Only the US and the EU(27) are bigger exporters of agricultural goods

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1 Fórum de Agronegócios Alemanha-Brasil An overview of Brazilian agribusiness Andy Duff, Head of Food & Agribusiness Research, Rabobank Brazil 27 August 2011

2 Brazil is already a global agriculture superpower Only the US and the EU(27) are bigger exporters of agricultural goods Brazil: ranking in global agri production & exports (2011) Brazil: agriculture exports [Billion USD] World ranking, production World ranking, exports Exp. Value (USD bln 2011) Soybeans Soybean meal Soybean oil Sugar Ethanol Coffee 95 Sugar 1 st 1 st 14.9 Coffee 1 st 1 st 8.7 Beef Poultry Pork Orange juice Others FCOJ 1 st 1 st Ethanol 2 nd 2 nd 1.2 Beef 2 nd 2 nd Soybeans 2 nd 2 nd Poultry 3 rd 1 st 8.2 Soy Oil 4 th 2 nd Source: MAPA, USDA 2

3 Volumes and prices have been growing Brazil: trend annual exports value growth, [% per year] Price growth Volume growth Soybean complex Beef Poultry Sugar Ethanol Cotton Coffee Orange Juice Source: MAPA 3

4 Where is the demand coming from? Brazil: destination of agricultural exports [Billion USD] Emerging markets account for an increasing share of Brazil s agricultural exports, from 36% in 2002 to Advanced economies Emerging markets 95 58% in Brazil s agricultural exports to emerging markets 65 suffered far less as a result of the global economic 58 slowdown in 2009 than exports to advanced economies With growth in 2012 and beyond expected to be robust in emerging markets, the outlook for Brazil s agricultural exports is promising Source: MAPA, USDA 4

5 An overview of Brazilian agribusiness How did Brazilian agribusiness achieve this? What are the opportunities and threats in the future? 5

6 An overview of Brazilian agribusiness The strengths of Brazilian agribusiness 6

7 Climate, soil & topography are all favourable Brazil: rainfall distribution [mm/year] Soil Soils with low natural fertility, but with good structure Fertility management allow high yields Climate & rainfall Most agricultural production regions have rainfall between 1,200 and 2,200 mm/year Mild winters allow production year-around, securing second cropping in most regions Topography Landscape is favorable to mechanization in most agricultural regions ,250-1,350 2,150-2,250 2,750-2,850 Source: Rabobank 7

8 Average farm size is large in key regions Brazil: average farm size by activity [hectares] Northeast Center-West Annual crops Permanent crops Pasture South-East Annual crops Permanent crops Pasture South Annual crops Permanent crops Pasture Annual crops Permanent crops Pasture Source: IBGE Censo Agropecuário

9 Regional characteristics Brazil: regional agriculture characteristics 1. MAPITOBA region includes Maranhão, Piauí, Tocantins and Bahia states Climate -Hot and humid summer and dry winter Crops -21% of cattle herd -2% of soybean production Restrictions on agricultural development, poor logistics Climate North -Hot and humid summer with dry winter Crops -46% of soybean production -60% of cotton production -30% of cattle herd Climate -Hot and humid summer with cold and humid winter Crops Center-West Large farms, soils inherently poor but responsive to fertilizers, logistics poor South -41% of corn production ; 37% of soybean production (2 crops per year -> summer soy + winter wheat or corn) Traditional agriculture region, small farms, strong co-op culture Climate Climate -Hot and humid summer and dry winter Crops Northeast -36% of cotton production -8% of soybean production Considerable scope for growth in MAPITOBA¹ region, which has favourable logistics and medium/large farm scale -Hot and humid summer with dry winter Crops South-East -Most of orange production -Most of coffee production -Most of dairy production -Most of sugar-cane production 6% of soybean production 30% of corn production Traditional agriculture region, good logistics, good technology Source: Rabobank 9

10 Productivity gains have been substantial Brazil: grain area and grain production [million ha / million metric tons] Widespread adoption of modern technology in production & manufacturing Planted area Production Investment in research on soil fertility, crop management and genetics - State (Embrapa) - Private Increase yield & scale driving cost competitiveness Increase of double cropping % +30% Source: CONAB 10

