2.2 Regional Concentration of Growth in Livestock Industry

The South Brazilian's producers have a European background. They brought their experience to Brazil and start other agriculture activities in Rio Grande do Sul, Santa Catarina and Paraná. They started by planting fruits, but in a second moment decide to produce grain and meat. They brought the dairy, swine and poultry systems of production similar to the one used in Europe. Likewise they used the meat to make some meat products. These families in general had small areas and small numbers of animals. They produced ham, sausage, salami and others products to sell in São Paulo and Rio de Janeiro. This is the origin of present big companies

Table 2.5 Growth rates of exports: chicken, swine, milk and eggs

Source: Secretaria de Comércio Exterior - Ministério da Indústria e Comércio

The companies grew and opened the capital, creating big companies as Sadia, Perdigão, Ceval and etc, whose control is shared by some groups. In others cases, cooperatives emerged, like Aurora and Cotrijal, working in the same system of others companies. In the relation with the raw material supply the companies grew by developing a partnership system that gave origin to the process of integration as currently known. The integration, in some regions of the south of Brazil, guaranteed to the small farmers technology, security and capital. These companies introduce new varieties of chickens and swine too. They provided small farmers with capital to build chicken or swine houses. The origin of this capital was the Brazilian National Development Bank or international capital raised through ADR.

The small company integrators and cooperatives also guaranteed access to technology, introduce modern techniques of feed formularization, technical assistance and the medicines, in addition to guaranteed commercialization. Some make project and create lines special of financing for the construction of new farms, replacing special credit facilities of official development banks.

The fast growth of the poultry and swine in Brazil is explained to a degree by this process of technology sharing on the part of the great companies of the south. The growth in size of these companies of the south is explained mainly by their great capacity of distribution by efficient logistics. Many industrialized products were popularized in the domestic market. In the international market they started exporting in middle of 70's, but they had more success in the poultry sector then in the swine trade. The swine exports had problem with animal disease in 80's - classic swine pest and Foot and Mouth Disease. Only in 90's Brazil had control of FMD..

The Center West region had the beginning of its occupation accomplished with the installation of the capital (Brasilia) in 1960. In the subsequent period investments roads, buildings, electricity and communication were made.

The region is characterized by a very favorable topography for mechanized agriculture, but the soils are poor in nutrients and present high acidity. The Brazilian Savannas were opened with pasture.

The farming occupation of this region was initiated with the introduction of the beef cattle, but in the end of 60's and beginning of the 70's the cattle production accelerated. This can be attributed the two factors: introduction of the brachiarias (a variety of pasture) and mineral supply to complement the feeding of the animals.

A second process of occupation of the region started in middle of 70's. The small farmers of the Rio Grande do Sul, Santa Catarina and Paraná, pressured by the lack of space for growth in their local states, migrated to Center West. The small farmers had the possibility of either leasing areas of cattle farmers or buying some areas. With the own capital southern farmers could start to plant soybean and corn.

The Center West farmers received important technological support from the Brazilian Company of Farming Research - EMBRAPA, created in 70's, that developed varieties of crops and pasture for the region.

The producers of the Center West experienced in 90's the period of consolidation. The government practically ended the minimum price policy stopped and reduced significantly the subsided credit program. The international companies like Cargill, ADM, Dreyffus and others offer to the farmers credit and guarantee of buying the production, in special for soybean crops. Cotton and rice crops appeared as viable alternatives to those farmers. Corn production, which depended strongly on the price support program because of high cost of transport, has been restricted to local consumption.

The pork and poultry southern industries have projects of meat and feed production in Center West. As a matter of fact, projects were initiated in the first years of 80'ies in Dourados - Mato Grosso do Sul state (CEVAL) and São Gabriel do Oeste (Cooperative Agriculturist Aurora).

Figure 2.2, 2.3 and 2.4 shows the current geographic distribution of the livestock production in 1999. Chicken production is traditionally concentrated in the south but is in fast expansion in the southeast. The swine production takes place predominantly in the south. A new swine region, however, is in formation in the Central West region since the last decade. Cattle herds, on the other hand, spread over the south, southeast and Center West. Major milk production areas are indicated in figure 2.4. The relative share of each region in total livestock production is shown in the tables below.

