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).

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 (Euro-pean 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.

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* Brazil’s highest corn prices over the past six years in Brazil occurred in Santa Catarina ($2.71 per bushel). Source: CONAB, Brasilia.

** Vaccination programs typically preclude export because it is not possible to distinguish between an animal that is

an active carrier of FMD and one that has been vaccinated.

 

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

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 process-ing. 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.

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*** Governance structure in this context refers to the way in which successive stages of the production and marketing channel are coordinated. Different governance structures that have been observed in the pork industry include but may not be limited to: open markets, vertically integrated corporations or cooperatives, and contracts between private entities at points of product transfer.

References

European Commission. 2002. Final Report of a Mission Carried Out in Brazil From 4 to 14 March 2002 In Order to Evaluate Animal and Public Health Controls Over The Production Of Fresh Pig meat. Health & Consumer Protection Directorate-General. DG (SANCO)/8529/2002-MR. (http://europa.eu.int/comm/food/fs/inspections/vi/reports/brazil/index_en.html). Accessed in August 2002.

FAS (Foreign Agricultural Service) 1997. Foot-and-Mouth Disease Spreads Chaos in Pork Markets. United States Department of Agriculture, FAS, Livestock and Poultry, World Markets and Trade. October. (http://www.fas.usda.gov/dlp2/circular/1997/

97-10LP/taiwanfmd.htm ) Accessed in August 2002.

Haley, M. & Jones, L. 1996. The U.S. as a Key Player in Pork Export Markets. Agricultural Outlook, Economic Research Service, United States Department of Agriculture. December. (http://www.ers.usda.gov/ publications/agoutlook/dec1996/ao236c1.pdf). Accessed in July 2002.

Hayes, D.J. 1998. Opportunities for Iowa Hog Producers. AGDM Newsletter Article. February, 1998. (http://www.extension. iastate.edu/agdm/articles/hayes/HayFeb98.htm)

Hennessy, D & Lawrence, J. 1999. Contractual Relations, Control, and Quality in the Hog Sector. Review of Agricultural Economics, volume 21, number 1, pages-52-67. (http://www.ingenta.com/journals/browse/bpl/raec)

Takitane, C & Souza, M. 2000. Produção de Suínos no Brasil: Impactos Ambientais e Sustentabilidade. Anais do XXXVIII Congresso Brasileiro de Economia e Sociologia Rural, Rio de Janeiro, agosto.

Talamini, D.; Santos Filho, J. & Canever, M. 1999. O Complexo de Grãos – Carne e sua Dinâmica no Brasil. Anais do XXXVII Congresso Brasileiro de Economia e Sociologia Rural, Foz do Iguaçu, agosto.

Testa, V; Nada, R; Mior, L; Baldissera, I & Cortina, N. 1996. O Desenvolvimento Sustentável do Oeste Catarinense (Proposta para Discussão). Florianopolis, Centro de Pesquisa para Pequenas Propriedades, Empresa de Pesquisa Agropecuária e Extensão Rural de Santa Catarina (EPAGRI).