agribusiness in brazil

______ Neves, Giordano, Spers & Zylberstajn - Agribusiness in Brazil - IAMA 1997 - Jakarta, Indonesia.

AGRIBUSINESS IN BRAZIL 1 Marcos Fava Neves2 Samuel Ribeiro Giordano3 Eduardo Eugênio Spers4 Decio Zylbersztajn5 Abstract: The main purpose of this paper is to show how agribusiness is structured in Brazil. In order to do this, some data about the country will be shown, such as the dimensions and potential of the agri-food business, in a backward systemic approach, analyzing the consumer market, the distribution (mainly retailing and wholesaling sectors), the agri-food industry, and the supply sector.

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Citar como: NEVES, M.F.; GIORDANO, S.R.; ZYLBERSZTAJN, D. & SPERS, E.E. – Agribusiness in Brazil – IAMA – International Food and Agribusiness Management Association - International Congress, 1997, Jakarta, Indonesia, p. 2-22.

Prepared for presentation at the “VII IAMA International Congress”, 23-26 June, 1997, Jakarta, Indonesia. The authors wish to thank Dr. Antonio Hermínio Pinazza, Executive Director of ABAG - Brazilian Agribusiness Association. 2 Professor of Marketing and Agribusiness at FEA - Faculdade de Economia e Administração (School of Economics and Business) of University of São Paulo (USP), PENSA Agribusiness Program Researcher. PhD. student, Master of Science in Business Administration by FEA/USP and Graduated in Agricultural Engineering from ESALQ-USP. Email: [email protected] Fax 0055 - 16 - 6336133. 3 PENSA-Agribusiness Program Coordinator of Extension Courses, PhD. in Geography by University of São Paulo and Graduated in Agricultural Engineering from ESALQ-USP. Email: [email protected] 4 SIAMA President for 1996/1997 - (Student International Food and Agribusiness Management Association), PENSA Researcher, Msc. In Applied Economics at ESALQ USP and Graduated in Agricultural Engineering from UNESP/Botucatu. Email: [email protected] 5 Professor of Business Policy at School of Economics and Business at University of São Paulo, PENSA Agribusiness Program Coordinator. PhD. in Economics by University of North Carolina (USA), Master in Applied Economics at ESALQ and Graduated in Agricultural Engineering from ESALQ-USP.

_______ Neves, Giordano, Spers & Zylbersztajn - AGRIBUSINESS IN BRAZIL - IAMA 1997, Jakarta, Indonesia.

Key Words: South America, Brazil, Food, Agri-food business, Agribusiness, Grain Production, Retailing, Food Consumer

1- GENERAL INFORMATION ABOUT BRAZIL Brazil is the fifth biggest country in the world with an area of 8.5 million square kilometers and a continuous coastline of more than 7.500 kilometers on the Atlantic. The population is around 160 million inhabitants, concentrated mainly in the southeastern region. The population growth rate has been declining over the last years, to a rate of 1.6% / year for 1995 (IBGE - Brazilian Institute of Geography and Statistics). Table 01 shows some general indicators concerning Brazil. Table 01 - General Indicators Concerning Brazil Gross Domestic Product 1995 Estimated Population 1996 Value of Grain Production 1996 Global Exports 1996 Global Imports 1996

US$ 717 billion 160 million US$ 21.4 billion US$ 48.5 billion US$ 52.5 billion

Several Sources: IBGE, Banco Central do Brasil, LCA On the institutional and economic levels, Brazil has been going through a stabilization process since 1994, which dropped the inflation rates from 40% per month to an estimated 8% for the whole year of 1997. The GDP is expected to grow between 3% and 4% in 1997. There is also political stability and a solid democracy. Projections show an expected per capita income of US$ 5,900 in 2001. The average domestic income grew 38% in three years (1992 to 1995). Within four years Brazil, Korea and China will be the emergent countries with the double of the population with more than US$ 10,000/year of income (Ernst & Young, in Exame, April 1997). Table 02 shows the expected growth of GDP: Table 02 - Brazilian Gross Domestic Product( in US$ billion). For 2001: projections 1993 1994 1995 1996 2001

436.5 564.8 717.2 779.7 1000.6

Source: IBGE and Macrométrica - Exame, March 1997 These numbers make Brazil one of the fastest growing consumer markets in the world, in areas like pre-cooked frozen food, industrialized meat, canned vegetables, cookies, juices and others, as will be seen in session 2.1 (according to the Nielsen Outlook). There is a privatization process of electrical, telecommunication services, mining companies and infrastructure (harbors, high-ways and subway). There will be a restructuring of the public sector with changes in tax regulations in 1997. An estimate indicates that direct foreign investment reached almost US$ 8 billion in 1996, and an amount between US$ 10 and 20 billion is expected for 1997. Table 03 shows the countries that received big investments in 1996 (not only direct).

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Table 03 - Forward investments in 1996, in US$ billions China Mexico Indonesia Malaysia Brazil

52.0 28.1 17.9 16.0 15.7

Source: BIRD/World Bank, in Exame, April 1997 Brazil is the country (among the developing countries) which has the highest number of big multinationals operating in its territory. From the 500 biggest multinationals of the world, there are 382 operating in the country. The country was also ranked in the first place in industrial foreign investments from Germany, USA, France, Italy, Sweden, Switzerland and the Netherlands in 1996. The main purpose of this paper is to show how the agribusiness, one of the most competitive business of the country, is structured in Brazil. In order to do this, some data will be shown, such as the dimensions and potential of the agri-food business, in a systemic approach, starting with the consumer market, the distribution sector (mainly retailing), the agri-food industry and, finally, the supply sector.

