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29/09/2015

A bigger share, please?

Suzana Cmargo
Brazilian producers are trying to modernize and get into shape to compete on the global milk, cheese and by-products market – an agribusiness sector where Brazil has lagged behind
SUZANA CAMARGO

The grandparents of Cícero, Paulo and Carlos Hegg were born in Switzerland, the land of cheese. However, the family only began to work with dairy products in 1980 when two of the Swiss-Brazilian brothers — Cícero and Carlos — bought a small plant in the town of Tiros in the Triângulo Mineiro region. They called their company, Tirolez after its place of origin. (Paulo, a specialist in foreign trade, would join the business later when it started to go international.) “Our aim was to make a good cheese, with a quality that would be recognized abroad. We always dreamed of exporting,” said Cícero.

The dream is now being realized, 35 years after the company was founded and Tirolez products are sold to 11 countries. Angola and Ghana in Africa account for almost half the volume exported, followed by Chile, Japan, Lebanon and Venezuela. However, this urge to find foreign markets is not the rule in the Brazilian dairy business. The opposite, in fact, and Tirolez is an exception.

Brazil produced 34 million tons of milk in 2013, behind only China, India and the United States at global level. However, almost all of it is consumed domestically and milk is even imported to meet the internal demand. At the same time, the milk-producing sector still has a long way to go before it can operate with ease in international markets as is the case with neighboring dairy farms and pastures. Producers of milk and its by-products are the kind of poor cousins of Brazil´s rich agribusiness sector.

While other segments — such as grains or meat — take pride in their use of state of the art technology to compete on global markets on an equal basis, the milk chain in Brazil, with rare exceptions, is chronically behind in its production practices and technologies. The result is that productivity is excessively low which means, in turn, that exports are very modest indeed.

The figures confirm this. The United Nations Food and Agricultural Organization (FAO) says American dairy farmers can obtain a daily volume of up to 33 kg of milk from a cow while Germans achieve 24 kg. The average daily productivity on Brazilian dairy farms is only 5 kg of milk per animal. Each cow in the Netherlands produces 8,000 kg of milk a year. Brazil produces a quarter of this amount - around 1,800 kg/year. Only 1% of Brazilian milk production was exported in 2014.

This means that the exports from the production chain of the world´s fourth-largest milk producing country, with a herd of 23 million dairy cows, made a contribution to the trade balance in 2014 of a mere US$ 350 million. (The Netherlands, which has 1.6 million dairy cows, exports US$ 8 billion a year in milk and dairy products.)
Obviously the comparison between the two countries needs to take the difference in the size of the domestic markets into account. Nevertheless, it is clear that there is an abyss between the conditions under which the European producers operate and those in Brazil.

Some of the obstacles holding back advances in the Brazilian milk industry and preventing it becoming competitive in terms of exports are really basic. For example, the incidence of disease in herds, such as brucellosis and tuberculosis. Others replicate the bottlenecks to competition that are common among a large part of Brazilian industry, such as a lack of skilled labor and modern automated premises in most dairy farms.
Agronomist and consultant Cesar de Castro Alves, from the MB Agro consultancy, gives an example of this backwardness.

It was only 20 years ago that it became common in Brazil for milk to be collected in cooling tankers so that the milk did not go off from one day to the next, as occurred with the old urns. “It was an important advance but it is something that has been done in Europe for almost 100 years,” he said. (See more on page 25).
To give the sector a boost, the Ministry of Agriculture, Fisheries and Supply launched a program in the first half of this year called Improving the Competitiveness of the Brazilian Dairy Sector. This brings together various measures affecting agricultural policy and regulations along with initiatives to improve sanitary aspects and the quality of the milk and dairy products.

The project also aims to strengthen the technical and managerial assistance provided to small dairy farmers who form the initial link — and perhaps the weakest in economic terms — of the productive chain. “Most producers have fewer than 30 cows which are badly treated. The farmers are undercapitalized, the standards of hygiene are precarious and most do not even know what their cost of production is,” Castro Alves said.

