THE FOOD INDUSTRY IN BRAZIL

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FLANDERS INVESTMENT & TRADE MARKET SURVEY

THE FOOD INDUSTR Y

IN BRAZIL

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Transport Infrastructure, Transportation and Logistics in Romania | december 2016 1

THE FOOD INDUSTRY IN BRAZIL

A key for the Brazilian economy

December 2016

Yves Lapere, Economic & Commercial Attaché FIT- Flanders Investment & Trade

Embaixada da Bélgica

Rua Maria Figueiredo, 595 cj 82 - Paraíso 04002-003 São Paulo - SP

Brazil

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1. Introduction

In this report we aim to give a general sketch of the food industry in Brazil. Both the domestic market and the export market will be discussed. Several facts about the Brazilian food industry are already general knowledge while other elements are still unknown. This analysis has as a goal to fill this gap of knowledge and to give a cohesive overview of the food industry in Brazil.

Besides a general overview, several sectors will be studied in more detail: beef, pork, poultry, milk and dairy, beverages (soda and coffee) and field crops.

The Brazilian economy has evolved dramatically over the past years. First, it was one of the new rising stars in the world economy and member of the BRIC countries and now it is considered one of the ill kids. This message is overly colored and does not stroke with the reality but it should be noted that the Brazilian economy went through some heavy storms. Figure 1 shows the evolution of the Brazilian Real against the Euro. It can be seen that from a relatively strong currency the Brazilian Real devaluated heavily against the Euro in 2014-2015. It seems that this trend is reverting for 2016. This is a good first impression of the turmoil of the Brazilian

economy. Thus, in this report we want to spread a nuanced message about the performance of the Brazilian economy in general and more in detail of the food industry.

Moreover, the importance of the food industry cannot be underestimated for the Brazilian economy as we will elaborate further on in this study. It should not be forgotten that the food industries are a diverse sector which incorporates agriculture, packaging and the preparation of food. The food industry can also be seen as a part of the agribusiness which is a key driver for economic growth in Brazil. Therefore, it is highly relevant and important to study the food industry in Brazil. Moreover, by gaining knowledge on the ins and outs of the food industry, this report can help companies to discover business opportunities in this growing and rapidly market.

Figure 1: Evolution of the Euro against the Brazilian Real¹

1Information available at https://www.ecb.europa.eu/stats/exchange/eurofxref/html/eurofxref-graph-brl.en.html

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2. General information on the economic situation of Brazil

Economic growth in Brazil in the last decade

Figure 2: Growth rate of the gross domestic product of Brazil (1990-2014)

In the last decade the Brazilian economy has been growing significantly (figure 2). Increased capital flows, macroeconomic stability (e.g. stable inflation) and increased demand for some of its important export products (e.g. soybeans and raw sugar) created important impulses for economic growth in Brazil².

As a result of economic growth and policies from the government, poverty reduced significantly in Brazil in the last decade. For example, between 2003 and 2014, 29 million people were able to leave poverty³. Moreover, the middle class has become the dominant group in Brazilian society while in the past this was the lower class. However, it should be noted that there is strong difference in wealth between members of the middle class (e.g. upper class >5310 BRL⁴middle class 1232 BRL < X > 5310 BRL and the lower class < 1232 BRL⁵). Hence, certain people from the middle class can with another classification still be considered poor. However, since the start of the recession in 2014 this trend has reverted and the lower class started to grow again⁶. This increasing middle class had important positive effects on the demand in the domestic market.

Thus, the reduction in poverty was an important factor that contributed to the economic growth of Brazil as it strengthened the internal market. This was especially beneficial for the food industry^7. It should be acknowledged that the increase in domestic demand was also boosted by low interest rates and consequently was partially credit fueled.⁸

2 Information available at https://www.ecb.europa.eu/pub/pdf/other/eb201601_focus01.en.pdf

3 Information available at http://www.worldbank.org/en/country/brazil/overview

4 Brazilian Real

5 Data are in terms of market prices of 2010

6 Information retrieved from ABIA - Associação Brasileira das Indústrias da Alimentação

7 Information available at http://dc.itamaraty.gov.br/imagens-e-textos/Industry05-TheFoodIndustry.pdf

8 Information available at http://www.worldbank.org/en/country/brazil/overview

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Since 2011 prices for important export commodities have dropped. As a result, the growth rate of the GDP slowed down. Moreover, structural problems of the Brazilian economy that were not addressed in the past, surfaced. For example, lack of competition on the Brazilian market, a complicated tax system and a deficient infrastructure (mainly logistics). In addition to this, confidence of the financial markets decreased in emerging markets with high external

imbalances such as Brazil. In a reaction, the Brazilian government increased the interest rate to avoid capital leaving the country. As a consequence, this increased the interest payments on public debt and attributed to an increasing public debt. To summarize, two important factors contributed significantly to the current economic downturn namely the drop in commodity prices and domestic factors which includes the drop domestic demand, rising borrowing costs and unstable monetary policy⁹.

Economic Forecast Brazil

The current political instability in Brazil, makes clear economic forecasts difficult. Especially given the significant effects structural reforms can have on the performance of the Brazilian economy.

Still, the Brazilian government expects the economy to pick up at the end of 2016¹⁰. Increasing business confidence can be an indicator of the recovery of the economy but there are no signals yet that the domestic demand is again growing nor is the unemployment decreasing¹¹. However, the drop in domestic demand is slowing down and the export is supported by the weak

currency.

Despite these economic difficulties in Brazil the food industry remains an important driver for growth and employment. In the next section, a closer look will be given to the economic importance of the food industry for the Brazilian economy.