Table 2.6 shows growth rates of livestock inventories per region in the 1990's. While poultry production increased at an average annual rate of 5.88% at the national level, in the south the average rate was 7.02% and in the Center West production grew at a rate of 13.54%, almost twice as much. Regarding swine production, a negligible average rate of change was observed in the aggregate as well as in the Center West. Swine production increases concentrated in the South, where an average rate of 2.53% took place. These average data, it should be clarified, were strongly affected by a severe corn crop failure in the mid 90's, which resulted in substantial losses to growers that reacted by reducing poultry production and, to a larger degree, swine production in the Center West. Given these observations, it is important to emphasize the strong increase in swine production in the Center West over the three or four more recent years, due to changed macroeconomic conditions. Given the size of Brazil's public debt and its dependence on external capital sources, many economists believe that the strong devaluation the Brazilian currency experienced after 1999 are expected to establish a new long-term trend for that rate. Such a devalued rate will certainly lead to increasing production intended for very profitable exports.

Figure 2.2 Chicken density in Brazil - LEAD 1999.

Source: Instituto Brasileiro de Geografia e Estatística, Year:1999 Map prepared by P. Gerber, FAO - LEAD

Figure 2.3 Swine density in Brazil - LEAD, 1999.

Source: Istituto Brasileiro de Geografia e Estatística, Year:1999 Map prepared by P. Gerber, FAO - LEAD

Figure 2.4 Cattle density in Brazil - LEAD,1999

Source: Istituto Brasileiro de Geografia e Estatística, Year:1999 Map prepared by P. Gerber, FAO - LEAD

Tables 2.6, 2.7 and 2.8 show the evolution of livestock inventory shares of the South and the Midwest (Center West in table) in the nineties. The south presents a growing share of poultry livestock that is approaching 50% currently. The Center West presented a more expressive growth so as to almost double its poultry livestock share in the nineties and reaching 8% in 2001. Therefore one may conclude that poultry livestock is concentrating in the South and Center West.

Table 2.6 Regional livestock inventories: chicken Brazil: 1990-2001

Souce: IBGE

The swine livestock share in the south increased in the nineties from about 31% to around 43%. In the Center West the share is currently stabilized around 8 to 9 percent. These results suggest that production in the south is presenting a growing importance so that the typical small-scale production of that region is still increasing its inventory share, while large-scale growers of the Midwest do not show any increasing trend.

Table 2.7 Regional livestock inventories: swine Brazil: 1990-2001

Source: IBGE

Regarding the milk sector, the herd size distribution has been relatively stable since the early 90's across regions: the observed shares are around 17% in the south, 19% in the Midwest and 30% in the southeast.

Table 2.8 Regional livestock inventories: milk Brazil: 1990-2002

Souce: IBGE

Today the main milk production areas in the country are in the states of Minas Gerais (30% of the national production), São Paulo (10.5% of the national production, especially in the areas of the Vale do Paraíba Valley and São José do Rio Preto), Rio Grande do Sul (10%), Paraná (10%), and most recently southern and south-eastern Goiás (9%). The production in Goiás savannah started after the deregulation of the sector, and most of it is shipped to the largest consumer centers of Brazil. According to Barros et al (2000), the organization and relative importance of the production areas are subjected to changes due to the increase of sterilized Long-life milk consumption. Long life milk is characterized by low transportation costs.

2.2.1 Reason Why Growth of the Livestock Industry may have occurred in these Regions and why it is Changing

2.2.1.1 Locations of inputs

Grain production was traditionally concentrated in south. In 1990, for instance, 58% of the Brazil's soy production occurred in the south and 32% in the Center West. In 2000, these shares had changed to 38% and 47%. Corn production shares were 55% in the south and 14% in the Center West. In 2000, they had changed to 45% and 19%. As the shares of grain production in the Center West increase it is expected that livestock production will move to that region as well. This adjustment has started to take place, as seen in Table 2.8 but not at the potential rate; that is, the livestock production is moving to the Center West at a rate slower than the expansion of inputs.