2. - A BACKWARD SYSTEMIC VIEW IN BRAZILIAN AGRIBUSINESS

2.1 - THE CONSUMER MARKET In an universe of 160 million inhabitants, Marplan Consulting divides the social classes and levels of income in Brazil: Table 04 - % of the total population in the social classes and medium monthly income in US$ of the families Monthly Family Income 1986 1996 Class A US$ 4.000 08% 08% Class B US$ 2.000 17% 22% Class C US$ 900 32% 39% Class D US$ 500 36% 28% Class E US$ 300 07% 03% Source: Marplan Consulting - Market Research, Rev. Distribuição, April, 1997 Considering 1 US$ = 1 R$ The consumer behavior is different among these social classes and among the regions of the country. The cultural influences of european colonization, mixed up with african

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immigration and indian culture furbished a peculiar and diversified behavior and consumption habits to this population. All kinds of market segments join together in the Brazilian market. There is an A and B market whose demands characteristics are: high quality, convenience, health and brand consciousness, light/diet products (growing segment), low cholesterol and fats, more vegetables and fruit diets and other trends related to the food consumption in USA and Europe. This is a market that has low restrictions in the income for food expenditures, and is always demanding new products. Companies like Perdigão are adapting to this trend, launching a new product every 25 days. There is also a market for D and E classes, which have a high percentage of income spent on food, and high income elasticity for meat products, milk derivatives, and other value added products. This is a market that grows at high rates and is mostly enhanced with low price products, attracting some companies to develop specific products to reach this segment. It is a market that has potential to grow due to the high sensitivity of a large base of low income consumers that change consumption patterns whenever they are subject to income gains. The so called “income effect” happens when consumption increases with income increase.

Some Consumption Data The per capita consumption of chocolates in 1996 was only 0,7 kg, but 100% higher than 1990. Yogurts had the same growth rate. Despite this low per capita consumption, yogurts sales were more than US$ 700 million in 1996. The per capita consumption of milk presented the highest growth rate in this decade. It jumped from 1,53 liter in 1990 to 11,16 liter in 1996. And in the non-food sector, Brazil is the second market of USA’s Xerox, third TV market in world, fourth in video rental, and the sixth in Compact Discs. (Exame, April 1997, pg 32). Other examples are: the domestic market of vegetable oils, which reached US$ 2,3 billion, margarines which reached US$ 600 million, cookies which reached US$ 2 billion and snacks which reached US$ 900 million. These numbers indeed show how fast this market is growing. Related to the trends of health care and convenience in food consumption, the frozen ready to eat food market grew 41% in two years in classes C, D and E. In diet products the market grew 10% from 1995 to 1996, reaching US$ 600 million/year of gross income. Food away from home This is also a very fast growing market, fitting the world’s trends. In 1969, the Brazilians used to spend 1,87% of total income in food away from home. This number grew to 6,04% in 1994 (Dieese - Intersindical Statistic and Socio Economic Studies Department). Most of this is related to franchise investments in food away from home. Brazil was, in 1996, the fourth country in number of franchises, with more than 60 thousand operation

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points, after the USA (250 thousand), Japan (140 thousand) and Canada (65 thousand) (Source: Arthur Andersen).

2.2 - The Distribution Sector Importance of Retailing for Agri-food Chains The importance of retailing in the agri-food business systems is already known. Being the last part of the agri-food business systems, it has permanent contact with consumers, allowing companies to better understand this important part of the systems. Retail chains know who buys, where, when, how the consumer buys, what the trends are, and what the reaction to prices, promotions, habits, behaviors and other issues are. This information, a continuous market research activity, is of fundamental importance to the food chains (Neves, 1997).

Retailers and Growth Strategies One of the most renown growth strategy for retailers is the internationalization. There are several parts of the world where the retail activity is growing at big rates. This is an opportunity for companies to internationalize. This can be done by direct investment and also by alliances (joint-ventures). In this case, the company makes an alliance in the other country. The local partner gets technological increases and capital investments, and the entering company finds an already established distribution channel with suppliers, a brand and consumer loyalty. In this way, both partners can profit from the deal. With regards to the retailing in the world, Andersen Consultant’s Matrix analyses the growth potential of markets and the business competitiveness observed in them. This is show in table 05. Table 05 - Potential of Growth x Business Competitiveness POTENTIAL OF GROWTH x BUSINESS COMPETITIVENESS HIGH POTENTIAL OF GROWTH SMALL COMPETITIVENESS OF BUSINESS China, East Europe, Indonesia, Malaysia, Thailand, India SMALL POTENTIAL OF GROWTH SMALL COMPETITIVENESS OF BUSINESS Africa

HIGH POTENTIAL OF GROWTH HIGH COMPETITIVENESS OF BUSINESS Brazil, Mexico, Argentina, Chile, Korea Taiwan SMALL POTENTIAL OF GROWTH HIGH COMPETITIVENESS OF BUSINESS USA, Canada, Europe, Australia, Japan

Source: Andersen Consulting, in Neves & Fernandes Jr., 1997 As observed in this matrix, Brazil has a very big growth potential but also high business competitiveness. This is being observed by several international companies that are

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entering the country for the first time, or increasing their investments already made here. In 1996, the international companies acting in food retailing in Brazil were mainly Carrefour, Makro, Wal Mart and Sonae (50% of Cia. Real de Distribuição). The French Auchan, the Dutch Royal Ahold (acquired 50% of Bompreço) and also the German Rewe-Zentralie could be new entrants in 1997. The retail sector in Brazil is growing at a very fast pace. Around 80% of food distribution is done by hyper/supermarkets. Sales in 1995 reached US$ 43.7 billion, with an increase of 14% from 1994 to 1995. The biggest group in Brazil is Carrefour, a French chain, mainly with hypermarkets, established in the 80’s, and with sales of almost US$ 4.7 billion in 1995. The second is Pão de Açúcar (Cia. Bras. de Distribuição), a Brazilian group, with sales of almost US$ 3.2 billion. Table 06 - Brazilian’s 10 biggest retailers - Sales in 1996, R$ BIGGEST RETAILERS BY SALES Classifica tion.