3. General information food industry Brazil

Importance of the food industry for Brazil

In 2015 the food sector represented 9.5% of the Brazilian GDP. The food industry is composed of two important sectors namely the beverage and the food sector. The food sector generated 562 billion BRL¹² net revenues from which 109.1 billion BRL came from beverages and 452.8 billion BRL from food. In 2004, the food industry only accounted for 9% of the GDP and was

responsible for a net revenue of 404.2 billion BRL¹³. It was responsible for 17% of the added value of the manufacturing sector. In 2014 the food industry already accounted for 22.4% of the added value of the manufacturing sector. In 2015 this number rose to 26.5% of the total value of the manufacturing sector. This illustrates the importance of the Brazilian food industry for the manufacturing sector. However, in 2015, it was the first year since 2004 that the net revenues decreased. The drop in net revenues was more significant for food than for beverages. In

9 Information available at https://www.ecb.europa.eu/pub/pdf/other/eb201601_focus01.en.pdf

10 Information available at http://www.bloomberg.com/news/articles/2016-03-03/brazil-s-economy-shrinks-less-than- forecast-in-fourth-quarter

11 Information available at http://www.keepeek.com/Digital-Asset-Management/oecd/economics/oecd-economic- outlook-volume-2016-issue-1/brazil_eco_outlook-v2016-1-7-en#page2

12 Numbers are in market prices of 2014

13 Retrieved from ABIA - Associação Brasileira das Indústrias da Alimentação

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addition, the growth rate of the output of processed foods also decreased andbecame negative in 2015. Despite the decrease in output and net revenues, the food industry remains important forBrazil and it can be an important driver for economic recovery given its strong performance in the export sector.

Moreover, the food industry employed 8.9 million people (out of 207 million people) in 2015 in Brazil which accounts for 21.6% of all the jobs in the manufacturing sector. In 2014 in total 34.800 companies were active in the food industry from which 93.1% were micro or small companies, 5% are medium sized companies and 1.9% are big companies^14. The distribution of the different types of companies present in the Brazilian market has remained stable over time.

Important sectors within the food industry with regards to the net revenues are the meat sector, coffee, tea and grains, sugar, dairy, oils and fat, wheat and its derivatives and fruit and

vegetables¹⁵. Sugar is still important but is decreasing over time while ready to eat meals and frozen food are increasing strongly. Several of these sectors will be described more in detail further in this paper.

Production of crops and livestock in Brazil

Sugar cane, corn, soybeans, oranges and rice are in terms of volume the five biggest sectors in Brazil when it comes to the production of crops and production of these crops is still growing.

Other important crops that are produced extensively in Brazil are potatoes, tomatoes, wheat, bananas and seeds. However, its production has stagnated or decreased in the past years.

Chicken, beef and pork are key sectors for the Brazilian meat industry¹⁶. Other important products produced in Brazil are powder milk, chocolate, bonbons and candies and fluid milk¹⁷.Top export and import products of the food industry in Brazil.

Important export sectors in terms of value are meat, sugar, soymeal, fats and oils and fruit, vegetables and its byproducts for Brazil. Brazil is the biggest exporter of sugar and orange juice, meat, poultry meat. It is the second biggest exporter in the world of soybeans, soluble coffee and of processed food in general in terms of volume. However, in value Brazil is only the fifth largest exporter of processed foods¹⁸.

The main goods in value from the food industry that are exported towards Belgium are

vegetables and fruits, coffee & tea. These goods are followed by meat, fish and seafood. Exports sectors that show growth are cereals and sugar, lac, gums, resins, vegetables, sap and extracts, fish, edible fruits and fats and oils¹⁹.

The main importers of Brazilian processed food are Argentina, Uruguay, the United States, Indonesia and Paraguay^20. The main products Brazil imports are wheat, salmon (100% from Chile), malt (important market for Belgium), food preparations, frozen fries (important shares for Belgium and the Netherlands), wine, olive oil and inputs for animal feed.

14 Retrieved from ABIA- Associação Brasileira das Indústrias da Alimentação

16 Information available at http://www5.agr.gc.ca/resources/prod/Internet-Internet/MISB-DGSIM/ATS-SEA/PDF/6673- eng.pdf

20 Information available at http://www5.agr.gc.ca/resources/prod/Internet-Internet/MISB-DGSIM/ATS- SEA/PDF/6673- eng.pdf

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The trade balance of the food industry

Almost 80% of the processed food and beverages were sold on the domestic market and 20%

was exported²¹. This industry accounted for 18% of the exports of Brazil in 2015. The agribusiness in total accounted for almost 38% of the total exports of Brazil.

The trade balance of the Brazilian economy tends to be historically positive. This is also the case when only taking the trade balance for processed foods into account. For processed foods, the balance tilts even more in the direction of exports and imports are only marginally important.

However, it would be wrong to assume that foreign companies were not able to participate in this growing market in Brazil. Figure 3²² not only shows the increasing importance of export for the food industry but also an increasing penetration coefficient. These coefficients display the amount of domestic demand that is met by imports and not by local products. It can be observed that while the Brazilian market is mostly served by local producers, the share of foreign producers participating in this market increased in the last 10 years. This indicates that there is room for foreign producers on the Brazilian market. The big multinationals Nestle, Kraft, Unilever, Bunge and Cargill are all present in the Brazilian market²³.

Figure 3: The export and penetration Coefficient for the food industry in Brazil

Source: Euler Hermes²⁴

22 Information available at http://www.eulerhermes.com/mediacenter/news/Lists/NewsDocuments/Industry_Report- Brazil_Food-Jan14.pdf

23 Information available at

http://gain.fas.usda.gov/Recent%20GAIN%20Publications/Exporter%20Guide_Sao%20Paulo%20ATO_Brazil_1-4-2016.pdf

24 Information available at http://www.eulerhermes.com/mediacenter/news/Lists/NewsDocuments/Industry_Report- Brazil_Food-Jan14.pdf

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Trends in the Brazilian food industry

A first important trend in the Brazilian market is the growing importance of processed foods compared to natural products. Illustrative is that in 1980 44% of the food consumption were not-processed foods. In 1990 this number had already decreased to 30% and in 2015 only 20% of the total consumption were natural products. This change towards processed foods can be partially attributed to the increased participation of women in the labor force and the decreasing prices for kitchen equipment like ovens and microwaves²⁵.

Other trends that can be observed in the food market are the rise of certain new niche products.

Diet and light products, traditional processed foods, functional foods, organic foods, ready to drink fruit juices and nutritional foods²⁶. These trends can be linked to the economic

development of Brazil. Moreover, obesity is in on the rise in Brazil. Factors that can explain this fact are urbanization and the associated busy lifestyle²⁷.

Mintel, a market intelligence agency, identified four important trends for the Brazilian food industry²⁸. Firstly, they expect sustainability to become more and more important for the Brazilian public. Consequently, they expect more companies to advertise their product as sustainable and good for the environment. Secondly, health will become a key priority for the average Brazilian but budget concerns will remain present. As a consequence, there is a large public for cheap but healthy options. Thirdly, in line with the cheap but healthy foods, Mintel expects an increasing awareness of the public for the story behind products and its ingredients.

