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August 30, 2013

Poultry Producers in Brazil Fear Losing Competitive Edge

While Brazilian corn farmers lament the low prices being paid for their record large corn crop, livestock producers in Brazil are anticipating lower feed costs and higher margins as a result of the burdensome domestic corn supply. Corn prices in Mato Grosso are as low as R$ 10.00 per sack (slightly less than US$ 2.00 per bushel) in spite of efforts by the federal government to support corn prices in the state through a series of auctions where the government purchases corn at a guaranteed minimum price of R$ 13.00 per sack.

The low prices are the result of not only a record large corn crop in Brazil, but also an anticipated record large corn crop in the United States as well. Even though estimates of the U.S. corn crop have declined in recent weeks, the U.S. crop is still expected to be large enough to keep downward pressure on corn prices.

Corn and soybean meal represent the major cost of producing poultry and lower corn and soybean prices are expected to increase margins for producers. Even with the good news of lower commodity prices, the poultry industry in Brazil continues to face other hurdles.

During a recent meeting of poultry producing companies in Sao Paulo, the president of finance for BRF, Leopoido Saboya, emphasized that Brazil's poultry industry is losing its competitive edge due to what is referred to as the "Brazil Cost". This is the high cost of doing business in Brazil due to inefficient transportation systems, congested ports, high taxes, and burdensome bureaucracy. Brazil is still competitive he states, but Brazil is no longer the low cost producer in the world.

In 2005 Brazil produced 40% of the world's poultry exports, but that fell to 37% in 2012 due to higher costs in Brazil and increased competition from the United States, Argentina, and developing countries such as Thailand and Ukraine. Brazil achieved that lofty position in 2005 due to a favorable currency and low labor costs.

BRF is the largest poultry producer in Brazil followed by JBS which recently entered into the poultry business. JBS is the largest meat processor in the world focusing more on beef and pork processing, but its recent purchase of Doux Frangosul and Seara now makes it a major poultry producer and processor as well. In 2009, JBS assumed controlling interest in U.S. based Pilgrim's Pride which has operations in the U.S., Mexico, and Porto Rico.

JBF's chief executive, Wesley Batista, spoke about the added burden of bureaucracy in Brazil. He stated that JBS has 75,000 employees in the U.S. and a legal department composed of four individuals compared to Brazil where they employ 80,000 in their poultry operations with a legal department composed of 50 individuals. Those fifty employees are needed primarily to navigate the labyrinth of Brazil's legal system and labor laws. He fears that if something isn't done to reduce the "Brazil Cost" of doing business, the country will continue to lose market share of the world's poultry market.