RETAIL COMPANIES

PLACE STATE

SALES

96

95

1

1

CARREFOUR LTDA

SP

1996 ( R$ 1000) 4,897,013

2

2

CIA. BRAS. DISTR.

SP

3

3

CASAS SENDAS S.A.

4

4

5

NUMBER OF SALES CHECKPER OUTS AREA ( M2)

NUMBER N. OF OF EMPLO SHOPS YEE

3370

450,525

44

23,976

3,535,662

2783

294,734

223

20,737

RJ

1,545,741

1441

142,917

56

11,849

BOMPREÇO S.A.

PE

1,247,060

1157

122,687

50

8,576

5

PAES MENDONÇA S.A.

RJ

1,010,186

1011

138,345

35

6,190

6

7

NACIONAL CDA LTDA

RS

695,497

960

82,713

65

6,741

7

6

SUPERMAR S.A.

BA

656,880

878

102,004

51

6,397

8

10 CIA ZAFFARI

RS

587,913

597

51,323

18

5,894

9

9

CIA REAL DE DISTRIB.

RS

560,965

564

65,460

34

3,889

10

8

ELDORADO S.A.

SP

499,090

340

57,968

8

2,577

Source: Superhiper, April 1997 US$ 1.00 = R$ 1.10

Most of these enterprises are owned by Brazilian family groups. It is estimated that these groups invested more than US$1 billion in technology, in 1996, in order to equip their stores electronically and to enhance competitiveness against global retail companies. The foreign investments in Brazil are being made mainly trough alliances, where the national companies get technological support, and the multinational can get new markets already established. Analyzing the concentration rates, it is possible to observe that the participation of the 5 biggest retailers remained the same between 1987 and 1995, with almost 38% of market

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share. As for the 20 biggest, their share fell from 64% to 58%. In spite of this fall, it is interesting to note that the market is growing, so most of the companies are selling more. There is a trend towards the reduction in the number of stores (28% from 1990 to 1995) and increase in the average sales area (16,6% from 1994 to 1995). There is also a trend towards bigger stores, following what has happened in developed countries. With technology and the automatization process, the retail sector is reducing the number of employees (320,000 in 1987, and 270,000 in 1995). Table 07 - Performance of the 20 biggest in the 300 biggest THE 20 BIGGEST ( PARTICIPATION IN THE PERFORMANCE OF THE 300 BIGGEST ) 1987

1988

1989

1990

1991

1992

1993

1994

1995

95/90

SALES

64.0% 64.4% 64.8% 62.5% 59.8% 58.2% 57.9% 57.3% 57.6% -7.8%

STORES

39.4% 32.6% 35.9% 35.3% 30.9% 31.0% 28.5% 26.0% 25.5% -27.8%

SALES AREA (M2)

50.9% 49.1% 52.1% 52.0% 49.6% 47.8% 47.0% 45.8% 45.8% -11.9%

CHECK-OUTS

51.4% 49.4% 50.5% 50.4% 47.7% 45.9% 44.2% 43.5% 42.9% -14.9%

EMPLOYESS

58.5% 54.8% 54.6% 52.4% 48.7% 49.0% 47.0% 45.8% 45.9% -12.5%

Source: Superhiper, in Neves & Fernandes Jr., 1997

Fruit and Horticultural Products In Brazil the consumption of these products is also growing. In the city of São Paulo, with 10 million inhabitants, the share of the 1,400 daily street markets in the sales of horticultural products has fallen from 50% to 30% over the last ten years whereas that of supermarkets has increased from 12% to 17%. This trend is expected to go much further because in the last two years supermarkets have been moving towards a larger participation in the segment of horticultural products. There is also a very fast growing market for private labels which do not have more than 10% of sales even in the traditional and recognized products. The big supermarket chains are entering the market with their own brands, following the example of Carrefour. The net revenues by segment are presented in table 08. Table 08 - Net Revenues by Segment in Brazilian Retail Store Types Supermarkets Hypermarkets Convenience Stores Limited Variety Stores Clubs

Net Margins 1995 2,84% 3,06% 3,30% 4,40% *

Net Margins 1996 1,75% 2,70% 6,21% 7,86% 5,94%

Source: Supermercado Moderno, April 1997. Wholesaling

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The wholesaling sector in Brazil is going through a consolidation. The traditional wholesaler is loosing market because of the EDI programs, directly between industry and retail. But the wholesaler-distributor, which has a very strong logistics system reaching the whole country and adding value to the marketing channels is growing. One example is Martins, with growing sales, reaching almost US$ 1,5 billion recently. The 10 biggest companies in wholesaling in Brazil, and also their sales are presented in table 09. Table 09 - 10 biggest Brazilian wholesalers and sales in 1994 and 1995 (US$) CL 95

CL 94

1 2 3 4 5 6 7 8 9 10 20 biggest

1 2 5 3 4 6 12 9 8 7

Company

1994 US$

Makro Atac. S.A. Martins Ltda Arcom Ltda (*) Atacadão S.A. Ciro Distr. Ltda Peixoto Ltda Benjamim S.A. Atacado Vila Nova Adriano Coseli S.A. Cofesa

Total of the ranking

1995 US$(**)

%

1.362.108.235 967.368.322 370.000.000 452.000.000 378.726.000 296.797.876 127.535.188 191.522.589 206.232.164 217.000.000 5.411.172.263

1.323.895.640 1.123.572.425 594.181.348 420.765.269 374.624.000 285.880.616 245.988.996 210.002.236 186.443.520 178.631.800 5.911.494.744