They are searching for authentic claims. Fourthly, similar to other countries, gluten, lactose and meat free products are expected to become popular.

4. Focus sectors

In the next part of the report a closer look will be given to several important subsector of the Brazilian food industry.

Beef

Brazil is the second biggest beef producer in the world after the United States. Brazil had a cattle of 220 million in 2016. Hereby, it has the second largest beef herd in the world after India but it has the largest commercial beef herd. The United States is the biggest beef producer in the world while they only have a herd of 90 million. This indicates that there is a lot of room for productivity improvements for the Brazilian beef sector. Figure 4 gives an overview of the Brazilian beef market in 2014. Around 80% of the produced beef is designated for the domestic market and 20% for export. Brazilian beef production can be divided in 5 big groups, namely

25 Information available at http://www.s-

ge.com/sites/default/files/private_files/BBK_Brazil_%20Food_and_Beverage_Market_Report_May2012.pdf

26 Retrieved from Retrieved from ABIA - Associação Brasileira das Indústrias da Alimentação

27 Information available at http://www.s-

ge.com/sites/default/files/private_files/BBK_Brazil_%20Food_and_Beverage_Market_Report_May2012.pdf

28 Information available at http://www.mintel.com/blog/food-market-news/four-key-food-and-drink-trends-for-brazil- in-2016

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fresh beef, offals, processed, casings and salted. In ton 70% of the total production will be fresh beef, 14% offals and 8% processed food²⁹.

Until 2013 Brazil was the biggest beef exporter in the world. In 2014 this position was taken over by India. The main export markets for Brazil are Hong Kong (21 %), Egypt (14%), Russia (13%), and the European Union (9%)³⁰. An important upcoming market for the beef industry is China. ABIEC, the association of Brazilian beef producers expects China to become the biggest importer of Brazilian beef³¹. This is the result of the decision by the Chinese government to lift a three-year ban of Brazilian beef. Before, beef still found its way to China through the Hong Kong market but in significantly smaller amounts. Moreover, the weak currency of 2015 and lower prices of Brazilian meat created important competitive advantages³². Since June 2016 Brazil has taken over the position of Australia as the main beef exporter to China³³. Important steps also have been taken to stop a ban on beef exports from Brazil to the United States after worries related to the foot and mouth disease. Hereby, Brazil was only allowed to export processed meats to the United States since 2001. From mid-2016 Brazil can export again fresh beef to the United States³⁴. This could lead to an export of 100 000 ton of fresh beef to the United States over a time period over 5 years.³⁵ Further opening of new markets can help to boost the exports of Brazilian beef.

As mentioned before, Brazil has huge potential to increase the productivity of its beef sector.

New grain feed systems and genetics could help to improve the weight of the carcass which is currently lower than in other beef producing countries.³⁶ Also the slaughter rate in Brazil which is around 15 to 20 % is remarkably lower than in other countries like Australia (30 to 35 %) and the United States (35 to 40 %). Other factors hampering the Brazilian beef productivity are inefficiencies in the supply chain, deficient infrastructure and the lower amount of meat that can be subtracted from the carcass³⁷. ABIEC, the association of Brazilian beef exporters indicates that a major hurdle to improve the productivity will be the organization of the production chain³⁸. The Brazilian government also sees increasing the productivity of the beef industry as a way to protect the Amazon.³⁹

29 Information available at http://www.abiec.com.br/download/relatorio-anual-2015.pdf

30 Data for 2015

31 Information available at http://www.brazilianbeef.org.br/noticia.asp?id=1418#.V4fHPfkrLIU

32 Information available at http://www.thecattlesite.com/news/49504/brazils-beef-exports-to-rise-as-china-doubles- volume/

33 Information available at http://www.abc.net.au/news/2016-06-30/brazil-uruguay-beef-overtakes-australia-in- china/7556272

34 Information available at http://www.dhabi-steel.com.br/#!carne-beef/c1m7k

35 Information available at http://www.reuters.com/article/us-usa-usda-meat-imports-idUSKCN0P92EL20150629

36 Information available at https://www.rabobank.co.nz/media-releases/2016/160517-brazil-on-the-rise-south-american- beef-expert-tells-nz-producers/

37 Information available at http://www.brazilianbeef.org.br/noticia.asp?id=1442#.V4fvFfkrLIU

38 Information available at http://www.abiec.com.br/eng/3_pecuaria.asp

39 Information available at http://www.brazilianbeef.org.br/noticia.asp?id=1321#.V4fczPkrLIU

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Figure 4: overview of the Brazilian beef industry in 2014

Poultry

Another important sector in the food industry is poultry. It accounts for roughly 1.5% of the Brazilian GDP and employs around 3.6 million people direct or indirect.⁴⁰ Brazil is the biggest exporter of poultry in the world before the United States and the European Union and it belongs to the top 3 of poultry producing countries together with the United States and China.

Moreover, it is the third biggest domestic market in the world after China and the European Union for poultry.

Chicken production reached its peak in 2011 in term of volume. Hereafter, production decreased but since 2014 this trend is reverted. A similar trend can be observed for the export of poultry in terms of output. However, in terms of revenues a positive trend was already presented in 2013 but revenues decreased significantly in 2015 while the output had increased in the same year.

Lower revenues can be linked to higher production costs due to higher prizes for soybeans and corn⁴¹.

Around 69% of the poultry production is sold on the domestic market and around 31% is exported. The most important regions for the export of poultry for Brazil are the Middle-East and Asia. The Brazilian poultry export industry also benefited from trade restrictions placed on the United States (its main competitor) after a high pathogenic avian influenza (H5N1) outbreak.

For example, China and South Korea placed trade restrictions on the United States. In contrast, Brazil never had a case of HPAI, thus making this is a clear competitive advantage for Brazil. In addition to this, the current weak currency helps to boost Brazilian exports⁴².

http://www.brazilianchicken.com.br/home/nossahistoriahttp://www.brazilianchicken.com.br/home/nossahistoria

41 Information available at http://abpa-

br.com.br/storage/files/versao_final_para_envio_digital_1925a_final_abpa_relatorio_anual_2016_portugues_web1.pdf

42 Information available at http://apps.fas.usda.gov/psdonline/circulars/livestock_poultry.PDF

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Several factors are seen as key elements to explain the success of the broiler meat industry in Brazil. Firstly, the integrated system of production which was implanted in the sixties similar to the American system heavily boosted productivity⁴³. Secondly, the stronger ties that have been created between farmers and plants. As a result, a more dense and cohesive vertical supply came into existence. Thirdly, the behavior of consumers is another factor that attributed to the good performance of the poultry industry. In the past the preferences of people were tilted towards beef but recently this is changing towards chicken. Elements that can explain this shift are the healthier image of chicken, it is quick and easy to prepare and people start to eat more proteins⁴⁴. 42.78 kilo of chicken per person was consumed in 2014. Lastly, the Brazilian climate, the rich soil, the presence of large quantities of land and strong investments in research and technology in the past years also had a positive impact on the performance of the poultry industry⁴⁵.

