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Latin America: F&A Brazil - Growing Chinese demand good for Brazilian exports

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  • Short term dynamics hide long term structural trends
  • The short term outlook is defined by volatility for F&A commodities
  • In the long term, growing Chinese demand bodes well for F&A exports, namely soybean, animal protein, sugar and cellulose pulp
  • Brazil seems well placed to benefit from this increasing demand for these commodities, while Argentina is also well position to benefit from the outlook for animal protein

The last twelve months have seen their fair share of commodity market turbulence. In such times, short term noise often obscures longer term, structural changes in markets and in trade flows. For South America, and especially for its leading agricultural exporter, Brazil, one of these key structural changes has been the rise of China as an importer. In 2016, China accounted for fully 25% of the value of Brazilian agricultural exports (27% if we combine China and Hong Kong), versus just 8% (10% including Hong Kong) in 2007. And, as we highlight in this article, China´s importance to Brazilian agribusiness is projected to continue to grow in the future.

Soybean

Soybean production in Brazil bounced back strongly in the 2016/17 (July/June) crop year, to 114 million tonnes, following a drought-affected harvest in the previous year. This, together with bumper crops in the US and in Argentina, has kept world prices subdued in 2017. Of the total Brazilian harvest in 2016/17, 48 million tonnes are estimated to have been exported to China (78% of total Brazilian soybean exports, 53% of total Chinese soybean imports). This compares with just 3 million tonnes in 2000/01, meaning that Brazilian soybean exports to China have achieved average annual volume growth of close to 20% between 2000 and 2017. Although Rabobank expects that the rate of growth of China’s import demand will slow down, Chinese soybean imports are nevertheless projected to grow by 35 million tonnes over the next decade, reaching some 125m tonnes in 2026/27. Furthermore, Brazil is well-placed to boost its soybean exports to fulfil these additional Chinese needs, especially in comparison to the US and Argentina, the two other main exporters in the world. A considerable expansion of crop acreage could be achieved through more intense use of pastureland, while port and logistics developments, especially in the north of Brazil (the so-called ‘Northern Arc’), hold out the promise of reducing costs and boosting competitiveness. Under such conditions Rabobank believes that Brazilian soybean production could exceed 154m tonnes in 2026/27, up 40m tonnes from output in 2016/17, with around 28 million tonnes of this additional production available for export after allowing for growth in domestic soybean oil and meal demand.

Animal protein

2017 has certainly been a dramatic year for the Brazilian animal protein industry, the largest meat producer and exporter in South America. In May 2017, Brazilian meat exports suffered a significant setback following the release of details of the Carne Fraca (‘weak flesh’) police investigation concerning bribes made to evade regulatory supervision in a number of meat processing plants. However, following the initial wave of temporary import bans, it became clear that the investigation concerned just 0.5% of total processing sector capacity/activity, and with considerable effort invested in providing transparent information and regular updates to importers, the negative impacts on exports began to dissipate early in the second half of the year. As a result, Brazilian beef, poultry and pork exports are expected to recover during the second half of 2017 and finish the year slightly above 2016 levels. Moreover, low corn and soybean prices will reduce feed costs, helping to sustain company margins.

Looking ahead, Brazilian beef exports are expected to increase by around 4% per year, over the coming decade. Meanwhile, Brazilian poultry exports (already the largest in the world) are likely to increase by around 3% per year over the same period. China (along with Hong Kong) has already become the main destination of Brazilian meat exports. Actually, along with Brazil, Argentina also a strong potential to increase meat production and exports over the coming decade, particularly in the beef sector, where Argentina has a positive reputation in the global market as a high quality producer, and where, once again, China/Hong Kong is already a leading export destination.

Sugar

The world sugar market has had a rollercoaster year. Prices rose steeply in 2016 owing to a tight global supply/demand balance, but, after peaking in October 2016, the decline was rapid. This has frustrated Brazil´s cane industry - by far the world´s largest sugar exporter, typically accounting for 45% or so of global exports – which is fully exposed to world market prices. The short term impact of the decline in prices is unlikely to materially impact Brazilian export volumes in 2017. Meanwhile, the longer term perspective shows that a rising proportion of South American (i.e., Brazilian) sugar exports in recent years has gone to the Asian and Middle East/North African regions, with China being the single biggest destination (10% of total exports) in four out of the last five years. Trends in local demography and incomes are expected to see these regions account for an ever-larger slice of the pie in the future.

However, a recent change in Chinese sugar policy suggests a temporary halt to the country´s import growth – the tariff on so-called Out-of-Quota sugar imports has been raised from 50% to 95% (these are imports above and beyond an annual import quota of 2.0 million tonnes which is subject to an import tariff of 15%). This increase applies to all origins supplying 3% or more of China´s Out-of-Quota imports. It will thus raise the landed cost of shipments from leading origins such as Brazil and Thailand. In the short term, this measure may well enable the government to offload some of its enormous sugar stocks onto the domestic market. Looking further ahead, the higher tariff is almost certainly temporary, and structural issues in China – the loss of cane land to alternative crop production and to real estate development – suggest that Chinese sugar imports will continue to rise over the longer term.

Cellulose pulp

Figure 1: China’s share of Brazilian exports by commodity
Figure 1: China’s share of Brazilian exports by commoditySource: Ministry of Agriculture, 2017

Finally, in another commodity market where South America and especially Brazil have been gaining prominence, cellulose pulp prices in 2017 have been supported in part by robust demand from China. This has happened despite the outlook for new eucalyptus pulp capacity (the fastest-growing segment of the market) coming on stream in Brazil and in Indonesia in the second half of the year. China is responsible for 24% of global eucalyptus pulp consumption, up from just 9% in 2007, and the country is the largest importer of Brazilian pulp and paper in volume terms. During 2016, it imported the equivalent of 38% of Brazil’s exports. Brazil’s cost competitiveness in pulp and paper has gained the country an ever-increasing share of the Chinese market, despite its being much further than alternative pulp suppliers in South East Asia. Furthermore, paper and tissue mills in China are well suited to eucalyptus pulp (which accounts for the majority of Brazilian production and exports). The strength of the Chinese economy has played a key part in the recovery of pulp prices worldwide in 2017, and its influence on the overall size of the international pulp trade will only grow in the coming years.

To the 'Latin America: the dawn of new beginnings' overview page

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Author(s)
Andy Duff
Rabobank KEO

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