Industry Trend Analysis - Beef: Solid Export Outlook But Key Impediments Remain - FEB 2017


BMI View: Paraguay will see moderate growth in beef production out to 2020/21 as key structural impediments prevent stronger gains. The export market will remain paramount for the Paraguayan beef sector and will drive output growth over the coming years. Success will depend on opening new markets and diversifying destinations. Growing demand for higher-quality beef cuts will support domestic consumption which is already at a high base.

After five consecutive years of growth, we forecast Paraguayan beef production to decline in 2016/17 on the back of a reduced cattle herd as well as improving export prices for beef and domestic prices for cattle, which will enable Paraguayan producers to focus on rebuilding their herd. 2016/17 output will decline by 4.0% y-o-y to 586,000 tonnes following two years of low prices for beef and cattle which induced producers to increase slaughtering in order to improve revenue.

Out to 2020/21, we expect beef production to grow by 1.4% y-o-y on average and reach 653,000 tonnes on the back of continued opportunities on the export market which captures most of the country's output. In spite of strong export opportunities and increasing investment in the sector, a number of structural impediments underpin our moderate growth outlook for beef output over the next five years.

Constraints On Acreage Expansion: Increasing pasture acreage for Paraguayan cattle will face obstacles from crop production and environmental protection. Paraguayan cattle is competing with crops (mainly soybean and corn) for acreage expansion, which drives cattle production further into the North and West of the country in the Gran Chaco region (spanning Brazil, Bolivia, Paraguay and Argentina). Similar to Brazilian soybean production in the Amazon region, expanding Paraguayan cattle in the Gran Chaco region is problematic as it causes environmental damage through deforestation and destruction of wildlife habitat.

Competing Growth In Cattle And Crops
Paraguay - Cattle Herd (mn heads) & Corn And Soybean Combined Harvested Area (mn hectares)
Source: FAO, BMI

Beef Supply-Chain In Need Of Consolidation: The Paraguayan cattle and beef industry is fragmented and overall efficiency is poor in comparison to other regional beef exporters. According to the US Department of Agriculture, the industry features large slaughter plants focusing on the export market as well as small, inefficient and unregulated on-farm slaughtering. This hinders growth in beef production as well as traceability. Moreover, Paraguayan cattle are mainly grass-fed while the use of grain is anecdotal and depends on the domestic price of corn. The Paraguayan beef sector is benefiting from strong foreign direct investment in slaughtering and packing facilities by Uruguayan and Brazilian players who will bring their industry knowledge to help the country scale up its beef output. Minerva and JBS are prime examples of large Brazilian investment in Paraguay with both companies operating three plants in the country and JBS investing USD100mn in its third plant in the northern part of the country. Nevertheless, this will take time to materialise and we do not see a significant upside over our forecast period, particularly given the length of the beef production cycle (30 months from birth to slaughter).

Logistics And Infrastructure In Need Of Improvement: Paraguay will require sizeable investment in transport infrastructure to support steady growth in beef exports over the coming years. Paraguay is a landlocked country and cattle-growing regions can be quite removed from large urban centres and export hubs. The long-term outlook is positive as elevated investment in export infrastructure is rising from local slaughter plants to large foreign investors including Brazilian meat company JBS, while the government is improving the country's overall transportation network.

Poor Transportation Network Dragging Beef Exports
Select Countries - BMI Transport Network Index
Note: 100 = lowest risk; 0 = highest risk. f = BMI forecast. Source: BMI

Lack Of Traceability: The lack of meat traceability and an unregulated and fragmented supply-chain weigh on export opportunities as they prevent the country from positioning itself on the premium segment of the export market as Uruguay did ( see 'Uruguay To Maintain Strength In Export-Driven Beef Sector', October 26 2016). In contrast to Uruguay, Paraguay offers meat traceability only for exports destined to the EU and Chile - two markets which previously banned Paraguayan exports due to health concerns. Disease outbreaks are a key impediment for any beef exporter and Paraguay faced export bans from numerous countries on the back of foot-and-mouth disease (FMD) risks, some of which, notably the US, are still in place.

Consequently, our production forecasts indicate a growth to 2020/21 of 10.6% only on the 2014/15 level. Although conservative, we believe this to be more realistic than the goals of local rural associations which mention cattle slaughtering doubling over the next five years or export revenue reaching USD4bn over the period compared to USD1.1bn in 2015.