Pork

Brazil is the fourth biggest producer and exporter of pork in the world. Around 85 % of the production of pork was designated for the internal market and 15 % was exported in 2015. The export of pork is dominated by four big players in the world namely, the United States, the European Union, China and Brazil. Import of pork is marginally small in Brazil. Since 2004 output in the pork industry increased up to 3 488.4 million tons a year in 2012. Output decreased in 2013 but positive growth could be observed in 2014 and 2015. In 2015 a production of 3642 million ton of pork meat was reached, a new record high. On average Brazilians consumed 15.1 kilo of pork in 2015 while in 2007 this was only 13.0 kilo per person on average.

The export of pork in terms of volume has varied between 624 million tons and 505 million tons between 2004 and 2015. The record high was reached in 2005 and the record low in 2014. In 2015, 555 million ton of pork was exported. Variations at the level of volume are rather small

compared to variation in revenues. The highest amount of revenues was reached in 2014 when a revenue of 1606 thousand dollars was reached while only 505 million ton of pork meat was exported. The most important export markets for Brazil are Russia and Asia and more specifically Singapore and Hong Kong⁴⁶. Strong growth in pork exports could be observed towards Russia, Argentina, Chile and China⁴⁷.

In 2016 revenues in the pork industry will be negatively affected by the rise in the price of corn which is an important input for the production of pork as fodder is responsible for almost 70%

of the total production cost. As a result, in the first half of 2016 exports of pork rose significantly to compensate for the higher corn prices and to benefit optimally from the lower exchange rate.

It is expected that this trend will continue in the second part of 2016⁴⁸. A similar trend but less strong could be observed for the poultry industry. As a result, also the domestic price of pork

43 Information available at http://abpa-br.com.br/files/publicacoes/fcc1856de5f036bb47a8a246a0781e26.pdf

44 Information available at http://www.fao.org/AG/againfo/home/events/bangkok2007/docs/part1/brazil_.pdf

45 Information available at http://www.scielo.br/scielo.php?script=sci_arttext&pid=S1516-635X2015000100087

46 Information available at http://abpa-

br.com.br/storage/files/versao_final_para_envio_digital_1925a_final_abpa_relatorio_anual_2016_portugues_web1.pdf

47 Information available at http://www.thepigsite.com/swinenews/42076/2016s-first-half-tough-for-brazilian-pig- poultry-producers/

48 Information available at http://www.thepigsite.com/swinenews/41987/brazils-limited-corn-supply-challenges-poultry- pork-sectors/

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increased in 2016. This could lead to changing consumption pattern in Brazil as it adds up to the effect of the economic crisis. In the past the pork industry benefitted from the increasing beef prices as this led consumers to shift from beef towards pork and chicken.

The common method to measure productivity in the pork industry is pigs per sow per year.

Figure 5 shows the value for pigs per sow per year for the most important pork producing countries. It can be observed that the productivity of Brazil is at the level of Russia but it is substantial lower than the productivity levels of Canada, the United States and the EU. Moreover, countries with a higher level of productivity are also noting higher levels of productivity growth.

Thus, increasing the productivity of its pork sector could be an important driver for growth in the pork industry and it could help to compensate for the higher feed prices. Currently, the lower exchange rate makes the need for structural reforms less urgent but in the future to remain competitive the Brazilian industry needs to make productivity gains.

Figure 5: Pigs per sow, 2008-2013⁴⁹

Milk and Dairy

In the next section, we will discuss the milk and dairy sector another important driver for growth which has been less affected by the crisis than other sectors. Moreover, what makes this sector very interesting is that in the past Brazil was a large importer of milk and dairy products.

However, this trend has reversed over time and Brazil is trying to find its way as an exporter of milk and dairy products. This was only possible due to the opening up of new markets and increasing productivity which was necessary for Brazil to become competitive in this market.

Nowadays, the milk and dairy industry is responsible for 3.6 million direct jobs in Brazil.⁵⁰ In 2014, 25 489 million metric tons of milk was produced, production for 2015 is expected to be around 26 101 million metric tons and 26 623 million metric tons for 2016⁵¹. Interestingly, these

49 Information available at https://www.usitc.gov/publications/332/pork_and_swine_summary_its_11.pdf

50 Information available at http://dc.itamaraty.gov.br/imagens-e-textos/agronegocios-ing12.pdf

51 Data for milk production are often ex-post changed

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numbers only take the official market into account which is the milk that is inspected by the government. Estimates for the production of the informal market lay around 11 199 million metric tons. Roughly speaking one third of the total milk production in Brazil is not under the inspection of the government⁵². This relationship also holds for the estimates for 2015 and 2016, indicating that the growth rate of the formal and the informal market is similar. The milk hub in Brazil is the State of Minas Gerais which produced 26% of the total production and managed to increase its production with almost 15% in 2015.

Despite a decreasing domestic demand due to the economic crisis, the consumption of milk increased by 2% in Brazil in 2015 to a total of 10 982 million metric tons. This positive trend is expected to continue in 2016, a consumption of 11198 million metric tons is expected for 2016.

The increasing consumption of milk was mostly driven by a surge in industrial use⁵³. An important trend in the milk industry is the increasing popularity of lactose free milk. As a result, companies are investing in these technologies. Moreover, to decrease their production costs larger companies are trying to increase their production by acquisitions, mergers and investments in new plants. This trend where larger companies expand their production capacity through joint-ventures and take-overs can also be observed in the dairy sector. As a result, small and medium sized enterprises need to invest more in new technologies and new products to keep their place in this competitive market.

Diverse climate conditions in Brazil can hamper the overall increase in productivity. As a result of the dissimilar climates, different techniques are used within the country. Therefore, technological improvements cannot always be used everywhere in the country. However, this can also be seen as an advantage as it makes the Brazilian market more flexible in case a crisis occurs⁵⁴.