It is producers like these who provide a large part of the fresh milk that goes to the industry to be finished. The goal of the government program is to enhance the technical knowledge of these farmers through continuous education and boost their social ascension from the D and E classes to the C class. Caio Rocha, an executive with the Ministry´s Secretariat for the Development of Agriculture and Cooperatives gave an idea of the number of farmers involved in the program. “We will train 80,000 professionals throughout the country in the coming four years,” he said.

The project also foresees giving incentives to exports of dairy products although this is not its main focus. “We will set up a foreign trade structure,” Rocha said. The immediate objective is to triple exports proportionally over four years. This means that Brazil will no longer export only 1% of its dairy production but raise this to 3% by 2019.

The target may seem unambitious but the idea is that it will be just the beginning. The government´s plans are to try and grab a slice of the global growth of consumption of dairy products. World demand for milk, cheese, yogurt and other by-products came to 747 million tons in 2013, according to the FAO. The estimate for 2025 is that 1. 2 billion tons will be needed to match the hunger of the world´s population. (Powdered milk currently accounts for 60% of Brazil´s dairy exports, followed by condensed milk, cream and butter.)

This is a good time to boost the international expansion of Brazilian dairy products. The costs of importing milk and by-products to complement what is produced domestically has been falling and there is a prospect, for the first time in decades, of milk and by-products production in Brazil exceeding the domestic demand. A situation like this means that exporting will become not just an opportunity but imperative. These costs amounted to an average of around US$ 600 million a year until 2013 and fell to US$ 448 million in 2014. They are expected to decline to US$ 138 million this year.

“We are bound to turn this situation around,” said Ricardo Cotta, institutional relations director of Itambé, a company from Minas Gerais that is the largest Brazilian exporter of dairy products. “We have reached a balancing point, a unique moment in history,” he added. Therefore, it is time to create the conditions to win markets abroad. However, there is a long road ahead to get there.

What needs to be done to make this path easier besides improving the conditions and production technology in the country? One of the first step is to diversify and expand the export markets. The main importer of Brazilian milk and dairy products is currently Venezuela — which accounted for 55% of exports last year. However, it is a country in recession and enmeshed in a serious political crisis with an uncertain outlook for the near future. “Sales are one-off and sparse,” said Cotta from Itambé whose main foreign client is Venezuela. “It is a risky business and totally differentiated due to the situation the country is experiencing at the moment”.
Itambé is certainly the most experienced Brazilian exporter in the sector, both in terms of the time as well as the volume sold.

It was exporting products such as butter and powdered milk in the 1970s. Last year, it exported 25,000 tons of dairy products and had revenues of US$ 120 million, i.e. 35% of the sector´s exports in milk and by- products. All Itambé´s five production plants are geared to export and 10% of what is produced today is sent abroad — led by powdered milk.

Tirolez decided to compete in a niche that does not even appear in the statistics of exports of Brazilian dairy products - cheeses. The Hegg brothers´ company has also been investing in expanding the share of its products in foreign markets. It is currently in the final stage of negotiations with a large American distributor whose identity it prefers not to reveal. “By the end of the year, a test will be carried out with our cheeses in a group of stores in the United States,” said Cícero.

The entry into the American retail market could be a leap forward in achieving a challenging goal for Tirolez which is to start exporting 10% of its production. The company has already exported 5% of what it produced but that percentage is currently around 2%.

The cheese segment on the world dairy market is dominated by the ultra-respected and centuries-old European producers. Germany, France, Holland and Italy lead the ranking of the top players (and jointly have 50% of global exports) and conquer the world with their high quality specialties (and high prices). In these countries, cheese is regarded as a top of the line food and cheese production is carried out on a large scale, with great expertise and advanced technology. (See more on European cheese on page 26.) Europeans have been surprised to face a new competitor in recent decades which is the US.

The Hegg brothers are not intimidated by this battle of the giants. “There will always be someone who will eat one of our cheeses, like it and want to import it,” said Cícero. He singled out what is even a competitive advantage of Brazilian product which is that, as most of the herd in Brazil is still raised in the pasture, the cheese has a distinct taste. It is different from cheese made with milk produced by animals in confinement and is an improvement on the cheese made by some of its competitors.