Exports To Drive Beef Production Out To 2021
Paraguay - Beef Production, Exports & Consumption ('000 tonnes)
f = BMI forecast. Source: USDA, BMI

Strong Export Opportunities For Paraguayan Beef

The export market will remain paramount for the Paraguayan beef sector and will drive output growth over the coming years. Paraguay exports more than 60% of its beef production, primarily in the form of frozen beef, with Russia being the main buyer ( see chart below). The country also exports fresh beef, although the logistical constraints associated with fresh beef exports limit the market to neighbouring countries including Chile and Brazil. Beef exports accounted for about 13% of Paraguay's total export revenue on average over the 2010-2015 period.

Paraguay's export opportunities on the beef market will keep growing in the coming years after the country succeeded in gradually regaining access to large import markets over the past five years. Health concerns are the key impediment to Paraguayan beef exports and the country is still deprived of the US market due to risks of FMD. Paraguay targets the US as its next opening after clearing a 2011 EU ban in 2015. Paraguay is also looking to open new markets, notably in the Middle East and North Africa region as well as Asia where we anticipate strong demand growth ( see 'Top Six Fastest-Growing Meat Consumers', February 24 2016). Paraguay already exports substantial amounts of frozen beef to these regions and additional exports would help to diversify the country's trade balance.

Similarly to soybean, Paraguay has difficulties exporting to China due to a diplomatic dispute over the recognition of Taiwan, which constitutes a sizeable loss to the country's beef export opportunities given that China was the second-largest beef importer in 2016 after the US ( see 'Solid Crush Outlook But Still Exclusively For Exports', October 12 2016). This deprives the country from a large market as we forecast China's beef production deficit to grow from 688,000 tonnes to 974,000 tonnes between 2016 and 2021. Uruguay, China's second largest frozen beef supplier to China, saw its beef exports to China multiply by almost 20 folds over 2011-2015, to reach USD450mn in 2015.

Lack Of Diversification In Beef Export Destinations
Paraguay - Exports Of Fresh Beef (LHC) & Frozen Beef (RHC) By Destination ('000 tonnes)
Note: 'MENA' = Middle East and North Africa. Source: ITC, BMI

Solid Outlook For Consumption

In addition to exports, we also hold a positive view on domestic beef consumption out to 2021. Paraguayans were the third-largest beef consumers in 2015 ( see chart below) and rising incomes as well as expanding beef production is stimulating demand for higher-quality beef cuts which are increasingly finding their way onto the domestic market. We forecast beef consumption to grow by 1.2% y-o-y on average between 2017 and 2021, ending the period at 235,000 tonnes.

Large Consumer Looking For Higher-Quality Meat
Select Countries - 2015 Beef Consumption Per Capita (kg)
Source: OECD-FAO, BMI

Risks To Outlook

Cross-border cattle trade between Argentina and Paraguay is not uncommon and the current boom in Argentine agriculture could induce Paraguayan cattle producers to fatten their cows in Argentina where the price of feeder cattle is higher. Substantial cross-border trade would lead to lower Paraguayan beef production but higher output in Argentina and would lead us to revise our forecasts in both countries.

A major disease outbreak in the Paraguayan cattle sector would annihilate the current pace of exports and significantly undermine future growth opportunities. This would lead us to revise downward our production forecasts.

BMI Beef Production & Consumption Forecasts (Paraguay 2013-2021)
2013 2014 2015 2016 2017f 2018f 2019f 2020f 2021f
f = BMI forecast. Source: USDA, BMI
Beef & veal production, '000 tonnes 510.0 570.0 590.0 610.0 585.6 591.5 615.1 633.6 652.6
Beef & veal production, % y-o-y 10.9 11.8 3.5 3.4 -4.0 1.0 4.0 3.0 3.0
Beef & veal consumption, '000 tonnes 186.0 182.0 210.0 222.0 213.1 215.3 221.7 228.4 235.2
Beef & veal consumption, % y-o-y -11.8 -2.2 15.4 5.7 -4.0 1.0 3.0 3.0 3.0
Beef & veal production balance, '000 tonnes 324.0 388.0 380.0 388.0 372.5 376.2 393.4 405.2 417.4