11 Double-cropping has boosted land productivity Brazil: corn area by 1 st and 2 nd crop [% total national production] 100% Double-cropping of corn has increased markedly in recent years owing to the rise in corn prices Double cropping permits expansion in production without any expansion in area under cultivation Not all areas are suitable for double-cropping; depends on climate 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% 1990/ / / / / / / /12e 1st Crop 2nd Crop Source: CONAB 11

12 Integration boosts competitiveness Brazil: integration of key agricultural value chains Inputs Farming Processing Trading Poultry Pulp & Paper Soybeans FCOJ Sugar & ethanol Beef Coffee Integration encourages: - The optimisation of field & factory operations, e.g. Harvesting Transport of raw material - The exploitation of economies of scale in field operations as well as in processing Source: Rabobank 12

13 Policy: little intervention, high exposure to world markets The degree of policy intervention in Brazilian agriculture is relatively low, and much lower than in the US or the EU Tariffs are small or zero, and supply management policies (production or sales quotas for example) are rare. In the case of biofuels, there are mandated blends for both ethanol and biodiesel There are mechanisms to support prices for some commodities (e.g., soybeans, corn, cotton), but these are generally only triggered at low price levels Most farmers and processing companies are therefore fully exposed to world market prices (commodity price risk and exchange rate risk) They have to be highly competitive and good at risk management in order to survive in such a business environment Official finance at preferential rates is available to support agriculture, but the supply is limited, and much of commercial agriculture requires financing not only from private banks but also from trading companies and input suppliers Source: Rabobank 13

14 Sugar: an example of Brazil s cost-competitiveness Indexed white sugar production cost, average 06/07 09/10 [CS Brazil = 100] Brazil s cane, sugar and ethanol sector provides a good example of the competitive advantage achievable via: - Ideal growing conditions for cane - Large-scale, integrated field and factory operations - Abundant land resources available for future expansion As a result, Brazil s cane sector is now the world s leading sugar producer and exporter, and second only to the US as an ethanol producer and exporter Malawi CS Brazil Swaziland South Africa Zambia Thailand Australia Tanzania UK Zimbabwe Mozambique India Egypt US Pakistan France China US Russia Ukraine China Source: Illovo Sugar Annual Report

15 An overview of Brazilian agribusiness The weaknesses of Brazilian agribusiness 15

16 Logistics in Brazil are poor... Brazil vs US: distribution of transport modes for goods World Banck Logistics Performance Index ranking [%] Air Pipeline Waterway Railway 0% 4% 12% 22% 0% 19% 12% 1. Germany 2. Singapore 3. Sweden 4. Netherlands 5. Luxembourg 6. Switzerland 7. Japan 8. UK 9. Belgium 21. New Zealand 22. Italy 23. Korea, Rep. 24. UAE 25. Spain 26. Czech Rep 27. China 28. South Africa 29. Malasya 41. Brazil 42. Iceland 43. Estonia 44. Philippines 45. Lithuania 46. Cyprus 47. India 48. Argentina 49. Chile 10. Norway 30. Poland 50. Mexico Road transport, interior of Mato Grosso state 42% Road 63% 28% Brazil US Sources: COPPEAD (2008), World Bank 16

17 ...but Brazil is 24x larger than Germany Germany 0.36 mn km 2 Brazil 8.5 mn km 2 17

18 Custo Brasil the cost of doing business in Brazil Inefficient legal system - From the lender s perspective - Good laws but weak enforceability Increases costs Expensive capital Discourages investment Influences competitiveness Heavy and complicated tax structure 18

19 An overview of Brazilian agribusiness Future opportunities and threats 19

20 Brazil has considerable scope to expand agriculture World: new land available for rain-fed agriculture [million hectares] Sub-Saharan Africa Global demand for agricultural commodities is rising as a result of increasing population and rising real incomes Latam/Caribbean E Europe/C Asia S & E Asia 3 11 Although part of the need for greater output can be achieved by raising productivity, new land will nevertheless be required for agriculture in the future ME/N Africa RoW Good logistics Bad logistics South America: new land availability estimated by crop The distribution of such resources is hard to evaluate, but it is certainly uneven around the world. Nevertheless, it is clear that South America, and specifically Brazil, holds a substantial part of the world s unused agricultural land [million hectares] Brazil Argentina Other S America Wheat Corn Soybeans Sugarcane Source: World Bank,