The company has had sanitary and customs certifications to export since 1993. The first exports of Tirolez cheeses occurred six years later and they were shipped to the other side of the world to Japan. “We were contacted by a company that had spotted the demand by the dekasseguis.” (These were Brazilian workers descended from Japanese immigrants to Brazil who went to find work in the land of their ancestors in the 1980s and 1990s.) Tirolez´s international expansion process, therefore, began by meeting the requirements of the Brazilian-Japanese residents in Japan who wanted the Brazilian types of yellow prato cheese, mozzarella, provolone and requeijão cream cheese they were used to back in Brazil.

There are also newcomers just starting to test the foreign market. Maikel William Grasel from Santa Catarina state is another cheese producer of European stock and sees a window of opportunity to export the Lac Lélo brand produced by Laticínios São João. The company finishes the production of 350 family suppliers in the eastern region of Santa Catarina and its products are widely available in Brazil´s southern region. Grasel now wants to tempt the palates of Chileans, Russians and Venezuelans. “The capacity to produce more and better cheese raised the possibility of looking for more profitable markets abroad,” he said.

Lac Lélo is being cautious and has chosen to invest in only three countries in the first stage of going international. “As this is a new process for us, all the stages are evaluated and the decisions taken with the greatest possible security,” he added.

Lac Lélo modernized its processes in 2014 to become more competitive. It transformed the semi-automated production line to one that was fully automated. This ensured that the final products had better standardization and also expanded production capacity. The company has a portfolio of 50 products but will only export mozzarella and prato cheese for reasons of logistics and shelf life.

The first shipments are scheduled for August and September. “If we manage to export 200 tons of cheese a month, it will be a great step forward for a medium-sized company,” Grasel added. He said it was only a question of time before other Brazilian dairy companies started to exploit foreign markets. Therefore, being a pioneer could be an advantage. “The sooner we create this culture, the greater our chances of success.”
Exports of Brazilian dairy products peaked between 2007 and 2009.

The price of powdered milk on the international markets reached a record level in those years, jumping from an average of around US$ 3,500 to US$ 5,000. However, the post-2008 global financial crisis and the appreciation of the Real in the period put a dampener on Brazil´s modest exports. Itambé´s Ricardo Cotta thinks the prospects are better.

The price of powdered milk should start rising once again and there will be greater Asian demand. (Much of Asia´s demand is currently met by New Zealand, a small country that exports 95% of its production.) The big magnet is the voracious Chinese food market, driven by an expanding middle class and the government´s strategy of increasing domestic consumption. “The Chinese thirst for imported milk is so great that New Zealand is unlikely to be able to meet this demand in the long-term,” Cotta said. “We expect to make sales to China in the near future. It is a market we are looking at with particular care.”

As well as China, he highlighted Latin America itself, Africa and the Middle East as interesting markets. The latter two jointly import three million tons of dairy products annually. The US Dairy Export Council, a body that monitors the dairy sector, said that countries in the region, such as Algeria, Egypt and Morocco, have limited production capacity, due to the scarcity of fertile soil. At the same time, the population – around 160 million – is becoming increasingly keener on consuming yogurts and cheese.

The opportunity to enter these and other growing markets and the urgent need to enhance the Brazilian dairy sector are factors that reinforce each other. International expansion, in itself, is a great stimulus to modernizing the productive chains, as one of the pioneers in this direction, Tirolez´s Cícero, confirms. “We believe going international puts demand on the company in terms of quality and controls which help us achieve the best levels in the world,” he said. The newcomer Grasel agrees. “Exporting demands a higher level of professionalism from the whole chain which will benefit the whole sector,” he claimed.

At the end of the day, winning new markets abroad could be an antidote to the risk of repeating a perverse cycle in which the producers lose out as a result of overproduction and lower prices. MB Agro´s Castro Alves believes the program to modernize the dairy sector is the right way ahead. However, he warns that raising productivity needs to be accompanied by opening markets and improving the level of the products. “The worst scenario would be to encourage inefficient producers, expand the herd and continue to produce small amounts of milk per cow at a low standard,” he said. This would be a recipe that would lead to overproduction and falling prices. “The producer would then go back to slaughtering the cows to survive.” This is a catastrophe the Dutch could not even imagine happening.


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