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The Brazilian dairy industry will continue to make an effort to have some sort of international presence.Sonia Amadeo is USDEC’s South American office representative based in São Paulo. In this Q&A, Amadeo answers questions about the Brazilian market and the potential for dairy exports.
Q: Brazil has been mentioned as a potential dairy export force for years, yet the nation seems to perennially underperform. Why?
SA: Brazilian milk production reached 35 million tons in 2013, but less than 24 million tons is under some form of federal, state or municipal inspection, meaning nearly one-third of all production ends up in the informal market or is used on-farm.
The industry has infrastructure problems due to long distances between remote dairying areas and coastal ports, and there is a huge degree of automation inequality at both the farm and processing levels. The government enacted regulations to improve milk quality by making refrigerated transport mandatory from the farm and by holding more frequent inspections of dairy plants, but Brazil has a long way to go to achieve a nationwide quality approach.
Most Brazilian dairy processors are not prepared to export. The industry is used to domestic prices being higher than international prices, and it lacks the long-term commitment to stick with the market even when prices decline.
Q: What is Brazil’s milk production outlook?
SA: Farmgate milk prices in Brazil reached an all-time high last year due to strong domestic demand and firm international commodity prices. However, national milk production is expected to slow from an average annual growth rate of 3.3 percent in the past 10 years to 2.1 percent in the upcoming decade.
Q: Brazil’s dairy exports have plummeted since 2008 while its imports have generally risen. Can we expect those trends to continue?
SA: The appreciation of our currency, the real, has played a big role in dairy import and export trends. A decade ago, a U.S. dollar bought 3.5 reals; it now buys around 2.4 reals. High domestic milk prices and the higher real have given imports a pricing edge for the time being. But according to a recent study by researchers from the University of São Paulo, imports will fall by 10 percent in the years ahead.
The Brazilian dairy industry will continue to make an effort to have some sort of international presence. Currently, the main markets for Brazil’s milk powder are Venezuela, Angola and Saudi Arabia. Over the last decade, the strong real made Brazilian exports less competitive, but the causes of Brazil’s competitiveness problem go far deeper than the exchange rate. Poor roads and a limited rail network push up freight costs, for example, creating additional challenges for dairy processors looking to export.
Q: Brazil has experienced significant social unrest over the past year due to public discontent with the rising cost of living and the government. How stable is the nation politically and economically?
SA: The nation, politically and economically, is stable, but there are a lot of domestic problems resulting from the government’s refusal to implement tax reforms, cost overruns on the Olympics and World Cup, and misuse of funds that should have been better invested in infrastructure. These problems have accumulated over generations, but the federal government has been unwilling or unable to tackle them. In order for Brazil to reignite growth, the government will have to resume the reforms it dropped during the good times and trim pension funds, cut red tape, lower and simplify taxes, and update labor laws. All that combined would help Brazil to tackle its loss of competitiveness.
(This article first appeared in the March 2014 edition of Export Profile.)
Image copyright: 123RF Stock Photo
The U.S. Dairy Export Council is primarily supported by Dairy Management Inc. through the dairy farmer checkoff that builds on collaborative industry partnerships with processors, trading companies and others to build global demand for U.S. dairy products.