Livestock entrepreneurs point to investment funds scarcity to explain the observed trends. As a matter of fact government credit has preferentially been directed to crop production rather than livestock production thereby creating an unbalanced growth of these two complementary activities. Producing grain in the Center West to feed livestock in the south and southeast is a clear inefficiency. Comparing the transportation costs for grains and meat, it is clearly more efficient to ship the higher valued meat; that is the reason why livestock industries in the long run tend to install nearby the source of inputs (grains).

2.2.1.2 Land prices

The price of the land also was another factor that used to stimulate and still does the occupation of the center-west of Brazil. In the description of the data presented in Table 2.9, the producers of the south sell the land and buy larger areas in the center-west. For example, in the case of a Paraná farmer, he could sell one hectare of crop land and buy 8 hectares of pasture land in the Mato Grosso. This is a fact that remains reasonably true as far as land price relations for southern and center western states are concerned.

Table 2.9 Land price relations for Center Western and Sothern States

Source: Fundação Getúlio Vargas - FGV.

2.2.2 Internal and External factors influencing the Scaling up of Production

2.2.2.1 Economic factors

Internal and external factors affecting the industry since the 80's. Brazil's economic development process is changing dramatically since the 1980's as a result of internal and external factors, which impacted both the public and the private sectors. A severe and chronic fiscal crisis changed the roles of the government leading to less market intervention and entrepreneurial activities. At the same time Brazil's economy was opened to external competition forcing the production and business sectors to enter in a process of searching for efficient, cost cutting, methods to increase exports and compete with growing imports even though exchange rates were substantially overvalued. For several years after the implementation of the Real Plan, Brazil experienced huge trade deficits, which were financed by external capital inflows related to the privatization process and also to the high domestic interest rate. The response of the Brazilian agribusiness sector was to concentrate at the industrial and retail levels forcing cost reduction down the supply chains. In some cases credit to farmers have been provided by input suppliers or output buyers in substitution to official credit. Farmers reacted as well by increasing productivity and the size of operation so as to explore possible sources of scale economies. The results were decreasing farm prices both to farmers and consumers. The agribusiness was able too of maintaining important trade surplus at a time when the Brazilian economy as a whole faced large deficits.

Traditional inflationary financing of the public deficit became politically less and less acceptable as inflation rates reached critically high levels along the eighties. (Pastore & Pinotti, 1999). Public administrations applied then several inflation fighting programs, but positive results were obtained only in 1994, when the Real Plan was implemented. Such results may in a large extent be attributable more to indexation reduction or extinction, severe monetary restraint and changes in the exchange rate regime (with overvaluation of domestic currencies) than to permanent solution to the fiscal crisis. As the decade approached its end, this policy combination started to show clearly its deficiencies: the uncontrolled expansion of fiscal debt tended to provoke extreme vulnerability of the Brazilian economy to external shocks.

In early 1999, facing a severe capital flight process, Brazil moved to a flexible exchange rate regime. Since the fiscal problem was not dealt with in a definite way, the exchange rate tended to absorb the bulk of the impacts of the external shocks. It is a fact that Brazil moved to a new very unstable exchange rate regime, which has been characterized by a pattern of devalued rates. See figure 2.5. This last aspect is very important because this new pattern may favor in a very significant way Brazil's livestock competitiveness.

Figure 2.5 Brazilian real Exchange rate

Source: FGV, Conjuntura Econômica (2002).

Since the nineties several factors have shaped Brazil's agribusiness sector. First in the wake of GATT Brazil substantially reduced its trade barriers so as to expose their domestic producers to eternal competition. This move was followed by an attempt by the government to correct the inflation problems associated with an overvalued currency. After 1999, with the devaluation of the currency, exports opportunities expanded significantly (as shown in Table 2.5) and domestic prices increased. Second, because of an overvalued currency, external capital flowed in as outside investors were attracted by high interest rates. In addition there was a strong privatization process being carried out by federal and state governments, which also attracted a lot of external capital. Third, as new investment capital entered the country business concentration increased substantially in almost every economic sector, including the agribusiness sector. During this period both the agro industry and supermarket chains had its market power strengthened, with a clear preponderance of the latter tremendously.

