Expert Commentary: Emerging From Crisis, Reflections on Brazilian Markets

Brazil has proven to truly be a global agricultural powerhouse; emerging as one of the world’s leading agricultural producers and sought-after trading partners. However, recent years of political uncertainty and financial instability have negatively affected the country’s ag sector both domestically and in international markets.

But as indications of recovery begin to become evident, how is the country faring now? What is the outlook for Brazil’s ag production and agribusiness markets, and what can be expected both for and by one of the world’s top agricultural producers?

Here to give exclusive insight is Bernard Hennies, managing director, Hagroex. Hennies has more than 30 years of experience in a wide range of leadership roles along the entire Brazilian agribusiness value chain from greenfield development to brownfield business development, as well as in senior agribusiness roles in procurement, handling, multi-model logistics, and international trade; M&A processes, strategic planning, market intelligence, and complex finance structures throughout his long career with some of the world’s top agribusinesses including Toepfer, ADM, Agspring, and Toyota Tsusho Corp. Nova Agri S.A.

By Bernard Hennies, Managing Director, Hagroex

Brazil seems to be finally emerging from the long lasting crisis that began during the second term of president Lula, and which grew significantly worse after the one and a half terms of president Dilma Rousseff.

However, after the long recession, the Brazilian economy begins the year with almost all factors pointing toward a good recovery, with the exception of one: the political environment. Nevertheless, such political turmoil, including a highly unpredictable presidential campaign, can hardly reverse the forecasted economic growth and financial stability.

The new year, according to the Focus bulletin, promises moderate inflation at 3.96 percent; GDP growing of 2.68 percent; a basic interest rate at 6.75 percent; direct foreign investments remaining steady at US $80 billion; and although the trade balance shall decline, it is expected to remain impressive at US$52.5 billion with current account deficit at low levels. The unemployment rate will continue to retreat, and the gradual improvement in wages will sustain consumption rates, which will in turn drive recovery. The biggest reason for disruption and risk to the economy are public accounts, for which there is no medium-term solution, neither before the elections nor after, depending on the outcome. There is very little chance that pending pension reform will be approved in March. However, even if approved, there would be no changes resulting within this year, as its short-term effect is small, although decisive in the long run.

The global economy shall grow as well. Despite the fact that the world has entered into a dangerous cycle of risks and uncertainties including terrorism, rearmament, unpredictable leaderships, and protectionism, plurilateral agreements are in check (WTO, climate agreement, Brexit, TPP) and massive migrations have the potential to open more markets for feed and food consumption. Together, with ongoing domestic growth supporting consumption, this may present an extraordinary opportunity for Brazilian agribusiness which is capable of generating large surpluses of agri-food commodities at competitive prices.

In regard to agribusiness, CONAB's third projection for the 2017/18 crop year reflects production of 226.5 million tons of grain - an estimate that is 4.7 percent lower than the current record harvest. Area planted will grow by almost 1 percent reaching 61.5 million hectares (151.96 million acres), while CONAB predicts worse weather conditions compared with the excellent ones observed in 2016/17.

The Brazilian Confederation of Agriculture and Livestock (CNA) estimates that Brazil’s agribusiness GDP (considering all value chains) is expected to increase by between 0.5 percent and 1 percent in 2018. Considering only agriculture and livestock, GDP shall increase 5 percent in 2018, compared to 11 percent in 2017. The Gross Value of Production (VBP) is expected to increase by 7.1 percent to R$559.6 billion (US$173.35 billion), with a 6 percent increase in the agricultural sector, and 9 percent in the livestock sector.

The Brazilian soybean crop is estimated at 109.2 million tons, with planted area expanding by about 3.1 percent to 34.94 million hectares (86.33 million acres). Prices should be between $9 and $10 per bushel, which at this exchange allows for a reasonable return to the country’s producers.

Corn is expected to lose 3 percent of its planted area, with 17 million hectares (42 million acres) expected to produce 92.2 million tons. Prices are expected to maintain ongoing averages for the year, however, corn production estimates come with greater uncertainty, as numbers rely on the planting of the "safrinha" (winter crop), which might be affected due to the delayed harvest of soybeans in Mato Grosso.

At the same time, domestic consumption of meat shows signs of recovery, and exports remain firm despite concerns with Russia. Brazilian supply increases and profitability for producers remains adequate due to the ample grain supply. Cattle is expected to hit record production levels of 9.9 million tons, and exports may increase to 1.8 million tons. Brazil should also see record poultry production of over 13 million tons and exports exceeding 4 million tons. Hog production, however, is more concerning as Russia accounts for more than 40 percent of purchases, but production is strong at more than 3.8 million tonnes, with exports passing 900,000 tonnes.

But it’s not all about sweet dreams...

Brazil managed so far to lead the world in the development of agricultural technologies adapted to tropical regions of the planet, which generated strong gains in productivity. However, that does not guarantee that the country will continue to lead the world in the future. New technological paradigms multiply around agricultural production systems, reorganizing organizations and institutions, and changing products and processes involving digital and precision technologies, biotechnology, sensors, satellite imagery, big data, robots, drones, microirrigation, indoor environments, and vertical agriculture, etc. New ways of communicating and more transparent access to information are also changing relationships and networking which in turn creates the need for new levels of service and efficiency from all stakeholders. This will require a lot of new capital, investment, and training.

As important as producing efficiently, attention to processing, shipping, distributing, opening new markets, developing brands, and creating a reputation for products, companies, and the country itself are key success factors to support Brazilian growth. But, due to political misconduct during the Workers’ Party (PT) era, the country has lost competitiveness and its presence became more timid and sporadic in global markets (exception made for select commodities into China).

Additionally, new systemic issues involving agriculture are gaining importance in the global agenda. Just to name a few: health and nutrition; sanity, quality, and traceability; losses and waste of food; use of pesticides, transgenics, hormones, antibiotics, and issues related to animal welfare. Abroad, these are themes as, or more important than the question of the balance between agricultural production and the environment, a subject that today receives enormous attention in Brazil.

In conclusion, Brazil’s economic situation is improving, presenting a tremendous opportunity for the country’s agribusiness sector to continue growing, as long as all stakeholders do their homework and focus their efforts in the right direction.