21 Where in Brazil will expansion take place? Brazil s prominence as an agricultural producer and exporter has been achieved to date with the use of 65 million hectares Brazil: areas of agricultural expansion by crop Brazil s state research agency for agriculture (EMBRAPA) estimates that as much as 100 million hectares of land (mostly pasture today) could be converted to agriculture in the future Brazil: current land use Pasture 158 Agriculture 65 Forest & protected areas 496 Cotton Corn Soybeans Sugar cane Other 141 Total land area 851 Source: UNICA, Rabobank 21

22 It s not all about exports - the internal market is also promising... Brazil s population is 190 million Brazilian consumers have seen a significant rise in their real income and purchasing power; consumer credit has also flourished in recent years Brazil: real salary index and unemployment rate Real industrial salary index Unemployment rate Industrial salary index Unemployment rate (%) This has generated a significant increase in 90 consumer spending in a number of sectors linked to agribusiness Brazil: income elasticity of food products History & projected development of income distribution Class A/B = > R$4850 Class C = R$1125 R$4850 Class D = R$501 R$1125 Class E = < R$540 Rice Beans Pineapple Wheatflour Meat (premium cuts) 0.52 Meat (standard cuts) 0.11 Ham Chicken Milk 0.34 Condensed milk Cheese Oil Beer Wine [million citizens] Class A/B Class C Class D Class E f Source: MCM, IPEA, FGV, Hoffman (2004) 22

23 Where will the resources to fund growth come from? The National Development Bank (BNDES) has been a significant source of funds for expansion in key sectors such as beef and sugar & ethanol In recent years, in addition to bank lending, global capital resources have been directed towards Brazilian agribusiness via both IPOs and bond issues, providing it with resources to expand... Between May 2008 and Sept 2009, all 3 major ratings agencies awarded Brazil investment grade status...and the first Brazilian agribusiness multinationals are now emerging Public offers in BM&F Bovespa Country Risk Premium (EMBI) [basis points] 1, Foreign Direct Investments [nº of companies] F&A companies Other companies [USD billions] Source: MCM, BM&F Bovespa, BACEN 23

24 Sugar & ethanol sector in Brazil Opportunities Threats Domestic ethanol market with tremendous potential for further growth as flex-fuel cars increase their share of the total fleet Abundant untapped land resources suitable for the production of cane [million tonnes] Ethanol Sugar +117% Over the long term, global growth in sugar and ethanol consumption cannot continue to be met without growth of the Brazilian cane sector Brazil: cane production by product Costs have been on the rise, due to rising labour costs, a strengthening currency, and, lately, low levels of productivity and capacity utilization There are concerns that Brazil is losing competitiveness and market share Government plays a significant role in two of the sector s three key markets ethanol and electricity; government policy also impacts rules regarding foreign companies ownership and use of land /82 91/92 01/02 11/12 Source: UNICA 24

25 Soybeans: opportunities and threats Strengths & opportunities Favourable conditions (climate, soil, landscape, scale) Growing demand from animal protein industries Possible additional revenues from farm financing Geographical dispersion of production regions (risk diversification) with different export channels New and growing regions (MAPITOBA / North MT) Potential benefits from investments in logistics Explore niche markets (non-gmo) Projected growth in soybean production [million tonnes] Northeast + North 2010/11 16,1 2021/22 27,1 +69% Weaknesses & threats Poor logistics and infrastructure conditions High exposure to volatile grains and FX markets Tax system benefiting exports of raw grains in detriment of oil and meal Biodiesel factories margins are very volatile, depending on the price of soybean oil in BRL and ANP/Petrobrás auction prices CSR issues threatening origination in some regions (Amazon Biome) Centre west + southeast South 30,7 +26% 38,8 28,7 +8% 31, Source: ICONE 25

26 Beef sector in Brazil Opportunities Demand for Brazilian beef should remain robust in the long run - Domestic beef consumption is set to keep growing on the back of rising income levels Currently, 80% of the total beef production are consumed domestically - International demand is also anticipated to increase driven by the growing appetite for beef in emerging coutrines (income effect) coupled with limted scope for supply growth in other regions at competitive costs Brazil s low yields mean that there is still much room for supply growth without relying solely on grains Productivity by Brazilian state [@ produced/ha*] Current Potential = 15 kf of carcass GO MG MS MT PA PR RO RS SP Average Source: Cepea 26

