A trade agreement with the USA appears on the radar

Of the relevant global studies that I saw published in July, it is worth highlighting the new report from the Organization for Economic Cooperation and Development (OECD) and FAO, the UN agency for agriculture and food, reinforcing the role of the Americas in food production and exports. The study states that Latin America and the Caribbean should go from 23 to 25% of growing global agribusiness exports by 2028. Divided by the main commodities, in ten years sugar grows by 7%, rice by 24%, wheat by 23%, oilseeds by 40,5%, beef by 57%, chicken by 27% and pork by 33%.

Driven by this increase in exports, cereal production in this group of countries will grow by 22%, pushing the global average growth forecast upwards by 15% (world production will reach 3,053 billion tons). In meat, our region will grow 16%, also above global production growth, forecast at 13%. In other words, much more than the world average.

The report strengthens our hypothesis that the supply of growing imports from Asia and Africa (despite the growth rate of world grain consumption falling from 2,1% p.a. to 1,2% p.a.) will be made by our production. The negative point is that the report also predicts that prices in dollars will fall by around 1,2% per year in real terms, that is, we have a market, but more efficiency is needed to make a profit.

In the case of corn, production is expected to increase by 2028 million tons in 183, distributed as follows: China 47 m.t.; USA 31 m.t.; Brazil 25 m.t.; Argentina 17 m.t. and Ukraine 6 m.t. Consumption in 2028 would be almost 190 million tons more. In the last decade, consumption grew by 265 million tons (comparing what was consumed in 2008 with 2018). The corn import market will grow by 33 million tons, reaching 193 million in 2028, and 90% will be exported by five countries (USA, Brazil, Argentina, Ukraine and Russia). The world's five largest buyers of corn will be Mexico, the European Union, Japan, South Korea and Egypt, with almost 45% of the total.

According to the same report, over the next 10 years, growth in soybean production in Brazil should exceed 1,8% per year, and in the USA, 1,2% per year. According to this projection, we will produce 144 million tons of soybeans in 2028. China is expected to import around 113 mt. of soybeans in 2028, almost 65% of the total. Almost 90% of soybeans exported will be from Brazil, the USA and Argentina, with Brazil alone expected to reach more than 42%. That is, one seller with more than 40% and three sellers with 90%.

Banco UBS also launched a study (Food Revolution) where he maps US$700 billion opportunities in agriculture with new technologies and digitalization. The use of technology will increase significantly (it is estimated to be a US$90 billion market in 2030) and the vegetable protein market (lab meat) is expected to jump to US$85 billion in 2030 from the current US$4,6 billion. O delivered is another growth area, increasing fivefold in 12 years. Anyway, great opportunities ahead.

Still on the global agricultural theme in July, more details about the agreement with the European Union were released. According to MAPA's analysis, when under full regime, 82% of Brazil's agricultural products will have free access to the European market. Another 18% of products will undergo quotas. Several fruits that paid tariffs of around 10% will go to zero in 10 years (watermelon, apples, lemons, limes, avocados, grapes, among others). In the case of coffee processed in four years, the current tariff of 9% drops to zero, on tobacco it also drops to zero in 4 to 7 years, depending on the processing stage. For fish and other fish aged 7 to 10 years, all tariffs will fall. These are part of the 82% that will not have quota restrictions.

Of those that will have quotas (volumes), it is worth highlighting beef (99 thousand tons carcass weight with a tariff of 7,5%), and the tariff of 20% of the Hilton quota (10 thousand tons) drops to zero at the beginning of the validity of the agreement. In poultry, the established quota was 180 thousand tons with zero tariff. In pork, a tariff of 83 euros per ton remained for 25 thousand tons, and in eggs 3 thousand tons without tariff. In sugar there are 180 thousand tons without tariff, in rice 60 thousand tons and in corn, 1 million tons. These volumes can all increase from the fifth year of validity. In the case of biofuels, ethanol received 450 thousand tons of zero-tariff quotas. The market for cachaça opens up, the rate of which falls from 9 to 0 in 4 years (source: MAPA). Tariffs for orange juice will also go to zero in 10 years.

Another interesting study launched this July in Brazil was the traditional 10-year estimate from the Ministry of Agriculture. In the base scenario, we will have to plant an additional 10 million hectares over the next 10,3 years. We would go from the current 75,4 million hectares to 85,68 million when considering all crops and specifically grains, we would jump from 62,9 million hectares to 72,4 million. With this increase in area and productivity, we will go from the current 236,7 million tons to 300 million produced.

Good news and opportunities for the medium term. In the short term of this harvest, the most important variable now is monitoring the performance of the gigantic American harvest. The fact is that areas of the cornbelt Americans now face strong temperatures and a very dry period. There is still a lot of uncertainty regarding the productivity of this harvest. At the end of July, corn crops classified as good or excellent were 58%, 14% below the previous harvest, which had 72% in these conditions. In soybeans, 54% were classified as good or excellent, compared to 70% last year. There is still uncertainty in the total planted area and any additional climate problem will have a major impact. Grain prices remained stable during the month, and this point is what could cause them to vary more strongly in August.

In the context of African swine fever, China imported more than 160 thousand tons of pigs in June, a volume 63% higher than the same month in 2018. In the year, Chinese imports exceeded 800 thousand tons, 26% more. Consumer prices have risen by more than 20%, and beef imports are breaking records, reaching 150 thousand tons per month, with Australia being, to date, the biggest winner in exports to this market, with growth of 55%. compared to last year. Food inflation in China is a concern and this could have positive impacts on Brazilian agriculture. Also the expected gesture of “goodwill” (goodwill) of the Chinese to resume imports from American agriculture did not happen in July. Let's watch in August.

To conclude a month with good long-term signs on its last day, Minister Paulo Guedes officially announces the start of work to build a trade agreement between the USA and Brazil. Oh yes, we are talking about big things. Look, even in agribusiness products, the USA imported US$ 130 billion last year, and its imports increased by US$ 50 billion in 10 years. Brazil exported US$100 billion, that is, the USA alone imports more than we export worldwide. 

The five agricultural facts to follow now daily in August are:

1) The most important: the weather in the US harvest and production estimates;

2) Estimates of meat imports from China with the impacts of the evolution of African swine fever. Great uncertainty.

3) The trade issues between China and the USA and whether there will even be a gesture of goodwill to increase China's imports of food from the USA with a view to speeding up negotiations, this being a risk to Brazil;

4) The resumption of work in Congress and the Senate and the progress of pension reforms and others;

5) Evolution of the Mercosur and European Union trade agreement.

Marcos Fava Neves is a Full Professor (part-time) at the Schools of Administration at USP in Ribeirão Preto and FGV in São Paulo, a specialist in strategic planning for agribusiness.