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BRAZILIAN BEEF CATTLE MARKET OVERVIEW Eng. Agr. José Luís Souza de Campos [email protected] OKLAHOMA GROUP VISIT FEBRUARY / 2006

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BRAZILIAN BEEF CATTLEMARKET OVERVIEW

Eng. Agr. José Luís Souza de [email protected]

OKLAHOMA GROUP VISITFEBRUARY / 2006

Presentation Scheme

Introduction & FiguresLocal Breeding SystemsBeef Cattle MarketBrazil X International MarketFinal Notes

Presentation Scheme

Introduction & FiguresLocal Breeding SystemsLocal Breeding SystemsLocal Breeding SystemsBeef Cattle MarketBeef Cattle MarketBeef Cattle MarketBrazil X International MarketBrazil X International MarketBrazil X International MarketFinal NotesFinal NotesFinal Notes

Introduction

Largest commercial cattle stock worldwide (165M of heads)89M acres of pastures (native and cultivated)1.79M beef cattle producersLargest beef exporter worldwideSecond largest beef producer worldwideHigh technology

154,1 152,8 154,6 158,3 161165,8

170,3175,1 176,2

170,2165

100

150

200

1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005

Year

Brazilian Livestock Balance

Apr. 80% Beef Cattle

CATTLE STOCK (millions of heads)

Source: FNP Consultancy

** Forecast

**

14%

- 6%

154,1 152,8 154,6 158,3 161 165,8 170,3 175,1 176,2 170,2 165

36,9 36,7 33,8 34,3 34,9 35,6 36,8 38,5 41,5 47 45,5

0

50

100

150

200

1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005

Year

Cattle Stock Slaughtering

Brazilian Livestock Balance

27.6%

Apr. 80% Beef Cattle

STOCK X SLAUGHTERING (millions of heads)

Source: FNP Consultancy

*

* Forecast

39%

Cattle Stock Breakdown 2005

14.3%Source: FNP Consultancy

17.5%

33.6%

15.4%

19.2%

Equatorial

Tropical Littoral

Subtropical

70% of the stock!

Brazilian Climate

Brazilian Livestock Balance

0100020003000400050006000700080009000

1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004

Year

Beef Production Export Import

19.2%

0.6%

Source: FNP Consultancy

PRODUCTION, EXP. & IMP. (1000 ton Carcass eq.)

6.2%1.4%

Brazilian Livestock Balance

Source: FNP Consultancy;

SECEX; DECEX

0200400600800

10001200140016001800

1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004

Year

Export Import

334%

- 56%

EXPORT AND IMPORT (1000 ton Carcass eq.)

Brazilian Livestock Balance

Source: FNP Consultancy;

SECEX; DECEX

0

200

400

600

800

1000

1200

1400

1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004

Year

Industrialized "In natura"

EXPORTS BALANCE (1000 ton Carcass eq.)

1078%

56%

Country % 20041 - UK 35 Exports -

Industrialized 2 - USA 32

1 - Russia 17 Exports – In natura (No bones) 2 – Egypt 12

1 - Paraguay 65 Imports 2 – Argentina 19

Brazilian Livestock BalanceEXPORTS (per Destination) X IMPORTS (per Origin)

Source: FNP Consultancy; SECEX; DECEX

+140 Countries34-2005

0%

5%

10%

15%

20%

25%

30%

1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005

Year

Brazil Australia USA

Brazilian Livestock BalanceWORLD BEEF EXPORTS (MARKET SHARE)

Source: USDA, FNP Consultancy

430%

*

* Forecast

- 74%

Rising Exports

Local currency devaluation in 1999Main competitors presenting sanitary problems

Mad Cow Disease: UK, USA and CanadaFoot and Mouth Disease under control

Unexpected outbreak in 2005…Increasing demand (Asia, Eastern Europe, etc.)Idle capacity to supply this demand“Brazilian green beef” – Marketing strategies$3 billion in 2005 (forecast)

* Forecast

0%5%

10%15%20%25%30%35%40%

1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005

Year

Brazil USA Russia

Brazilian Livestock Balance

Source: USDA, FNP Consultancy

WORLD BEEF IMPORTS (MARKET SHARE)

- 54%*

55%

World Per Capita Beef Consumption (2005 forecast)

Country Pound / hab./ yearArgentina 24.4

USA 19.4

Australia 16.1

Brazil 15.9 Canada 13.9

Mexico 10.2

EU 8.0

Russia 6.9

Source: USDA; FNP Consultancy

Presentation Scheme

Introduction & FiguresIntroduction & FiguresIntroduction & FiguresLocal Breeding SystemsBeef Cattle MarketBeef Cattle MarketBeef Cattle MarketBrazil X International MarketBrazil X International MarketBrazil X International MarketFinal NotesFinal NotesFinal Notes

Cattle Breeds Breakdown

Cross Breed X Pure Breed (Braford, Brangus, etc.)