Dairy are all type of products which contain milk or are derivatives from milk. Relevant dairy products in relation to Brazil are butter, cheese, yoghurt and milk powder⁵⁵. The production and consumption of cheese grew by 2% in 2015. A similar observation can be made for milk powder.

Rising production was mostly stimulated by growing exports. Increasing consumer demand was responsible for the rise in consumption. An important trend within the cheese industry of the Brazil is the increasing amount of varieties that are offered to the public. These new products need to fill the desire of the public for European style cheese. This growing nichesector is very important for the smaller producers who are trying to differentiate themselves from the competition by offering higher quality cheeses⁵⁶.

Exports and imports are small for the milk industry in Brazil and mostly takes place with its neighboring countries namely Argentina and Uruguay. Brazil is also a small player on the export

http://gain.fas.usda.gov/Recent%20GAIN%20Publications/Dairy%20and%20Products%20Annual_Brasilia_Brazil_10-20- 2015.pdf

54 Information available at https://adsagsd.wordpress.com/2012/12/14/summary-of-the-dairy-industry-in-brazil/

55 There are no official data from the government for these sectors. Consequently, numbers represent estimates of both the formal and informal market.

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market of cheese. However, new market opportunities in Russia for cheese, butter andmilk powder combined with the increasing productivity of the dairy and milk industry, could lead to increasing export levels in this sector for Brazil. However, in order to do so obstacles toimprove the qualityof the milk need to be overcome⁵⁷. Due to a higher level of production of cheese and the decreasing value of the BRL, imports of cheese are decreasing for Brazil. A similar, trend can be observed for the butter industry.

While cheese and butter are still marginal and insignificant export products for Brazil, export in the dairy sector is mainly driven by the exports of milk powder which was responsible for 76 % of all the export in the dairy industry. However, it should be noted that almost all the export goes to Venezuela making Brazil sensitive for changes in the demand and market situation of Venezuela⁵⁸.

Beverages

Non-alcoholic beverages

In the next section we will focus on the non-alcoholic beverage industry in Brazil and a separate section will be dedicated to coffee. A separate rapport related to the beer industry can be found online on our website.

The sector of non-alcoholic drinks in Brazil generated a net revenue of 109.1 billion⁵⁹ BRL in 2015.

Several trends can be observed in the beverages industry in Brazil. Table 1 shows data from the Brazilian association of soft drink producers and non-alcoholic beverages for the production and consumption of all type of non-alcoholic beverages in Brazil. A strong increase in

production can be observed for almost every sector except for sodas, soya based drinks and concentrated juices. However, the consumption and production of carbonated soft drinks is still very high in Brazil. In 2010 Brazilians consumed on average per person 88.9 liters of soda per year, in 2014 this level dropped to 75.1 liters per year. In contrast in 2014 the average

consumption of water from a Brazilian brand was 59.6 liters per person per year while in 2010 this was only 34.3 liters per year per person. It should be noted that these numbers do not take filtered water from the tap into account. Also in comparison to the rest of the world soda consumption is high in Brazil. Brazilian consumption is close to the top 10 of highest soda consuming countries in the world but still significantly lower than the United States, Chile and Argentina. A survey conducted by Cint also indicates that on average soda is the most consumed beverage for Brazilian before local beers and local juice⁶⁰⁶¹.

The strongest growth can be observed for fruit juices, ready to drink juices and teas. It is expected that due to the economic crisis growth for luxury drinks as energy drinks, isotonic drinks and ready to drink teas will decrease and the growth of cheaper and healthier

57 Information available at https://adsagsd.wordpress.com/2012/12/14/summary-of-the-dairy-industry-in-brazil/

59 In market prices of 2015

60 Information available at http://www.statista.com/statistics/561114/brazil-regular-beverage-consumption/

61 However, other sources cite coffee as the second most popular beverage.

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alternatives like bottled water, juice, fruit drinks and fruit drinks in powder will keep rising⁶²⁶³. In 2013 there was remarkable drop for isotonic drinks but in 2014 the market stabilized at the same output level as in 2012.

The Brazilian beverages industry is mostly dominated by big corporations like Coca-Cola and Inbev (Ambev) but opportunities for smaller and local industries lay in the niche sectors like ready todrink teas and energy drinks⁶⁴. Coca-Cola and Inbev (Ambev) are responsible for 81% of the total output and 90% of the total revenue. Given the strong market presence of these two players, they have the power to control the market and to hamper the entrance of other players⁶⁵ (e.g. several brands on the market and sometimes an excessive amount of brands to avoid competition from other companies in their segment). Moreover, they can resist the economic crisis better. For example, the exclusivity contracts of these companies help to mitigate the effect of the crisis. Therefore, the market opportunities lay in the niche sectors which focus on current trends (e.g. health, sustainability and price-quality).

Another trend which developed in Brazil due to the difficult economic situation is the introduction of family size packages which are put in the market as bigger portions for less money. In addition to this, smaller packages also find their way to the market. These ready to go formats are mostly popular in the big metropolitan areas⁶⁶. The World Cup and the Olympic Games are also import drivers for growth in the beverage industry.

Table 1: Production and Consumption of Brazilian Beverages in 2014⁶⁷ Volume (In

thousand liters)

Growth in volume compared to 2013 (in %)

Consumption per person per year

Ready to drink teas 137,789 9,8 0,7

Water 12.088.245 6,2 59,6

Soya based drinks 273.273 -11,7 1,3

Energy drinks 140,639 9 0,7

Isotonic drinks (sport drinks)

113.700 5,8 0,6

Ready to drink juices (nectars or sumo)⁶⁸

1.306.441 14,9 6,4

Fruit drinks (in powder)

4.993.326 4,8 24,6

Fruit drinks (ready to drink)

503.033 14,9 2,5

62 Data for 2015 was not made available yet by ABIER-Associação Brasileira das Indústrias de Refrigerantes e de Bebidas não Alcoólica

63 Information available at http://www.euromonitor.com/soft-drinks-in-brazil/report

65 Information available at http://afrebras.org.br/setor/bebidas-nao-alcoolicas/

67 Information available at http://abir.org.br/o-setor/dados/

68 The level of juice in juices is higher than in fruit drinks

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Soft drinks 15.350.222 -6,0 75,1

Concentrated juices 669,616 -1,2 3,3

Total of all

Nonalcoholic drinks

36.567.992 4,0 180,3

Coffee

Until 1929 coffee was the main export product of Brazil. It was an important driver for the early economic development of Brazil and it used to be called the green gold. The great depression ended the golden times for the coffee business in Brazil. Moreover, Brazil lost it almost

monopoly of the coffee export market when more new competitors entered the market⁶⁹. Around 50% of the total export of Brazil before 1929 was coffee. During the sixties, more than 60% of the Brazilian export was coffee which made the Brazilian economy very dependent on the world prices and demand for coffee. Nowadays, the importance of the coffee export decreased significantly and it varies around 2% of the total exports⁷⁰.

