Porto Alegre, January 26, 2023 – Brazil will remain as the best alternative for beef supply in 2023. On the last 12th, USDA updated its projections for the meat industry in 2023. Some pieces of data draw attention, amid them is the potential expansion of import demand by China. According to the Department’s recent publication, less severe policies against COVID-19 lead to greater demand and more consistent advances in economic activity in the second-largest economy of the world, particularly the demand related to restaurants and other establishments. However, these issues are not that simple, some adjustments need to be considered in this market composition.
The first aspect is that China continues in a process of growing production of its meat industry. After the crisis that hit the local pig farming, following the outbreak of African swine fever, the government made good investments in the replenishment of its animal protein supply. This process was not restricted to pig farming. Cattle and chicken farming also received massive investments. The big question is that cattle raising is an activity with a long cycle, so the investments made between 2019 and 2020 took a long time to be translated into an increase in production capacity.
The USDA projection is that beef production in China will reach 7.35 mln tons in 2023, that is, an increase of 3.2% over 2022. Beef occupies a different role in the Chinese market, while chicken and mainly pork serve as a consumption base for an overwhelming portion of the Chinese population. Beef attracts consumers who have a higher income, able to frequent restaurants and other establishments more often. Even having this niche character, beef must also feel the impact of the productive expansion of pork, which currently has much more competitive prices.
The consumption pattern in China places pork as a major protagonist, that is, its supply fluctuations end up incisively affecting the price formation of competing proteins. This is an important limiting factor for beef prices not to skyrocket in the Chinese domestic market. In addition, it offers a perspective of less propensity to readjust the prices paid for beef in the international market, unlike what happened in most of 2022, when Chinese importers ended up inflating the global market of that protein.
With greater optimism surrounding economic activity in China, optimism about animal protein consumption also increases, even those with greater added value. The trend is that around 10.85 mln tons of beef in carcass equivalent are consumed in the current year in China, up 2.8% from 2022. Imports must increase, reaching the level of 3.5 mln tons, up 2.2% from last year.
Brazil faces acute difficulties in opening new markets for beef. To achieve better-distributed shipments, it is important to move forward on issues involving FMD-free status without vaccination, which would allow negotiations on key markets to evolve, such as Japan and South Korea. The evolution of tracking and environmental issues would also allow for more decisive advances in Europe. At least in the short term, the country will remain highly dependent on China for its beef exports. Chinese decisions will have a direct impact on the formation of prices of fattened cattle in the Brazilian market, which is why it is so important to understand the evolution of supply and demand in Brazil’s main trading partner.
Brazil has a huge comparative advantage over its major competitors in beef production. As previously discussed, cattle farming in the country is in a moment of significant production expansion, while our major competitors are in the opposite moment of the cycle. From the point of view of the main Brazilian competitors in the international market, the supply condition is as follows:
– USA: High production costs and a prolonged drought in the northern plains between 2021 and 2022 caused the US cattle herd to enter a cycle of lower production capacity after a period of disposal of matrices. The USDA estimate is that the US cattle herd will decrease by around 3.1% compared to last year, that is, there will be around 89 mln head;
– European Union: In Europe, the high cost has also impacted cattle ranchers’ decisions in recent years, which has also caused the region to enter a stage of lower productive capacity in the farming cycle. According to data from USDA, the herd in the region totals 74.6 mln head, down 1.4% from last year;
– Argentina: Besides the hostile climate in consecutive La Niña years, the untimely decisions of the local government ended up influencing the decision of Argentine farmers. In this context, the cattle herd in the country has fallen by 1.2% and is estimated at 52.77 mln head;
– Australia: After long years of lower production capacity, Australia is working on the replenishment of the herd, which today is estimated at 25.71 mln head, up nearly 7.4% from 2022. For logistical reasons, Australian beef is emerging as a major competitor of Brazilian beef in 2023. Australian farmers traditionally produce for exports.
This market composition tends to keep Brazil in the global leadership of beef exports with some margin. The cattle herd in Brazil is rising sharply, while the perspective of the dollar operating between the levels of BRL 5.00 and 5.50 offers great competitiveness to Brazilian commodities in the international market, and beef is no exception in this context.
Brazil is not likely to set a new record in exports this year, but it is interesting to consider that they continue to offer excellent revenue, even with the already mentioned decline in beef prices in the international market. However, the productive expansion in the country requires that domestic demand be strengthened so that there is a new balance price for fattened cattle. Consistent domestic demand goes beyond aid to the low-income population, it is necessary to advance more solidly in the field of employment and income, which will directly depend on the economic policy adopted by the new government.
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