27 Pork & poultry sectors in Brazil Brazil holds key success factors to support sustainable growth Key sucess factor Poultry Domestic consumption and exports Abundant supply of grains at a relative low cost Access to good genetics Integration model largely adopted - Strict control of the entire supply chain Industry with high technology levels Favorable climate Water availability [million tonnes] Exports +5% 11.0 Consumption Threats Rising labour costs and a strengthening currency Pork Domestic consumption and exports [million tonnes] Exports Consumption On the pork side, the high exports dependency on Russia means that the current stimulus to boost Russian production will force Brazil to expand its sales destination % For poultry, the recent reopening of the EU market to Thailand and a possible lift of Japanese restrictions to the same country may hurt Brazilian exports Source: UBABEF, ABIPECS 27

28 Farm inputs The farm inputs chain in Brazil is growing rapidly and is essential for the development of the competitive agricultural and livestock industries Market size: USD 7,1 bi 65 thousand machines sold in the domestic market + 19 thousand exported in 2011 Total production: 81 thousand 82% Tractors 8% Harvesters 10% Others CAGR : 6,3% Agricultural Machinery Animal Nutrition Market size: USD 20.0 bi 64 MM tons 57% corn 18% soybean meal 5% minerals 1% Premix CAGR 00-10: 5.8% Market size: USD 16,9 bi or 28,3 MM tons 28% nitrogen 33% phosphates 38% potash CAGR : 5,5% Fertilizers Animal Health Market size: USD 1.7 bi 34% anti-parasitic products 29% vaccines 22% antibiotics CAGR 05-09: 6.9% Market size: USD 8,5 bi tons in % herbicides 35% insecticides 28% fungicides CAGR 01-11: 14.1% Crop Protection Products Seeds Market size: USD 2 bi or 2.9 mln tons Genetically Modified organism Soybeans: 88.1% Corn: 74.9% Cotton: 50.1% CAGR 05-10: 6.3% [volume] Source: ANFAVEA, Sindirações, SINDAN, ABRASEM, ANDA, ANDEF, Kleffmann Group and Rabobank Estimates 28

29 High technological adoption, together with area expansion on agricultural frontiers areas like Northern Mato Grosso and MAPITOBA region, will probably support a consistent demand growth for farm inputs in Brazil over the coming years. Brazilian Crop Protection Industry Trends Brazil is the world s 4th largest consumer of fertilizers and the biggest crop protection market The Brazilian Farm Inputs Industry Brazil is a large & growing fertilizer market Brazil is the 4th fertilizer market in the world, following China, India and the USA - The historical growth of 5.2% per annum in total demand is the highest among the main consumers Brazil became the world s largest crop protection market in 2011, surpassing USA Fertilizer Sales in Brazil [million tonnes] 17,1 19,1 22,8 22,8 20,2 5,2% 21,0 24,6 22,4 22,5 24,5 28,3 In 2011, sales in Brazil reached USD 8,5 bln, 16,4% higher than in The growth of the Global Crop Protection Industry between 2001 and 2011 was around 5.5% per year The tropical climate in Brazil increases the demand for chemicals to combat agricultural pests Brazilian Crop Protection Industry Sales [USD billions] % Source: SINDAG, Valor Econômico, Phillips McDougall, Rabobank 29

30 Summary: opportunities and threats Import demand for key commodities set to grow in parallel with emerging markets growth Large (190 mn) domestic market with rising real incomes Opportunities More land available for agricultural expansion at a good price than any other producing/exporting country Good agronomic conditions, extensive use of advanced technology and large scale of operations generally provide Brazilian agribusiness with a significant cost advantage over other players World class corporate producers and processors with a growing international reach and capacity to attract international capital for expansion Will logistics capacity grow at the same rate as production & export availability? Will a strong exchange rate erode competitiveness? Threats Will trade barriers be gradually dismantled in order to give Brazilian agribusiness greater market access? Capacity to monitor, control, eradicate livestock diseases Real or imagined abuse of the environment can provoke sanctions from trade partners Volatile business environment exchange rate, commodity prices, interest rates 30

31 Thank you! Rabobank International Brasil FAR - Food & Agribusiness Research Endereço Avenida das Nações Unidas andar Brooklin São Paulo SP Brasil Rabobank International Brasil S.A. 31