Currently, Brazil is the largest exporter and producer of coffee in the world and the second largest consumer of coffee⁷¹. The coffee sector employs direct and indirect more than 5 million people⁷². Thus, despite its declining importance in the total exports of Brazil, coffee remains a key sector for the Brazilian economy.

Brazil produces two types of coffee namely Arabica and Robusta. In total 290000 producers realized a total production of 43 million 60 kilogram bags of coffee⁷³. Since 2012 the production of coffee has been decreasing but forecasts expect production to grow again in 2016 mostly due to favorable weather conditions for the Arabica coffee bean⁷⁴. On average 75 % of the

production is Arabica coffee and 25% is Robusta coffee in Brazil. The quality of Arabica coffee is considered superior to Robusta. As a result, the price of Arabica is significantly higher but its productivity is lower. Therefore, Robusta is also commercially interesting as it is more resistant to diseases⁷⁵. Due to its higher prices Arabica is mostly exported while Robusta is used to serve the domestic market. The production of Robusta in the world is increasing. It is expected that by 2020 45% of the total production will be Robusta⁷⁶. The biggest producer of Robusta is Vietnam and Brazil holds the second place.

In 2015 Brazil exported 37.1 million bags of coffee⁷⁷ and was responsible for 30% of the world trade of coffee⁷⁸. Other important exporting countries are Vietnam, Columbia and India. In

69 Information available at http://www.cecafe.com.br/en/about-coffee/the-history-of-coffee/

70 Information available at http://www.morethanshipping.com/worlds-largest-coffee-producer-and-exporter-brazil/

71 Information available at http://www.cecafe.com.br/en/about-coffee/production/

72 Information available at http://www.ecf-coffee.org/about-coffee/coffee-facts

73 Information available at http://www.abic.com.br/publique/cgi/cgilua.exe/sys/start.htm?sid=52

http://gain.fas.usda.gov/Recent%20GAIN%20Publications/Coffee%20Annual_Sao%20Paulo%20ATO_Brazil_5-16-2016.pdf

75 Information available at http://pt.slideshare.net/cafeicultura/caf-arbica-e-robusta-uma-anlise-da-produo-consumo- e-dos-blends-nos-diversos-pases-carlos-brando

76 Information available at http://portal.cocapec.com.br/noticias/o-aumento-da-participacao-do-cafe-robusta-na- producao-mundial/

77 Bags of 60 kilogram coffee

78 Information available at http://www.abic.com.br/publique/cgi/cgilua.exe/sys/start.htm?sid=52

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contrast to declining production of coffee, Brazilian coffee exports have been on the rise except for 2012.

The word used by Brazilians when they refer to breakfast is “café da manhã” which means morning coffee. This little fun fact, gives an indication about the importance of coffee for Brazilian society. As noted before, Brazil is the second biggest consumer market of the world behind the UnitedStates. The consumption of coffee per capita was 6.12 kilogram of green coffee in beans which is equivalent to 81 liters of coffee per year per person while in 1990 this was only 3.39 kilos of greencoffee in beans⁷⁹. In comparison Brazil belongs to the top 10 of countries with the highest level of coffee consumption per capita. Finland with 10 kilogram of green coffee in beans per person stands at the top of the list⁸⁰. The Brazilian Coffee Industry Association⁸¹ (ABIC) expects positive growth for the consumption of the coffee per capita in Brazil despite the crisis and this up worth trend is expected to continue in the following years.

Research from Euromonitor indicates few people believe that the crisis will alter the volume of coffee they consume but is possible people will switch to cheaper brands. People under thirty are the most likely to change their behavioral patterns as they are the group that consumes the most coffee outside of the house⁸².

COFFEE CAPSULES

In the western world coffee capsules have already became an important niche market. In Brazil this market is relatively new but it has a lot of growth potential. In 2014 in only 1% of the Brazilian household’s coffee capsules were being used while coffee is available in 98% of the Brazilian households. However, it is expected that by 2020 this number will climb to 20% despite the economic downturn. The most common method in Brazil to make coffee is by using coffee powder. However, the popularity of coffee capsules is increasing because of their practicality, convenience and their large variety. Hence, coffee capsules are mostly consumed by the higher class in Brazil as often they are willing to pay extra for the reduction in time that can be obtained by using capsules. In total coffee powder accounted for 86.4% of the value of total consumption and capsules were only responsible for 1.7% of the value of the total consumption.

Nonetheless, revenues for capsules increased with 54% in 2014. Capsules are also in line with the gourmet trend that emerged some years ago in Brazil. People are looking for more diversity, higher quality and sometimes more special products. This creates interesting opportunities for foreign producers as often these trends already exist in Europe. The Brazilian Coffee Industry Association (ABIC) expects that revenues for coffee capsules will triple and reach 3 billion BRL by 2019. At the beginning of this new trend, mostly the big players in the coffee market were dominating this segment but since 2015 more and more small players entered the market of coffee capsules⁸³.

79 Information available at http://www.abic.com.br/publique/cgi/cgilua.exe/sys/start.htm?sid=61#expect2015.2

80 Information available at http://www.cecafe.com.br/en/about-coffee/consumption/

81 Associação Brasileira da Indústria de Café

82 Information available at http://www.cecafe.com.br/en/about-coffee/consumption/

83 Information available at http://www.abic.com.br/publique/cgi/cgilua.exe/sys/start.htm?sid=61#segment2015.2

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Field crops

Important field crops for Brazil are wheat, corn, sugarcane and soybeans. Brazil is the largest soybean exporter in the world and the second largest producer of soybean. In addition, Brazil is the second biggest producer of corn in the world and the third biggest producer. In contrast stands the position of Brazil in the wheat industry where it is a relatively small player in the export market.

