Looking ahead in Brazil
Salted butter sold in a supermarket, Ponta Grossa, Paraná, southern Brazil. credit: Simplus Menegati
Brazil’s economy has been either contracting or sluggish for the last decade, but the country’s strong dairy sector hopes this year could be different. With a new president in charge of the most populous South American nation since 1 January, business leaders say exports could revive the industry, even if the local market continues to be in poor shape. Analysts are far from sure that a solid economic recovery is at grasp, with the OECD projecting moderate economic growth of 1.2 per cent for Brazil in 2023.
There has been some optimism prompted by the 77-year-old leftist Luiz Inácio Lula da Silva, who governed between 2003-2010, unseating ultraconservative Jair Bolsonaro in October’s elections for a four-year term, however. Lula has formed a multi-party administration that gathers progressives and moderates. And the dairy sector does have a voice in cabinet, as one of the most powerful ministers is agriculture minister, Carlos Favaro, a senator from the agribusiness rich state of Mato Grosso, in the western-centre of the country. Favaro is widely seen as a friend of the dairy industry.
The sector needs this help. Analysts at the Brazil government agricultural research unit Embrapa (Empresa Brasileira de Pesquisa Agropecuária) think that the country’s milk production shrank by more than four per cent in 2022 because of global constraints such as Russia’s invasion of Ukraine (hindering the availability of animal feed from these two farming giants). China’s economic woes because of its zero-Covid 19 policy also harmed Brazil’s dairy sector, reducing imports because of lower consumption and shifting to suppliers geographically closer, to cut delivery times.
London-based market research company Euromonitor has said Brazil’s dairy products and eggs segment together generated US$21.3 billion in earnings last year, which while substantial was a frustrating figure for the industry whose analysts were expecting more sales. This underwhelming performance was caused by growing production costs – Brazilian inflation was 6.47 per cent in October 2022, for instance, with Brazilian unemployment being 8.1 per cent in November and 2022 GDP growth being weak at an anticipated 2.8 per cent (OECD projections).
Brazil’s dairy industry also saw its milk production fall in 2021 by 500 million litres year-on-year, down seven per cent, forcing milk imports to rise by 21.5 per cent. Domestic production costs have risen sharply. Over the last two years, Embrapa’s index for the cost of milk production ICP/Leite rose a staggering 62 per cent, with the fuel and fertiliser input prices soaring. Producers have been unable to pass on such increases to consumers in fill, so their incomes have fallen, especially in the second half of 2022 – from August’s Brazilian Real BRL3.53 (US$0.67) to BRL2.50 (USD$.48) in December. So, the pressure is on for providing some help for the industry.
Exports and imports
Favaro said in a statement on 17 January that he wants to make it easier for Brazil to export every product of animal origin, including dairy. His intention is to offer companies a single and pre-set process for exportation, which would end inconsistencies, secure sanitary certification and, thus, avoid sales losses. “We are working to broaden our markets, show Brazil’s potential to the world, and that also includes the simplification of internal processes so companies can be ready for this new moment,” the agriculture minister said.
Analysts, such as Natália Grigol, a researcher at Cepea, the Centre for Advanced Studies in Economy at the higher school of agriculture of São Paulo University, agree that is not the most ambitious agenda for companies but see it as a positive first step.
Favaro can count on his president’s support in reopening foreign markets, as Lula is trying hard to appeal to foreign leaders to rebuild bridges broken by Bolsonaro’s tacit and even open support for deforestation in Brazil – a major international concern given the Amazon’s key role in limiting climate change.
Brazil has existing trade deals to export dairy products to China, Argentina, Australia, Myanmar, Egypt and Thailand, but it is not a traditional dairy exporter. An example of the country’s difficulties in that field lies in an agreement to export dairy to Mexico. A high volume of trade was supposed to kick off at the end of 2021, but so far it has barely totalled one tonne due to taxes imposed by the Mexican government.