-2,8% 16,1% 60,6% -6,9% -1,1% -3,7% 92,9% 9,6% -9,6% -17,7% 9,2%

7.436.887.023

7.954.539.556

7,0%

Source: Journal Distribuição

2.4 - The Agri-food Industry The most important sectors for foreign investments in Brazil are the supply automobile industry, the pharmaceutical industry, telecommunications, electrical energy, durable consumer goods, financing and industrialized food. The food industry in Brazil is expected to grow at a rate of 4.2% per year and expects to have investments of around US$ 11.5 billions until the year 2000 (ABIA, 1997). Table 10 - Participation of the food industry in the GDP (in billions of US$) 1994 1995 1996 GDP (market price) Total Industry Transformation Industry Food Industry

564,764 312,862 303,628 49,666 (11%)

718,495 408,218 396,239 65,381 (11%)

760,271 412,363 399,142 69,835 (11%)

Source: IBGE One of the most important contributors to the inflation control was the food prices. Between the period of July 1994, when the stabilization plan began, until January 1997,

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food prices increased around 26%, a number lower than the general price index (51%), housing (115%), transportation (45%), personal expenses (36%), health (78%) and education (111%). The food index was only higher than clothes which stayed stabilized in this period. The agribusiness sector has also contributed to the success in the commercial balance. The decrease of the higher deficit in the commercial balance has been one of the main challenges for the Brazilian economy. The participation of the agribusiness products in the list of Brazilian exportations was around 30% in 1996. Of this total, 10% came from agricultural and animal production and 20% from industrialized food. This participation has brought about positive balances, in opposition to the other sectors which have accumulated negative balances.

Table 11: Importation and Exportation of the Brazilian Agribusiness (US$ 1000 FOB) Agriculture/Animal Industrialized Food Agribusiness Total

Export 4,551,960 8,965,591 13,517,55 1 46,506,28 2

Jan-Dec/95 Import 3,240,863 2,610,472 5,851,335

Balance 1.311.097 6.355.119 7.666.216

49,857,613

-3,351,331

Export 4,944,682 9,574,600 14,519,28 1 47,746,72 8

Jan-Dec/96 Import 3,711,180 2,399,459 6,110,639 53,286,25 1

Balance 1.233.502 7.175.141 8.408.642 -5,539,523

Source: ABIA - SECEX/MF/SRF Table 12: Evolution of Brazilian Exportation, in US$ billions. Exportations Totals Agriculture Semi-industrialized Industrialized Machines of Agriculture use Tractors

1995

1996

46,5 10,9 19,6 25,5 0,133 0,123

47,7 12,1 17,4 26,4 0,190 0,168

% growing in 95/96 2,67 11,0 -8,6 3,23 42,80 36,95

% grow 96/97 (1st. quarter) 5,0 31,7 -3,96 -1,5 160

* comparison with April of each year. Source: Secretaria de Comércio Exterior/Siscomex (O Estado de S.Paulo).

The national food industries have been a target of several partnerships and acquisitions of local national groups by multinationals companies that try to expand their business. In 1989, among the 20 bigger companies of the food sector, 7 were controlled by foreigners while, in 1994, this number increased to 9.

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Table 13 - Biggest foreigner groups in the food sector in Brazil (1995 in U$ thousands). Company Souza Cruz Bunge Brasil Carrefour Nestlé Parmalat Cargill*

Net Patrimony 1,377,176 961,641 920,762 867,746 600,785 411.608

*Estimated data. Source: (Relatório Anual Gazeta Mercantil 96/97).

The Brazilian agroindustry developed basically in the 70’s with the local fiscal incentives that were provided by the government, followed by stagnation in the 80’s and characterized in the 90’s by a great volume of investments.

Table 14 - Main Brazilian agroindustrial companies, situation in 1995 (U$ thousands) Total Asset Tobacco Souza Cruz S. A. Philip Morris Marketing S. A. Food Products Ceval Alimentos S.A. Santista Alimentos S. A. Sadia Concórdia Textile Alpargatas - Santista Têxtil S.A. Vicunha Nordeste S. A. Sugar and Alcohol Usina da Barra S.A. Açucareira Zillo Lorenzetti S.A. Açucareira Corona S.A. Beverages Cia. Cervejaria Brahma Cia. Antartica Paulista Spal Ind. Brasileira Bebidas S.A Pulp, Paper e Pasteboard Aracruz Celulose S.A. Klabin Fab. Papel Celulose S.A. Cia. Suzano Papel Celulose S.A.

Net Profit

1,924,461.0 376,022

249,432 -25,089

1,516,524 1,254,105 1,131,563

62,827 20,137 99,138

544,339 628,542

-56,717 11,385

405,490 236,898 233,698

1,729 -14,211 -34,690

2,482,442 1,879,751 627,149

257,384 101,764 -9,306

3,879,153 1,584,288 1,940,332

346,555 69,729 84,809

Source: Agroanalysis, 1996. The market for less elaborate products, such as beans and rice, has more competitive characteristics, while for more elaborate products like dairy and meat by-products and the refined vegetal oils is predominantly dominated by less and big companies. These companies are enhancing their economic power through joint-ventures or acquisitions, which are strategic movements in an environment of more and more competitiveness.

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This kind of strategy has caused a growth in the amount of anti-trust processes moved by the CADE6 against the industries of the sector. Another factor that has contributed to the concentration in the food industry or to the necessity of high scale production is the reorganization of the idle capacity through the process of joint-ventures and acquisitions. These factors culminate with the entrance of multinational companies in Brazil. According to ABIA (Associação Brasileira das Industrias de Alimentos)7, in 1996 there were around 38 thousands factories dealing with food. This is the first position in the transformation industry. The sector also occupied the first position in the numbers of direct employment generated (775 thousand). The total income of the sector was US$ 52,9 billions for the same year.

Table 15- Annual Employment in the Brazilian Industry (thousands) Transformation Industry Food Industry

1994 5,078 754

1995 4,730 775

1996 4,650 779

Source: Ministério do Trabalho e Previdência Social

The total number of projects announced in Brazil during the period of January- November 1996 in the food, beverage and tobacco sectors was 144 (or 10,3% of the total in numbers announced) amounting US$ 9,153 millions (6,5% of the total in value announced).