Wheat

The consumption of wheat has steadily been increasing in Brazil. In 2013-2014 a growth of 4%

could be observed and in 2014-2015 a growth of 5%. This trend is not new in Brazil and emerged together with the growing middle class. Together with the increasing wealth of the public, also their diet changed towards more wheat oriented products and this despite the higher prices⁸⁴. However, rising inflation and the economic crisis have reverted this trend for the time period 2015-2016.⁸⁵

The production of wheat is more volatile than the consumption of wheat as it is heavily affected by the climate and the expected prices. For example, between October 2013-October 2014⁸⁶ wheat production went up 20% because at the time of planting prices were high. However, due to higher than expected production of wheat in the rest of the world, prices were lower than expected in the end. This resulted in a drop of 6% for the time period 2014-2015 to 5 million metric tons of wheat. It is expected that exports will further decrease in 2016 as more producers will switch to more profitable crops like corn and soybeans⁸⁷.

The quality produced by Brazilian producers is lower than that of other producers. As a result, there is a significant import of wheat. Domestic millers do not use 100% of Brazilian wheat but a blend that contains only 30% of locally produced wheat and 70% of imported higher quality wheat. In total Brazil imported 7.3 million metric tons of wheat in 2012-2013. This volume remains steady between 2014-2016. In the past most of the imported wheat came from Argentina but since export restrictions implemented by the Argentinian government, the United States became in 2014-2015 the most important exporter of high quality wheat towards Brazil⁸⁸. However, it lost this position when Argentina entered the market again in 2015⁸⁹.

http://gain.fas.usda.gov/Recent%20GAIN%20Publications/Grain%20and%20Feed%20Annual_Brasilia_Brazil_3-21- 2014.pdf

http://gain.fas.usda.gov/Recent%20GAIN%20Publications/Grain%20and%20Feed%20Update_Brasilia_Brazil_6-17- 2016.pdf

86 Further on when 2013-2014 is used, we refer to the period from October to October.

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Brazil itself exported 1753 million metric tons of lower quality wheat to Africa and the Middle East where it is mostly used for flat bread between October 2012 and 2013⁹⁰. Despite expectations that exports would drastically decrease, exports remained relatively stable. However, numbers for 2015-2016 show a significant decrease in export, a trend that is expected to continue in the upcoming years⁹¹. Major world export countries of wheat are the United States, the European Union, Russia, Canada and Australia.

Corn

The importance of corn for the Brazilian economy has been on the rise especially since the export boom in the last years. Brazil always has been one of the biggest corn producing and consuming countries in the word (i.e. they are the third biggest producer in the world) but recently they also became the second biggest exporter of corn in the world⁹².

In 2015 Brazil produced 85 million metric tons of corn or 8.4 of the total production of corn in the world and the double from what it produced in 2000. One of the elements that contributed to the strong performance of Brazil in the corn industry is the abundance of land. In the past the land that could be used for the cultivation of corn has expanded meaningfully due to the use of new technologies which created the opportunity to also use less fertile soil for the cultivation of corn. Hereby, the before unused land of the center east of Brazil became very important for the harvest of soybeans, corn and cotton. Furthermore, new seeds were developed that were more suitable for low fertile ground in a tropical climate. A second important element that can explain the strong performance of Brazil in the production of essential commodities (e.g. soy, corn, beef, pork and poultry) is the focus of the government in the seventies on self- sufficiency. As a result of this import substitution agriculture developed strongly everywhere in the country. On the down side, these policies gave little incentives to producers to be

competitive with the rest of world. Only with the opening of the markets in the nineties, Brazilian producers started to focus intensively on increasing their productivity. Thirdly, the possibility to use double cropping due to the climate, decreased the productions cost significantly. In most cases corn will be double cropped after soybeans (another possibility is cotton), this results in what they call the little harvest or “safrinha”⁹³.

Recently this little harvest has become more important for the production of corn than the first harvest. This is the result of the increasing area of land that is used for double cropping. In 2015 64% of the total production of corn came from the “safrinha”, in 2005 this was only 22%. First- crop corn is mostly used to serve the domestic market and especially the market of animal feed (corn is an important input for the pork and poultry industry) while the second-crop corn is mostly exported as visualized in figure 6 (information is obtained from the United States department of Agriculture). The harvest time of this second-crop corn (June-September) has important and positive implication on the production and export of corn. In the past there was

http://gain.fas.usda.gov/Recent%20GAIN%20Publications/Grain%20and%20Feed%20Annual_Brasilia_Brazil_3-21-20 http://gain.fas.usda.gov/Recent%20GAIN%20Publications/Grain%20and%20Feed%20Update_Brasilia_Brazil_6-17- 2016.pdf 14.pdf

92 Information available at https://research.rabobank.com/far/en/sectors/grains-oilseeds/Brazil-Harvest-2015-16- Soybean.html

93 Information available at http://www.ers.usda.gov/media/2103048/aes93.pdf

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a trade-off between the export of corn and soybeans due to a lack of capacity and

infrastructure at the Brazilian ports. Given the fact that soybeans are denser and more valuable they were given priority. Due to the harvest time of this second-crop corn, corn can be exported after the peak export season of soybeans⁹⁴. However, there is still room for improvement at the level of logistics which could favor the export of both corn and soybeans⁹⁵.

In addition to this, export quotas for Argentinian producer, drought in the United States and high prices in the world market have created strong incentives for Brazil to increase the export of corn. Brazil has become a strong competitor of the Unites States and Argentina in the corn industry. In the last ten years the average growth rate of the export of corn was 21% for Brazil⁹⁶. However, a sharp decrease in exports can was noted in 2013-2014 and 2014-2015 after a record high was reached in 2012-2013. This drop in exports can mainly be attributed to lower prices on the global market⁹⁷. It is expected that the export of corn will peak to a new record high for the period 2015-2016. Stimulating factors for export are the weak BRL and an increasing world demand for Brazilian corn. The side effect of this boom in corn exports are the higher prices for corn on the domestic market. This has a negative impact on the production cost of feed and results in higher production costs for the meat industry (another important export sector for Brazil)⁹⁸. Therefore, due to pressure on the domestic market, higher imports of corn are expected for 2016.

