June 30, 2011

Brazilian Pork Producers Losing R$ 80 per Head

Author: Michael Cordonnier/Soybean & Corn Advisor, Inc.

The decision by Russia and Ukraine earlier in June to ban the importation of Brazilian pork has left the industry reeling from the immediate financial shock. Russia has consistently been the number one destination for Brazilian meat, importing 230,000 tons of pork per year. The Russian government had approved 85 processing facilities in Brazil for export to Russia, but the sudden decision by Russia to ban 84 of the facilities has left only one facility authorized to export pork to Russia. A reasonable explanation for the sudden action has yet to be fully elaborated. As a result, the domestic market has been flooded with pork and hog prices in Brazil have plummeted.

Baring a quick resolution to the standoff with Russia, it is feared that as many as 40% of the pork producers in Brazil will go out of business in 2011. Pork producers in the state of Santa Catarina are losing R$ 80 per head for each pig marketed. Some of the pork will be put into expensive storage, but most of the excess production will be dumped onto the domestic market. The state has approximately 12,000 farmers who produce 700,000 tons of pork per year.

The recent action by Russia is the second shock to the pork industry in the last several months. Recent high corn prices had already put a significant financial squeeze on producers resulting in negative margins. It has now gotten so bad that there are reports of producers turning lose their animals because they have no way to feed them.

The situation is similar in the other two major pork producing states in southern Brazil, Parana and Rio Grande do Sul. The state of Parana has many small pork producers numbering as high as 30,000 and it is feared that as many as 15,000 may close down if immediate help is not forthcoming. The state of Rio Grande do Sul is in the same situation with approximately 10,000 pork producers in the state.

If the situation is not resolved quickly, it could impact farmer's decisions on which crops to plant for the 2011/12 growing season. It had been assumed that farmers in southern Brazil would opt for more full-season corn production due to the strong prices for corn. If thousands of pork producers suddenly go out of business in southern Brazil, it could negatively impact corn prices and farmers may not opt to plant more corn.