Table 16 - Evolution of the Food Industry (% accumulate variation in years) Real invoice (IGP)* Real sales Production Occupied Persons Real medium wages Medium occupation of the installation capacity

Source: Decon/ABIA

1995 5.88 11.43 7.20 1,98 11.33 78.04 %

1996 4.68 6.34 4.23 0.03 0.46 78.90 %

* IGP=General Prices Index

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CADE (Coordenadoria de Assessoria de Defesa Econômica) is the institution that regulates and controls the anti-trust law in Brazil. 7 ABIA is the Brazilian Food Industry Association.

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The Brazilian agroindustry is concentrated in the southwest region of the country, as well as other industries. This region contains 40% of the country’s industrial establishments which represents 52% of the value produced in Brazil. The installation of agroindustries in the frontier regions of the country could be a good opportunity to add value to products. For example, to transform grain into meat, promote economic development, and, moreover, economize the freight cost by transporting goods with higher added value.

Table 17 - Values accumulated for the different sectors of the agribusiness Companies Analyzed Food Food Conglomerates Mills Bread and Pasta Oat, Corn Chocolate Candies e Biscuits Ice Cream Prepared e Frozen Food Condiments Diverse Conserves Industrialized Coffee Soluble Coffee Rice Vegetal Oils Mate Cashew-nut Coconut Others Total Food Total Textile and Leather Total Beverage and Tobacco Total Wood/Furniture/Paper Total Cane/Sugar/Alcohol Total Cattle Meat Total Agriculture

Net Patrimony (R$ thousands*)

10 35 17 14 9 33 6 10 3 14 23 6 9 52 3 3 4 42 293 499 116 386 228 399 226

3,771,079.0 751,054.0 106,201.8 84,134.8 271,221.3 650,214.8 216,931.0 75,582.0 42,958.0 188,805.0 87,969.0 150,707.0 108,953.0 1,172,975.3 36,136.0 52,244.0 50,825.0 436,325.1 8,254,316.1 9,788,575.9 8,973,376.7 9,608,495.2 6,973,426.8 6,573,084.5 5,882,582.5

Net Profit (R$ thousands) 446,947.0 7,314.0 3,274.0 5,901.8 13,814.2 82,934.1 56,613.0 -19,070,0 -1,076.0 -1,374.0 -816.8 14,262.0 8,949.0 -45,891.2 2,886.0 3,303.0 -11.836.0 -1,956.0 564,177.8 -93,972.0 876,933.5 587,233.7 -332,033.2 -3,318.7 104,302.3

Source: Gazeta Mercantil (Balanço Anual 1996/97) * Values of December 1995

Conclusions and Strategies for the Food Industry The basic strategy for the agroindustry sector are the joint-ventures and acquisitions, segmentation and differentiation, vertical coordination and finally diversification.

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Considering the saturation of the European and the USA markets, the food and agroindustry companies try to increase their profits through the migration of their investments to the new emergent markets like Brazil. The developing markets like Brazil are characterized by the increase of the per capita income, by the fast changes in the consuming habits and by great growth opportunities. This growing process is made through the introduction of differentiated products with market segmentation. Even in less elaborate products the segmentation is possible through the introduction of characteristics with high level of sophistication like the addition of vitamins for example. The segmentation of the market, with the introduction of different products, also permits less submission to governmental prices control (inflation control). Vertical coordination is crucial in this growth strategy. In the distribution sector like supermarkets and retailers which have good control and monitors with more facility the wishes and demands of the consumers this coordination is important. In the suppliers, the coordination is also important due to the demand of higher quality supplied products to attend consumer’s demands concerning to environment and hygiene aspects. At last, the diversification of activities, products and services have been strategies that decrease the risk for the agroindustries in a highly competitive market characterized by great changes. However this process has some limits related to the companies’ capabilities.

2.5 - Agriculture Brazil has importance and potential in the world’s agri-food business. The country has 547 million ha of arable lands of the total 850 million ha. That is almost 70% of arable land (the second highest percentage is in Europe, with 44%). Almost 19% of world’s arable land is in Brazil (FAO/ONU), but the country uses just 10% of this area. There is great farming potential in the “Cerrado” (Savannah) region, in the Midwestern part of the country. The yearly production of agri-food business is estimated to be more than US$ 160 billion, approximately 30% of the GDP. The composition of this total shows 6% to the input sector, 28% to the agricultural sector and 66% to processing and distribution sectors. Brazil has a privileged position in the world scene, not only by the volume produced, but also by the volume exported. However this is still a poor performance for such a resourceful country. The lack of a stable agricultural policy causes a large number of problems to the production sector. Problems with financing, taxes and poor transportation infrastructure also hinder competitiveness. With the recent stabilization process, larger amounts of resources are being invested and with the privatization of infrastructure, big increases are expected in grain production (mainly in the Midwestern region ), meats (the poultry and pork sectors are following the grain production towards the Midwestern and fruits (Brazil is the largest fruit producer in the world, but the exports are just around US$ 100 million/year), mainly in the northeast of

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the country, where large investments are being made, some of them by multinational companies. These are already market-oriented investments, trying to apply supply chain management strategies.