Gustavo Beduschi, executive director of Brazil’s dairy sector association Viva Lácteos, said during an industry panel in December that Mexico’s import taxes are about 45 per cent, which makes it impossible for Brazilian companies to export.
“We saw that as a great deal. Mexico is a great importer of cheese, powder milk and skimmed milk. Now we need to get to the second stage, and have them reduce those taxes,” said Beduschi. He is also hopeful that China will become a key market for some exporters whose products have a longer shelf-life, but for now, exporters are finding sales a challenge: “We had to learn a lot about trading with China, understanding it is a different regulatory environment, with specifics and special consumer habits.”
Regardless, Beduschi added that Brazilian dairy companies are still focused on expanding their presence in these recently opened markets rather than searching for new ones. He believes a close association with the new government will be important in making these targeted sales happen.
While the agriculture ministry likes to explore new opportunities (and these might emerge in the European Union and the Mercosur bloc, which includes Brazil, finalise a trade deal this year), Beduschi said: “Our vision is that it is more productive to work at the markets we have.”
Too soon to see
Silmara Figueiredo, marketing director at ABIQ, the Brazilian Association of Cheese Industries (Associação Brasileira das Indústrias de Queijo), said it is too soon to say if the new administration will bring better results than the one per cent year-on-year growth in volume during 2022, based on output of 1.3 million tonnes. “We have had a historic high in the price of milk due to scarcity. That brought a price increase in a year of reduction of family income. Cheese remained on people’s grocery lists, but in smaller amounts,” Figueiredo told Dairy Industries International. For the coming year, he said: “We will have a tough year in milk supply, below our demand. But we do hope for some recovery in income and an increase of internal consumption in 2023. The market is bringing some innovation in snacks and fine cheese, which could grow in sales.”
Some Brazilian milk producers are taking note of the strength in demand for this segment, investing in expanding their capacity and adding cheese to their portfolios, including Brazilian milk majors Piracanjuba and Castrolanda. However, consumers are still wary of high prices. Mozzarella cheese still costs more than BRL28 per kilo (US$5.40), which is almost double the price before the Covid-19.
Embrapa researcher Glauco Carvalho said Brazil’s expected high production of grains in 2023 could help the dairy industry this year. The cost of feeding cattle is likely to go down, especially those based on food based on soybeans and corn.
“But this will still be a year of uncertainty,” said Carvalho at a press conference in January. “There’s a new administration, there’s doubts on the fiscal area, which will impact interest and exchange rates.”
Fernando Teodoro Fiori, the CEO of Laticínio Almeida Prado, which makes cheese based on buffalo cow milk, said his company returned to stability in 2022 despite all problems that Brazil’s economy faced, including an increase in costs. He added that this year began with more turbulence, which “took the place of confidence,” but he is more worried about the market itself than the government’s outlook.
“I don’t see any significant change in the tax and operational side for now. What creates some concern is the behaviour of customers, since there is a tendency of reducing consumption in uncertain scenarios,” said Fiori, who added the whole industry needs credit to invest and boost growth. “Unfortunately, in Brazil, access to credit is very complex and expensive, but it is necessary for more than 90 per cent of [all] companies in our country.”
“The market also suffers from a lack of skilled labour,” added the CEO. “If the government focuses on technical education, reducing the tax burden and releasing resources for agriculture with competitive rates, the sector’s situation will improve significantly.”
Another issue for Brazil’s dairy industry will be legislation from the country’s new congress (parliament). At the end of 2022, lawmakers started a debate on dairy products modified with non-traditional ingredients, which have taken some market share from conventional dairy. Many consumers have confused their traditional products with cheaper ones that add milk whey and/or vegetable fats, for example. Current legislation said those modified products should comprise at least 51 per cent standard dairy ingredients and add a clear label naming all the ingredients it contains. Industry lobbyists are suggesting products sold as dairy should have a higher proportion of dairy ingredients, by law.
If they succeed, it will be a sign that the dairy sector’s influence on the new government is solid, which could help it navigate the current unstable economic backdrop.