Institutional responses. From 1987 to the present there also has been a serve reduction of public resources to the agriculture sector, in particular the commodity programs in an effort to save resource. Another major source of saving for the public sector was the change in the role of the Treasury, which originally only transferred funds corresponding to interest rate differential - between market and official rates - to financial agents. Rural loans were also reduced as the inflation rate increased and the financial market developed currency saving instruments. Today the official credit system is directed to serve mainly small family farmers at subsidized interest rates. Since the rural credit historically has been seen as an important instrument for stimulating the use of modern technology in agriculture, some negative productivity impacts in the rural sector were attributed to these factors. It is true that as the official credit system lost most of its importance, some private sources of credit emerged, including both commodity buyers and input supplier's credit funded in a significant degree by external sources. Although specific research is needed to correctly evaluate the role of this type of credit, it is believed that it has been providing funds mainly for the working expenses of commercial farms.

Besides the commodity programs, the rural credit program has historically played a fundamental role in terms of agricultural policy in Brazil and has been submitted to important changes during the last decade as well. Table 2.10 shows the substantial reduction in rural credit that between 1987 and 2001. A major source of savings for the public sector was the change in the role of Treasury which currently only transfers funds corresponding to interest rate differentials - between market and official rates - to the financial agents. It is true that as the official credit system lost most of its importance, some private sources of credit emerged, including both commodity buyers and input suppliers' credit funded in a significant degree by external sources. Although specific research is needed to correctly evaluate the role of this type of credit, it is believed that it has been providing funds mainly for working expenses for commercial farming purposes.

Since expenditures on commodity programs designed to support agricultural prices were reduced and so were the rural credit resources (specially commercialization credit), farmers lost two instruments designed to protect them against market power of industries. That helps to explain the success of supermarket and industry in producing sharp farm price reductions observed in the 1990's.

Table 2.10 Rural credit and agricultural production in Brazil, 1987-2001.

Sources: Banco Central and Banco do Brasil

2.2.3 Emergence of an Agribusiness/Supermarket Sector

According to Farina, the supermarket had its consolidation through an intense process of merging and acquisition with multinationalization in the nineties. The ten largest companies that held a share of 23% of the food retail reached a share of 46% in 2000. The strategy adopted was to invest in advertising and promotions and compete fiercely on costs and prices.

Agro industry as whole is rather concentrated also but in a lesser degree than supermarkets: the 10 largest companies held a share of 28% in 1994, which reduced to 26 in 2000 (Farina). Regarding individual industry sector, the industrialized meat sector is very concentrated as a matter of fact: the 3 largest industries comprise 55% of total production. The dairy industry is concentrated as well: the 5 largest firms are responsible for 50% of the formal sector's production (Farina & Jank, 1998).

It is to be understood, however, that, although supermarkets obtained increased power, the degree of retail level competition turned out to be much more severe than before. This structural change resulted in a very important conduct change in the food chains. Traditionally, industry would lead price changes and supermarkets would transmit them to consumers in a passive way. During most of the nineties, supermarkets adopted the strategies of price competition among themselves (at the retail level) and of a very active (aggressive) trading with agro industries. The possibility of importing almost any item certainly helps a lot this tough kind of negotiation. It has been observed that consumers' prices particularly food prices' variations have been held very much below the general price index. Of course the industry strategy had to be to hold prices down the food chain until the farm level. Substantial relative farm price reductions have been observed as matter of fact. It is possible, however, that this pattern of decreasing prices, as mentioned above, is about to experience a major change if the exchange rate devaluation is sustained. As exporting opportunities increase the power of supermarket and industry to hold prices down is weakened.

Changes related to two of the main agricultural policies were fundamental to assure the necessary condition for the livestock sector performance in the nineties. On the one hand, significant changes were observed in the allocation of public resources to the agricultural sector. The strategy has been to save resources by reducing the role of the government in commodity programs such as buffer stocks and minimum price for grain products and in such long living specific commodity programs as those directed to coffee, rubber, wheat, and sugar and alcohol. The data available indicates that the total amount of federal public resources applied in the agricultural sector was drastically reduced - by around 46% - from 1987 to 1989 with the lowest level being reached in 1992 (70% below the 1987 value); since then an increasing trend is observed but by no means expenditure approached the 1987 level again.