Brazilian Agricultural Frontiers and Competitiveness Brazil is the biggest producer of fresh oranges and fruits in general as well as concentrated frozen orange juice with 1,055 million of metric tons. Brazil is the second biggest soy-bean producer following the United States with 23,2 million tons. Brazil is also the third biggest corn producer behind the United states and China with 33 million tons. The second biggest tobacco producer behind the United States with 0,427 million tons. The second in sugar cane and raw sugar production following India, and the first in coffee and alcohol. Besides that, the planted areas have stabilized since the beginning of the 80’s. Productivity is growing. From 1980 to 1995 it grew more than 35%. In order to have a better idea of the Brazilian production numbers table 18 shows the production of selected crops and table 19 shows the gross income of selected crops in the last two years. Table 18 - Production of Selected Crops in Brazil (in millions of metric tons) Crop/Year Alcohol (m3) Arabic Coffee Cocoa Corn F.C. Orange Juice Raw Sugar Soy-bean Sugar cane Tobacco

1992 12.7 1440 0.3 30.8 1.145 9.8 19.3 90 343

1993 11.69 1710 0.33 33.0 1.118 9.93 22.5 91 371

1994 11.28 1680 0.28 37.0 1.126 12.5 24.7 110 442

1995 12.7 1008 0.23 32.0 1.085 13.7 26.0 120 398

1996 12.34 1650 0.27 33.0 1.055 14 23.2 125 0.427

Source: FNP-Consulting, USDA.

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Table 19- Gross Income of Selected Crops in Brazil (in millions of US$) Crop/Year Soy-bean Sugar Cane Corn Coffee Rice Orange Beans Tomato Tobacco Potato Cotton Cocoa Banana Other Total

1995 4559 4159 4507 2388 2205 2811 1567 1148 831 862 694 312 297 5925 27706

1996 5002 4504 4498 2325 2202 1800 1649 1108 978 604 562 287 207 6045 26769

Source: FGV and IBGE Other competitive advantages are that Brazil still has a stock of plowable land situated on good rainy areas. There is still a lot of cerrado (Savannah) land to be utilized. Of the total area of cerrado areas, around 2.1 million km2, only 33% are occupied by agriculture and cattle growing. These areas will act as buffers to the exploitation of the rain forest, in the Amazonian region. The experiments of cattle growing and agriculture in the rain forest areas were such a great disaster that almost nobody thinks of exploring it in the traditional way anymore. The slash and burn practices in Amazon has proven unsustainable to farmers. In terms of deforestation Brazil is ranked in the 5th place in Latin America according to EMBRAPA, the State Agricultural Research Company data. In first place comes Paraguay with 4% of deforestation over the total of its natural forests. Then comes Equador with 2,6%, Venezuela with 0,9%, Colombia with 0,6% and Brazil with 0,4%.

Regional Competitiveness and Globalization In the modern world it is necessary to understand the region concept in order to comprehend the changes caused by the globalization process of the economy. After the fall of Berlin wall in 1989, the concept of nation-state went down along with the political borders of countless countries. One good example of this problem are countries whose borders simply disappeared, due to the formation of the EEC, Nafta, Mercosul and other blocks. Discussing the concepts of competitiveness it is possible to link these concepts to the regional processes inside the larger process of globalization. In the present process of globalization there is a pulverization and an incitement of the competitive spaces. In the XIX century Ricardo said, formulating the comparative

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advantages law that: “ ...comparing two products A and B produced in two distinctive countries,1 and 2 expressed the production cost of A in relation to the cost of product B. The comparative advantage would be in the country in which the smaller relation of production of A to B would be achieved.” According with Porter (1993) the idea of comparative advantage, based upon Hecksher and Ohlin, was that, if all nations had equivalent technology, they would differ in the production factors such as: land, capital, labor and natural resources. The examples are: electronic assembly in Korea (with low cost of labor), the Swedish steel (with very little impurity indexes in the iron ore) the Brazilian soy bean meal (with abundance of plowable lands). These ideas were later dislodged by the concept of transnational companies (with production bases in several countries), global sourcing (with multiple sourcers producing for multiple plants in the world), world products (like the Ford Escort, Fiat Palio, and many Volkswagen and General Motors models of cars). The specialization then would not be in a determined country but in a product. The United States started to produce goods in the form of software, while the hardware was produced first in Japan and then in the so called Asian Tigers (Hong Kong, Taiwan, Malaysia and Korea). In Brazil the example of poultry growing can be cited. This activity is competitive in determined regions inside the national territory. Genetics is not a problem because it can be easily bought in the international market. This activity is showing growing productivity (conversion of meal into meat) with the consequent reduction in the termination period. Land in Brazil, as natural resource, is still abundant and cheap when compared to European countries or Japan. Brazil produces a variety of poultry products ranging from frozen carcasses (with very little added value) to very sophisticated cuts (taylor made) to the Japanese market. Other specialty produced in this area are ethnic poultry products exported to the Muslim countries. These products are supervised by religious ministers inside the plants to guarantee the tradition and ritual procedures. Brazil is a "sui generis" case, because the country is also very competitive in the production of raw materials such as corn and soy bean, used in the meal industry. There are no problems to expand or to horizontalize the territorial production base of these crops. In a general way the rains are well distributed in Brazil and, where is not, irrigation techniques have been used against dry season. These two activities have had an enhancement in productivity along the last 15 years, through technology acquisition in genetics and management. These actions guarantee companies situated in the southeast and south competitive and comparative advantages in relation to other countries. The biggest problems in Brazil's performance in agribusiness as a whole still remains in governmental interference, lack of policies, lack of roads and harbors infrastructure (high operational costs). According to GIORDANO (1995), the inefficiency of these systems have struck the operations of exports of the whole Brazilian industry, specially those who depend upon refrigeration, such as the animal protein. Besides that there is a long way to go until the bureaucratic procedures change.

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As can be seen, some times due to other factors, the comparative and competitive advantages lose their value or diminish in relation to the real margin attained. In Brazil it can be said that there are various regions inside the national territory apt to expand horizontally and produce several different products. With a wide range of latitudes and reasonably well distributed rains around the year Brazil is able to produce a wide range of products varying from coffee and soy bean to apples, pears, melons, grapes, and others.