Figure 6: Production of Corn and Exports in Brazil (2000-2015)⁹⁹

98 Information available at https://research.rabobank.com/far/en/sectors/grains-oilseeds/Brazil-Harvest-2015-16- Soybean.html

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Besides high levels of production and export, the level of consumption of corn is also high in Brazil. Figures from the Unites States department of Agriculture shows that since 2006 production of corn exceeds domestic demand (see figure 7). Demand for corn mostly comes from the feed industry and the demand from the food industry has remain relatively stable over time. The increasing demand and export for meat are important drivers for the growing demand for corn of the feed industry. Increasing wealth of the public can be linked to a higher demand for meat and this results in a higher demand for corn. This compensates the negative effect that higher wealth has on the domestic use of corn in the food industry. Since 2011, the demand for corn by the feed industry has been stagnating, this was partially due to the higher price for corn on the domestic market¹⁰⁰.

Figure 7: consumption of corn in Brazil (2000-2015)¹⁰¹

Soybeans

Brazil is the second largest producer of soybeans in the world after the United Sates. Until 2013 it was also in volume the second most harvested crop in Brazil after sugar canes but in 2014 this position was taken over by corn¹⁰².

Figure 8 represents data from the association of Brazilian soybean producers (Aprosoja Brasil¹⁰³) on the average usage of soybeans in Brazil. On average 44% of the total productionof soybeans is exported, the rest will be processed 49% and 7% will go to the stock. Almost 80% of the soybeans will be converted in bran and the rest will be processed to oil. 52% of the total amount of bran will be exported and the rest will be used to serve the domestic market of animal feed.

The oil obtained from the soybeans is for 77% designated to the domestic market where it is used for cars, cooking… and 23% will be exported¹⁰⁴. These are indicative numbers which can vary over time. For example, when the demand for biodiesel is high, the amount of processed

soybeans can be higher or it can alter the relationship between biodiesel and cooking oil.

102 Information available at http://www5.agr.gc.ca/resources/prod/Internet-Internet/MISB-DGSIM/ATS-SEA/PDF/6673- eng.pdf

103 A Associação dos Produtores de Soja do BRASIL

104 Information available at Information available at http://aprosojabrasil.com.br/2014/sobre-a-soja/uso-da-soja/

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Figure 8: the use of soybeans in Brazil¹⁰⁵

The production of the soybeans is expected to hit a record for the year 2015-2016 with an estimated production of 100 million metric tons which is meaningfully higher than the previous year and the assumption is that this trend will continue¹⁰⁶. Similar to corn, the expansion of otherwise unexploited land that can be used for the production of soybeans is important factor that can explain the success of soybean production in Brazil. Moreover, compared to its main competitors, the direct cost of producing soybean are higher but they can compensate for this by significant lower land costs¹⁰⁷.

Brazil is since 2014-2015 the biggest exporter of soybean seeds when they exported in total 50.612 million metric tons and exports of soybeans are expected to keep growing due to strong

demand from China. As a result, a record of 57.200 million metric tons is projected for 2015- 2106¹⁰⁸. 75% of the total export of soybeans of Brazil goes to China and Spain stands second with 5%.

105 Information available at http://aprosojabrasil.com.br/2014/sobre-a-soja/uso-da-soja/

http://gain.fas.usda.gov/Recent%20GAIN%20Publications/Oilseeds%20and%20Products%20Annual_Brasilia_Brazil_4-1- 2016.pdf

107 Information available at https://www.agritechnica.com/fileadmin/downloads/2015/Programm/Forum_3/F3-13-11- 1400_Balieiro.pdf

108 Information available at http://apps.fas.usda.gov/psdonline/circulars/oilseeds.pdf

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As already noted before, insufficient capacity and logistics in Brazil are important hindrances for the export of soybeans and corn. The two main ports in Brazil, Santos (in the state of Sao Paulo) and Paranagua (in the state of Paraná) have invested in capacity. However, this has not been sufficient and further improvements need to be made in all Brazilian ports so that they are better prepared for increasing exports and the sometimes difficult climate conditions (e.g.

rain)¹⁰⁹. Soybean oils

Around 20% of the processed soybeans are used for the creation of soybean oil which can be used for cooking or as an input for biodiesel. In the year 2013-2014¹¹⁰ 7.76 million metric tons of soybean oil was produced in Brazil. This was a strong increase compared to the previous years but stagnation in this market is forecasted for the upcoming years¹¹¹. Exports, domestic demand and the market for biodiesel have an important impact on the production of soybean oil.

Brazil is the second biggest biodiesel producer in the world after the United States. Soybeans are the main input for biodiesel and they account for 77% of all the inputs used in biodiesel.

Other inputs are animal feeds and cotton seeds. In 2015 3.94 billion liters of biodiesel were produced in Brazil. The full capacity of the industry is even the double of the 2015 production, thus growth in the domestic demand can be met by domestic production. It is expected that the domestic production of biodiesel will grow after the Brazilian government changed the

regulations on how much biodiesel can be blended with diesel. The current target for biodiesel was raised by the government^112.

However, due to the economic crisis forecasts about the consumption of biodiesel and soybean oil in general are uncertain. Together with a decline in exports, a stagnation of the production of soybean oil is forecasted for Brazil despite the higher production of biodiesel^113.

Sugarcane

The sugarcane industry and its derivatives are responsible for 900000 direct jobs and an added value of 2% of the total GDP of the Brazilian economy. Hereby, Brazil is the largest producer of sugar canes and of sugar in the world and the second largest producer of ethanol. Moreover, it is the most important exporter of sugar.¹¹⁴

Similar to the use of soybeans, sugarcane can be used for a wide range of options. Its main derivatives are sugar and ethanol. In 2015 41% is used to produce sugar and the rest 59% is used for the production of ethanol. It is forecasted that this relationship will shift towards more

110 Data are for the October - September marketing year

114 Information available at http://unica.com.br/documentos/documentos/cana-de-acucar/pag=0

THE FOOD INDUSTRY IN BRAZIL

FLANDERS INVESTMENT & TRADE MARKET SURVEY

THE FOOD INDUSTR Y

IN BRAZIL

THE FOOD INDUSTRY IN BRAZIL

A key for the Brazilian economy

TABLE OF CONTENTS

1. Introduction

2. General information on the economic situation of Brazil

Economic growth in Brazil in the last decade

Economic Forecast Brazil

3. General information food industry Brazil

Importance of the food industry for Brazil

Production of crops and livestock in Brazil

The trade balance of the food industry

Trends in the Brazilian food industry

4. Focus sectors

Beef

Poultry

Pork

Milk and Dairy

Beverages

Field crops