Brazil - More latte than espresso?
The major problem has been a lack of ability on the part of the national and state governments to enforce prudent fiscal policies and introduce the austerity measures demanded by the IMF in return for the last support package. The public sector deficit was running at 8% of GDP in 1998. High interest rates were in the end not enough, once international investors had lost faith in emerging economies, to buy time for structural reforms and prevent the devaluation.
Brazil's population in 1999 is estimated at 164 million, mostly concentrated in the coastal regions and large cities. In recent years there has been a significant move away from rural areas and twelve cities are now estimated to have populations of more than one million. Sao Paulo, with around 19 million people, is one of the world's largest metropolitan areas.
The structure of the dairy industry in Brazil has changed considerably during the past twenty five years. There has been move towards consolidating the processing of dairy products and by 1998 fewer than ten companies accounted for more than half of all milk processed.
For over 40 years farm-gate and dairy product prices were regulated until liberalisation in November 1991. Since 1995 the government has been monitoring prices to avoid abuse by producers but they are not fixed as before.
Raw milk production grew at an average rate of around 7% per annum from 1993 to reach 20.6 million tonnes by 1997. This is forecast to increase by a further 5% in 1998 to reach 21.6 million tonnes. The steady recent growth in milk supply is mainly attributable to improved milk yield. This has grown by almost 8% per annum over the past five years, thanks to significant investment in upgrading the genetic profile of the national herd but with an average milk production of 1,280 litres per cow estimated for 1998, the Brazilian dairy industry is still lagging well behind its Mercosur neighbours, and in particular Argentina where average productivity has reached 3,800 litres per annum. It is widely accepted that yields could double within a relativity short time by continuing the present programme of investment in dairy genetics, improved herd management practices and by better nutrition. Milk production is now increasing in non traditional areas such as Goias, which is now estimated to be in second place behind the state of Minas Gerais.
Milk production in Brazil is highly seasonal because practically all cows are fed on grass, the quantity of which naturally varies with the weather. The seasonality in milk supply is also reflected in volatile farm gate prices. Relatively little milk comes from specialised farms. Liquid milks available in the commercial Brazilian market include pasteurised milk, UHT milk and flavoured milk. Pasteurised milk in Brazil is further sub divided into types A, B and C. Type A is produced, pasteurised and packed by the milk producer. Type B is pasteurised and packed by a company other than the producer of the raw milk. Rules applying to the hygiene, health of the dairy cows etc are different for each type of milk. Almost the whole production of types A and B is sold in Sao Paulo and to a lesser extent Rio de Janeiro. The rest of the country mostly only consumes type C, which accounts for around 85% of all pasteurised milk.
As recently as three years ago, the price premium of type C milk over UHT milk was as much as 40%. This has now fallen to around 5% and in 1998 it is expected that UHT milk sales at 3.1 billion litres will have exceeded for the first time sales of type C pasteurised milk at 2.7 billion litres. The UHT sector grew at a reported 26.5% over 1997 compared with 8.9% for pasteurised.
UHT is growing so rapidly because the carton packaging is perceived by consumers to be superior to the glass bottles or plastic bags used for pasteurised milk. Since it does not need refrigeration, UHT milk is more suitable in those parts of the country where distribution and especially refrigerated distribution is poor. Another factor in the increasing take up of UHT milk has been its promotion by energetic suppliers such as Parmalat, who have used the product as a mainstay in their development strategy.
UHT milk may be growing for the reasons outlined but milk powder is even easier to handle, particularly in the poorer and climatically more difficult regions of the north and north west and Brazil is by far the largest market for retail milk powder in Latin America. In 1997 the retail whole milk powder market was estimated at approximately 280,000 tonnes equal to approximately 2.24 billion litres in LME terms.
Brazil is a major consumer of concentrated milk in the form of condensed milk - total demand is now estimated to be approximately 250,000 tonnes. There is no use of evaporated milk as in Peru, where concentrated milk is used mixed with water for drinking milk. Condensed milk is used only for cooking purposes and mainly for desserts for which a large number of recipes exist.
At a per capita consumption level of only 0.4 kg per year, butter is a relatively insignificant product in the Brazilian dairy diet and there is strong price competition from margarine. Cheese consumption leapt forward in 1995 when imports rose to 90,000 tonnes or about 20% of all consumption, if cheese from the important informal sector is included. Local production has continued to grow at just under 4% per annum since then but imports have dropped back to an estimated 21,500 tonnes in 1998 following an increase in tariffs faced by non Mercosur suppliers from 19% to 33%. Mozzarella is the most important cheese type reflecting growth in the fast food sector. However processed cheese is of minor importance (less than 2% of consumption). Some local cheese types such as prato and requijão cremoso are used where in other markets processed cheese would be preferred.
The dairy industry has been among the more proactive in developing relationships with foreign firms, which may be partly explained by its dependency on imports. Despite the economic difficulties of 1998, Brazil has been seen as presenting appreciable medium term opportunities for multinational food companies and this is supported by the list of those already present in the market:
Bestfoods (formerly CPC)
Kraft (Phillip Morris)
The main dairy processors in approximate order of importance are:
There are many other cheese producers in Brazil, the more important of which are Coonai (producing 30 different cheese types), Quatá (mainly Prato cheese), Catupiry (strong in pizzerias), Laticínios Nova Esperança (mainly cheese but also involved in pasteurised and UHT milk).
The recent economic tribulations have naturally affected growth in most dairy product sectors and there is a notable increase in pressure from local industry for protective measures against imports (and especially non tariff barriers such as certification of origin and insisting on the pre-inspection of plants). It will take time for Brazil to get back on track but the long term potential is clear.
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