Brazilian Agricultural Frontiers With a vast territory still to be occupied, mainly in the cerrado region and without threatening the Amazon Ecosystem, Brazil is expanding its frontiers mainly in three regions named: Barreiras-Ba; Balsas-Ma and Parecis-MT as shown in the map bellow. The occupation of these regions occurred more then 15 years ago and now they are booming with affluence from external financing and the good prices of the soy-bean in the international markets. There are important projects financed by JICA-Japan International Cooperation Agency called PRODECER (Cerrado Development Program). These projects of colonization are concerned with environmental care and select a specific profile of technified settlers. In order to understand the importance of these places the Balsas (PRODECER III) region jumped from 1986 to 1996, from a planted area of 8.8 thousand hectares 8 to 89,127 hectares. The corresponding production increased from 13,881 tons to 192,229 tons averaging an yield of 2.15 tons/ha. Barreiras in Bahia (PRODECER II) jumped from 250 thousand tons in 1987 to more than 1 million tons in 1996. Ceval Industries is located here with a milling plant which adds value to grain. There are plans for the construction of a plant with capacity to mill 600.000 tons/year, next to the harbor of São Luis, in the State of Maranhão. With a railway connecting the Balsas region to the harbor, and having competitiveness in the production cost besides high productivity, turns this area into one of the most important soy bean production regions of the world. The Parecis region in the State of Mato Grosso jumped in ten years from 2.7 million tons to more than 5,5 million tons in 1996.

The map shows more details of the localization of these regions in Brazil.

8

1 hectare = 10.000 m2 or 2,46 acres

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The Brazilian Competitiveness

There are a lot of advantages and also disadvantages in the Brazilian Agribusiness System. In the poultry Agribusiness System, Brazil has a very significant advantage. High genetic technology was introduced, as well as high management standards. The meal is very competitive and corn is abundant in the production areas. The practical result of this efficiency were shown in the fall of the chicken’s meat price for the final consumers during the implementation of the stabilization plan. Now a considerable portion of the low income population have included chicken meat in their menus. Of the total meat produced in Brazil, according to Jank (1996), it is exported 6% of the beef, 12% of poultry meat and 3.5 % of the pork produced.

2.6 - Supply Sector The supply sector is, in general, growing very fast. It can be said that the main characteristics of the stucture of this market is the economical concentration degree, the diferentiation of the products, barriers to entrance and individual action in a competitive basis. In the last seven years the planted area diminished in relation to the productivity that showed a significant 35% growth. The input sector in Brazil is quite advanced. Due to the policy of Import Substitutions that began in the middle of the 60s, the country acquired an industrial base that supported the internal demand for inputs for more than three decades. The dimensions of the sector can be seen in the above table below : Table 19 - Sales of the Supply Sector in Brazilian Agribusiness. Data in US$, tons, or units Year

Fertilizers US$ 1.000

Seeds 1.000 t

Feed Stock US$1.000

1992 1993 1994 1995 1996

1.749 1.787 2.234 2.311 2.960

1.516 1.660 1.761 1.650 1.700

2.050 3.998 4.387 4.600 5.200

Agricultural Machinery 1.000 units 16,2 26,6 40,7 22,1 13,3

Agrochemical US$ million

Veterinary US$ million

Limestone US$ 1.000

947 1.050 1.094 1.535 1.762

515 615 691 750 800

225.000 295.000 306.000 181.000 240.000

Source: Anda, Abrasem, Anfavea, Sindam, Sindirações, Sindical. Authors Elaboration. Due to recent acquisitions and merging, this sector is becoming highly concentrated in Brazil as well as all over the world. The veterinary products had sales of US$ 826 million in 1996, with a growth of 5,6% from 1995. In fertilizers, the consumption in Brazil in 1996 was about 12,24 million ton, 13% larger than 1995. Brazil is the fourth biggest market in the world. The market has around 250 companies, that also imported more than US$ 1,1 billion in 1996.

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The agrochemical sector grew 14,7% in 1996, reaching almost US$ 1,8 billion in sales. The feed sector also grew, at a lower rate (2,75%), with sales of almost US$ 5,2 billion in 1996. The agricultural machines market grew 10% in 1996. This is one of the sub-sectors that suffered most with the short supply of credit lines and the competition promoted by imported products that happened with the liberalization of the economy. The Seeds market is a growing sub-sector inside the input sector. The demand for grain seeds as well as for horticultural products is increasing. There are new corn varieties and new hybrids in the market. With the approval of the patent law for genetic rights it is expected to have an enhancement in the the supply of seeds. Sales in this sector decreased from 1,41 million ton in 1995 to 1,31 million ton in 1996. The main reductions were in beans, rice and cotton seeds.

3 - CONCLUSIONS Brazil has been going through a big “quiet revolution” in the last few years. The consolidation of democracy in the 1980’s, the maturity observed in the 1992 President impeachment process, the economic stabilization with a new currency since June 1994, the fast opening of the economy and the election of a president known worldwide for his academic work, started this very difficult process of change of Brazil’s foreign image. Besides these aspects there is still a long way to search for competitiveness in Brazil. The restrictions that may cause some kind of problems in the development of the Brazilian Agribusiness systems according to Giordano (1996), are: • Domestic X International Market. Without despising the international markets Brazil ought to take better care of its domestic market. The general process of inclusion of consumers in the market in the last two years, due to the raise of the income will not stop and this factor may be the key to reach surplus to international markets. • International competition. The opening of the Brazilian economy has forced the agribusiness systems inside the country to adjust themselves to this new reality, becoming more efficient, at reducing costs and bettering quality. • The infrastructure of roads, is still one of the major problems, even though there are good perspectives to privatize these roads in the long run making them more operational and efficient. • The cost and efficiency of the Brazilian harbors are still causing problems to exports and imports. All the competitiveness may be lost when the product is on board. • Other problems are: lack of strategic vision, lack of coordination, tarifary and non-tarifary barriers and taxes.