Willing to combine the positive characteristicsHybrid Vigor (Heterosis)

Increase the resistance for diseases and ticks (South)Increase the meat softness and the early puberty of females (Center-North)

Breeding Systems (2004)

96,9%

1,7% 1,5%

Pastures (Nati./Cult.) Pastures SuplementationFeedlots

South

Southeast / Center-West

Cattle Raising Systems

Cow-Calf OperationNative pastures (South)Cultivated pastures (Center-North)

Stocker-Yearling and FinishingCultivated pastures

Full Cycle (Calving Finishing)15-20% cultivated winter pastures (South)100% cultivated pastures (Center-North)

FeedlotsUsually with own silage and/or hay production

Seasons / Ages

Spring Mating Oct/Dec to Jan/Mar Autumn Mating Mar/May to Jun/AugWeaning Mar or SepSlaughtering 1 - 3 years steers; culled cows or bulls and surplus heifers

Carrying Capacity / Stocking Rate

Native Pastures: 0.2 to 0.4 animal equivalent / acre

Cultivated Pastures:Southeast / Center-West / North:

Brachiarias and Panicuns: 0.4 to 0.6 an. eq. / acre

South:Consortium of Rye-grass, White Clover and Birdfoot Trifoil: 0.4 to 0.6 an. eq. / acreBlack Oat: 0.4 to 0.6 an. eq. / acre

0

50

100

150

200

250

300

350

400

450

500

aut/win spr/sum aut/win spr/sum aut/win spr/sum aut/win spr/sum aut/win spr/sum

Season

Wei

ght (

kg)

Carrying Capacity / Stocking Rate

“Roller Coaster Trend”Cold Winter - SouthDry Season - Center/North

HaySilage (sorghum, corn)

Winter Pastures (rye grass; whiteclover; birdfoot trifoil; black oat)

Pastures Supplementation

Eliminate “Roller Coaster Effect”Strategic handling; delivery all year long; contract performance, etc.

Carrying Capacity / Stocking Rate

Trading

SlaughteringIntermediate tradersSome small, tax dodging and inefficient beef abattoirs More than 20 medium-sized slaughterhouses have been sold or rented in 2003Still a few big beef abattoirs, seeking for respectability and scale:

Exports requirements; food safety, etc.Increasing professionalism and investments

Breeding stock Sold through live auction markets

Presentation Scheme

Introduction & FiguresIntroduction & FiguresIntroduction & FiguresLocal Breeding SystemsLocal Breeding SystemsLocal Breeding SystemsBeef Cattle MarketBrazil X International MarketBrazil X International MarketBrazil X International MarketFinal NotesFinal NotesFinal Notes

Beef Cattle Market

PASTSatisfactory profit marginExtremely high inflationSlaughtering 4-5 years steersLacking technology

Not much investments on pasturesLow stocking and extraction ratesNo cross breeding

Low productivity

Beef Cattle Market

1994 – 20001994 – Brazilian Economic Plan (REAL – R$)Steady growth of production costsDecreasing prices

Slaughterhouse X RanchersPoultry and pork competition

Profit margins under pressure!Low exports

Beef Cattle Market

SINCE 2000…Losing area to agriculture (soybean)Increasing females slaughtering

Decreasing stock (since 2003)Price falling pressure / Profit margins loweringMeat production increasing

Soaring exports (in natura) and new markets achieved

Prices ($ / Carcass pound)

0,4

0,5

0,6

0,7

0,8

0,9

1

1,1

1,2

1983

1984

1985

1986

1987

1988

1989

1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

- 47%

Source: IEA; FNP Consultancy

19%

Beef Cattle Market

TRENDSJeopardized grains profitability in 2005Rising prices / profitability

Calf shortageStock reduction (Brazil, Argentina and Uruguay)

Slight and steady growth of:Beef cattle stock Beef cattle exportsProduction costs

Beginning of a new positive cycle

Beef Cattle Market

OPPORTUNITIESSystematize and organize the leather market

10% of the global leather market85% damagedMind-set changing

Achieve best (high price) markets like USA, Japan, Australia by premium cut exports

