared to 48 kg for poultry and 38 kg for beef. In domestic marketing campaigns, Brazil is working to encourage consumption of fresh pork as processed pork products are the most commonly consumed. So while Brazil’s pork industry is certain to continue to push for broader global access, domestic consumption may offer the best potential for significant continued growth.
“While the recognition of Santa Catarina as FMD-free and the subsequent decisions to approve selected pork plants are not likely to cause a ‘wall of pork’ to enter the United States, the full impact on global pork trade won’t be known until we have a better idea of how officials in other key markets will react,” said Borror. “It will be very important to keep an eye on Brazil’s domestic demand and the degree to which this impacts its export capacity, as well as other factors such as feed prices and exchange rates.”
While the decision applies to both pork and beef, it should be noted that Santa Catarina is primarily a pork-producing region with little capacity for raising or processing beef. In fact, Santa Catarina and two other southern states - Rio Grande do Sul and Parana - account for more than 60 percent of Brazil’s total pork production. Not surprisingly, the first plants to be approved under the new FMD-free status are all pork plants: one Brazil Foods plant, two Seara plants, two Cooperative Central Oeste plants and Sul Valle Alimentos. Brazil Foods is the country’s largest pork producer and pork exporter while Marfrig, which owns Seara, holds the second-largest export market share.
The direct impact of Brazilian pork entering the U.S. market is not likely to be significant primarily because Brazil is likely to find it difficult to displace Canada, the largest source of pork imports today. According to Global Trade Atlas data through November, the United States had nearly a five-to-one pork export/import ratio in terms of value ($5.526 billion to $1.208 billion) and a six-to-one ratio in terms of volume (2.04 million metric tons to 335,119 metric tons). Canada is by far the largest supplier of pork to the United States, with chilled/frozen imports through November totaling 221,665 metric tons - down 10 percent from the same period in 2010. This consisted mostly of chilled cuts, with unit values of $3.80/kg for chilled bellies and $3.46/kg for chilled spare ribs. U.S. imports from the second-largest supplier, Denmark, totaled 27,820 metric tons of frozen pork- down 4 percent from a year ago, though the average per-unit value was up 8 percent to $4.53/kg. Imports from Mexico were up 29 percent but still totaled only 4,176 metric tons at an average unit value of $3.78/kg.
Brazil’s ability to expand pork exports to the United States, and to the rest of the world, will largely depend on the competitiveness of its industry. Brazilian pork producers were challenged by relatively high feed costs and a strong currency during 2011. Drought conditions are currently impacting crops in South America, with USDA lowering Argentina’s corn production estimate by 3 million metric tons and Brazil’s soybean production by 1 million metric tons. This could mean high feed prices for Brazilian producers again this year. (More than seventy percent of Brazil’s corn is utilized for feed, with poultry accounting for the largest share, followed by pork.) On the other hand, the Brazilian real has devalued by around 13 percent since last summer, which will be supportive of exports. But Brazil’s GDP growth is also expected to be a solid 3.5 percent this year, indicating continued strong domestic demand.
Actual cost-of-production data can be difficult to come by, but a recent study commissioned by Saskatchewan Pork found that in 2010 the total cost of production in Canada was about $1.54/kg, compared to $1.43 for both the United States and Brazil. The European Union’s average cost was about $2.12/kg, with France reporting the region’s lowest cost at $1.86/kg. Southern Brazil had the lowest costs of any region in the survey, but not by a wide margin. Costs for that region came in at about $1.38/kg. Data for January-October 2011 indicate pork production costs in Santa Catarina averaged about $1.47/kg, slightly higher than corresponding costs of production in the United States.
“Brazil – and especially southern Brazil - competes well in terms of cost, and duties on imports of pork to the U.S. are zero for all countries,” said USMEF Economist Erin Borror. “But Brazil may still have a difficult time competing with Canada and Mexico due to those countries’ proximity to the U.S. market and their ability to supply chilled product. Any inroads that Brazil makes in the U.S. market are likely to be the result of seasonal or structural shortages of specific cuts that push prices up to levels that permit Brazil to compete with product from the U.S., Canada or Mexico.”
The biggest impact of the U.S. decision to recognize Santa Catarina as FMD-free may in fact come further down the road, if Brazil can parlay it into expanded access to markets such as Japan, South Korea and Mexico.
“The Brazilian pork industry definitely views the U.S. decision as an important tool for gaining access to Korea and Japan,” said Jessica Julca, USMEF-South America manager. “Brazil has been reaching out to these countries, but with little response.”
Japan, Korea and Mexico are all extremely important export markets for the U.S. pork industry, so the potential entry of a new competitor is something that bears watching. On the other hand, there is no guarantee that the U.S. decision will have any influence on regulatory officials in these countries. Brazil had similar hopes when the European Union took a regionalized approach on its FMD status, but that decision didn’t open any new doors to Brazilian beef or pork.
While often characterized as a looming export powerhouse, Brazil’s pork exports have been essentially flat over the past several years. Its 2011 exports were down 4 percent in volume to 509,145 metric tons, but up 7 percent in value to about $1.4 billion. Russia, Hong Kong and the Ukraine are Brazil’s three largest markets, with most other key destinations located in South America and Africa. Other than the Hong Kong/China region, Singapore is Brazil’s only significant Asian market. Production has grown by an average of 3 percent annually over the past eight years, bolstered by a corresponding increase in domestic demand. Still, Brazil’s annual per capita pork consumption is relatively low at just 13 kg, compared to 48 kg for poultry and 38 kg for beef. In domestic marketing campaigns, Brazil is working to encourage consumption of fresh pork as processed pork products are the most commonly consumed. So while Brazil’s pork industry is certain to continue to push for broader global access, domestic consumption may offer the best potential for significant continued growth.
“While the recognition of Santa Catarina as FMD-free and the subsequent decisions to approve selected pork plants are not likely to cause a ‘wall of pork’ to enter the United States, the full impact on global pork trade won’t be known until we have a better idea of how officials in other key markets will react,” said Borror. “It will be very important to keep an eye on Brazil’s domestic demand and the degree to which this impacts its export capacity, as well as other factors such as feed prices and exchange rates.”