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The scenario that is being designed is very good for the Brazilian agri-food business. The room for enhancing grain, fruit and value-added processed products with technology, infrastructure and foreign investments is very large. Recent incentives to exports, like tax reductions are already increasing the production. Most of the recent movements of the European food industry, related by Fearne (1996, pag 304), ...food safety legislation, consumer concern of where and by whom food products are produced, demand for chilled and fresh fruit products, decreasing life cycle, grown of own label and incentives to squeeze costs in the supply chain to gain additional margin and enhanced competitiveness...” can be observed in the Brazilian agri-food business and consumers, as well. The changing consumer habits towards shopping in big stores, where they can have everything they need “under one roof”, is also observed in Brazil. The convenience, comfort, safety and variety are meeting consumer needs. There are still big opportunities for hypermarkets and discount stores, but only if they have “up-to-date” technology. In this scenario, Brazil is a very attractive growing segment in the world’s agri-food business. Multinational companies are entering this market, mainly through alliances with local partners, in order to compete in an already highly competitive market.

4 - REFERENCES

ABIA (Associação Brasileira das Indústrias da Alimentação). 1995, A Indústria Brasileira da Alimentação Hoje (The Brazilian Food Industry Today). 28p. ABIA (Associação Brasileira das Indústrias da Alimentação) 1995, Investimentos da Indústria da Alimentação de 1995 a 2000 (Investments in the Food Industry from 1995 to 2000). Monografia. 29p. ABIA (Associação Brasileira das Indústrias da Alimentação). 1997, O Ímpeto da Indústria da Alimentação e as Inevitáveis Possibilidades de Expansão (The Impetus of Food Industry and the Inevitable Expansion Possibilities). 21p. ENGEL, J.F; BLACKWELL, R.D & MINNIARD, P.W , 1995 - Consumer Behavior - Eighth Edition, The Driden Press, USA, 951 pg. FEARNE, A, 1996 - Strategic Alliances and Supply Chain Management: Lessons from the UK” Proceedings of the Second International Conference on Chain Management in Agri and Food Business- Department of Management Studies - Wageningen Agricultural University, May 1996, pg 293-307 GIORDANO, S.R. 1996, A Competitividade das Regiões no Processo de Globalização( Regional Copetitiveness in the Globalization Process).119 p. São Paulo,. Projeto de Tese de Doutoramento-USP, FFLCH. Departamento de Geografia GIORDANO, S.R. 1995, Perdigão: Tecnologia e Reformulação dos Negócios (Perdigão: Technology and Business Reestructuring) Estudo de Caso apresentado no V Seminário Internacional de Agribusiness, em Águas de São Pedro -SP.

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JANK, M.S. 1996, Competitividade do Agribusiness Brasileiro: Discussão teórica e Evidências no Sistema Carnes (Competitiveness of the Brazilian Agribusiness System: Theoretical Discussion and Evidences in the Meat System). 191 p. São Paulo, TESE (Doutoramento). JOHNSTON, R. & LAWRENCE. P.R. 1988 Beyond Vertical Integration: The Rise of Value-Adding Partnership - Harvard Business Review, July/August - 14 p NEVES, M.F., 1997 - Food Retailing in Brazil - Presented at the Second Agri-food business International Conference of the Royal Agricultural College - Cirencester, UK, September, 1996. Submitted for publishing. NEVES, M. F. & PINHEIRO MACHADO, C. A., 1996 - A Distribuição Varejista de Alimentos na Europa (“Food Retailing in Europe”)- Capítulo 05 do livro “Agribusiness Europeu”. Pioneira, São Paulo, S.P., 130 pag. (Chapter 5 of “European Agribusiness”, a book by Pioneira Publishers, Brazil, 1996). NEVES, M.F. & FERNANDES Jr., W.B, 1997 - “Cia. Real de Distribuição: O Consumidor Determinando o Futuro do Varejo” - VI Seminário Internacional de Agribusiness do PENSA/FEA/USP., pag 1-36. (CRD Company - The Consumer Determining the Future of Retail - in V PENSA International Seminar Proceedings). Revista Case Studies - IBMEC, No. 03, Ano 01, pag 66-78. NEVES, M.F. ; LAZZARINI, S.G. ; MACHADO Fº, C. A. P. 1997 Agribusiness Brasileiro: Cenários e Perspectivas (Brazilian Agribusiness: Scenary and Perpectives). Accepted for publishing at RAE/FGV São Paulo. PORTER, M. ,1993, A Vantagem Competitiva das Nações (Competitive Advantage of Nations), Editora Campus, Rio de Janeiro VIGLIO, Eliana C. B. L.; 1996, Industria de alimentação - características e tendências para o ano 2000 (Food Industry-Carachteristics and Trends to 2000). Agroanalysis, vol. 16, n°. 9, setembro p.6-15. WEDEKIN, I. & NEVES, M. F., 1995 - Sistema de Distribuição de Alimentos: O Impacto das Novas Tecnologias - In: V Seminário Internacional de Agribusiness do PENSA/FIA/FEA/USP, ET 001/95 e Revista de Administração da FEA/USP, edição de Dezembro de 1995, 31 pg.. (Food Distribution Systems: The Impact of New Technologies - in V PENSA International Seminar Proceedings) WILKINSON, J. 1996, Estudo da Competitividade da Indústria Brasileira - O Complexo Agroindustrial(Competitiveness study of Brazilian Industry. The Agroindustrial Complex). Editora Universidade Rural, p. 136. WILLIAMSON, O.E., 1985 - The Economics Institutions of Capitalism - The Free Press, New York, 449 p. ZUURBIER, P., 1996 - Market Structure and Vertical Coordination. - Proceedings of the Second International Conference on Chain Management in Agri and Food Business- Department of Management Studies - Wageningen Agricultural University, May 1996, pg 307-322 ZYLBERZSTAJN, D. 1995 - Economia dos Custos de Transação: Conceitos e Aplicação ao Estudo do Agribusiness - Tese de Livre-Docência apresentada à FEA/USP, 237 pag. (“Transaction Cost Economics - Concepts and Applications to Agribusiness Studies” - Post-PhD. Thesis, University of São Paulo).

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