Beef Cattle Market

THREATSWeak infra-structure

Poor internal transportation system: No railwaysIdle navigation capacityBad condition roads – Just 10% paved (OECD report); Center-West upwards

Port issuesLimited storage capacityA few professional slaughterhouses (possible cartel formation)

Beef Cattle Market

THREATSSanitary issuesFeeble contractsToo large and influent GovernmentBureaucracyFriendliness to the enviroment (Amazon Forest)

Production Costs 2004 ($ / produced pound)

Source: FNP Consultancy

0.350.250.280.250.450.30

5,000An. Eq.

0.650.620.390.550.380.690.43

500 An. Eq.

0.63Low inputStocker-Yearling and Finishing 0.63High input

0.63High input0.63Low inputCow-Calf

Operation

0.63High inputFeedlot0.63High input0.63Low inputFull Cycle

Sale Price ($/kg)

TechnologyBreeding System

Region: Mato Grosso do Sul

Production scale

Estimated Production Costsper Country

Source: Brazilian Agriculture Ministry

1.36Ireland0.86USA0.82Australia0.59Argentina0.56New Zealand0.43Brazil

$ / produced poundCountry

Presentation Scheme

Introduction & FiguresIntroduction & FiguresIntroduction & FiguresLocal Breeding SystemsLocal Breeding SystemsLocal Breeding SystemsBeef Cattle MarketBeef Cattle MarketBeef Cattle MarketBrazil X International MarketFinal NotesFinal NotesFinal Notes

Brazil X International Market

Largest cattle stock without “Foot and Mouth Disease” worldwide (90% of the stock). The goal is to be 100% free shortly.No BSE Disease level 1 (highly unlikable)Traceability

National Program since 2002Approximately a third of the herd meets this requirementMandatory for exporters

Brazil X International Market

Lowest production cost worldwideBrazil has some especial groups on the government to continue increasing the exports

BSE (Mad Cow) Disease preventionMarketing - “Brazilian Beef”Animal Sanitary Program

Subsidies and barriersCanada Russia, EU, Egypt

Competitive Advantages

Climate – 12 months on pasturesMore than 95% of breeding is on pasturesHormone & anabolic steroid freeNew frontiers – NorthLow production costs

Labor cost: foreman –$ 315/month 2006farm laborer –$ 200/month 2006

Low cost landsLarge areas / production scale

Competitive AdvantagesLAND VALUATION ($ per Acres)

0100200300400500600700800

1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005

Pasture Areas Source: FNP ConsultancyRegion: Mato Grosso do Sul

- 78%

167%

Competitive Advantages

Split the productionCow-Calf Operation – poor soils / regionsRaising Heifers/Steers and Finishing – best soils / regions

Genetic Improvement ProgramsIncrease productivity by crossing breedsVital sector for the Brazilian economy –government attention!

Presentation Scheme

Introduction & FiguresIntroduction & FiguresIntroduction & FiguresLocal Breeding SystemsLocal Breeding SystemsLocal Breeding SystemsBeef Cattle MarketBeef Cattle MarketBeef Cattle MarketBrazil X International MarketBrazil X International MarketBrazil X International MarketFinal Notes

Final Notes

Significant potential for growingSince 1994 Profit margins under pressure

Trade in agriculture and related industries accounts for 40% of Brazil exports and in 2004 for 100% of the $34 billion trade surplus, a vital prop for an indebted economy still vulnerable to crises of confidence.“We have good rural producers; what we lack are rural entrepreneurs.” – ABCZ, world’s largest group of ranchers

Professionalism

Final Notes

ACHIEVED:

Final Notes

FOCUS:

INCREASE PROFITABILITYINCREASE PROFITABILITY

SANITARY ISSUES!!!SANITARY ISSUES!!!

PARTNERSHIP &PARTNERSHIP &

PROFESSIONALISMPROFESSIONALISM

Questions?Thank you!

Contact:

José Luís Souza de CamposPhones: + 55 51 3330-3346 / 9268-5466 E-mail: [email protected]

Conversions Table

1 hectare = 2,471 acres1 acre = 0,405 hectares

1 kilo = 0,037 bushels = 2,205 pounds1 bushel = 27,216 kg = 60,000 pounds

1 @ = 15 kg = 0,551 bushels = 33,069 pounds

1 meter = 3,281 feet1 foot = 0,305 meters