New commodity processing surge turns Brazil into “world’s supermarket”

A growing trend of raw product processing in the oil and mining sectors is driving industrial chains. However, it’s the food industry that really stands out in Brazil.

This sector comprises around 38,000 companies that provide 2 million formal jobs; it has become the country’s largest branch of the manufacturing industry, accounting for 24.3% of total employment.

In addition to these direct jobs, the food industry creates another 10 million jobs across the production chain, according to the Brazilian Association of Food Industries (Abia). In total, the food sector represents 12% of all people employed in the country.

The sector processes 58% of the value of agricultural food production, and raw grains now play an increasingly large role in domestic and international markets. In the last seven years, processed food exports have surged from $35.2 billion to nearly $60 billion (+72%).

The chart below shows Brazil’s processed food exports in containers from Jan 2019 and Oct 2023. The data is from DataLiner.

Processed Food | Jan 2019 – Oct 2023 | TEU

Source: DataLiner (click here to request a demo)

While the manufacturing industry as a whole shrank by -1.2% from January to September this year, the food industry grew by 3.9%. The oil-related industry experienced an even higher increase: 4.8%.

The Luiz Inácio Lula da Silva administration has been grappling with finding new formulas—or attempting to reissue failed policies—for industrial revitalization. Still, without state interference, the food industry invests $30 billion annually, transforming Brazil from the “world’s breadbasket” into the “world’s supermarket.”

Oil, minerals, and agribusiness create robust trade surpluses every year. This year, the difference between exports and imports could reach almost $100 billion, bolstering international reserves (around $350 billion) and mitigating Brazil’s historical vulnerability to external crises due to a lack of dollars.

However, experts question whether Brazil’s excessive dependence on primary products would leave the country vulnerable to sharp fluctuations in these markets. These risks include an increase in global oil supply, climate events affecting crops, or a more significant slowdown in China, the main Brazilian agribusiness and minerals market.

“Despite the risks, Brazil is well-positioned in this process. This typically increases domestic savings, which can generate growth and ways to finance investments and public debt,” says Manoel Pires, the Economic Policy Center coordinator and the Fiscal Policy Observatory at Ibre-FGV.

In the oil, natural gas, and iron ore sectors, economist Bráulio Borges’ calculations indicate that the Union’s additional revenue could reach R$1 trillion between 2022 and 2030 compared to the previous decade, helping balance public accounts.

“But, in the medium term, there is an important question: how can we turn temporary natural wealth into added value, knowledge, and innovation capacity to generate quality in long-term growth? This is a significant challenge, but some things are naturally happening,” says Pires.

At this point, the endogenous strengthening of the food industry is good news. So are the increasing investments in oil refining and steelmaking.

In oil, Petrobras’ $102 billion strategic plan for 2024-2028 foresees $17 billion for refining, transportation, and marketing, with the completion of some refineries, adding value to crude oil.

According to Valéria Lima, an executive director at the Brazilian Petroleum Institute, significant investments are also planned in more sophisticated biofuel industries, such as those for aviation and those that can be blended with conventional diesel.

Although employing less technology than more sophisticated industries like electronics, machinery, and equipment, these sectors could create more and better jobs, containing Brazil’s deindustrialization trend.

According to the Brazilian Institute of Geography and Statistics (IBGE), the industrial sector’s share of GDP has plummeted from 36% to about 11% in the last 40 years. To a large extent, it has given way to the rise of the services sector, which currently accounts for about two-thirds of the economy but generates fewer formal and lower-paid jobs than industrial ones.

Established studies show that formal exporting companies tend to be more productive, with specialized labor, leading them to contribute more to sustainable growth.

According to Cleber Sabonaro, manager of Economics and Competitive Intelligence at Abia, this is happening in the food sector.

In addition to industrializing traditional products such as sugar, animal protein, soybean oil, and orange juice, the sector is growing in wheat derivatives (such as biscuits), dairy products, coffee, including capsules, and more.

Sabonaro says that Brazil gained ground since the war between Russia and Ukraine began in February 2022, when many food-exporting countries halted businesses to ensure supply to their domestic markets.

“Without harming the Brazilian market, which absorbs 72% of production, we did not stop meeting exports,” he says.

Globally, Brazil’s main markets for processed foods are China (17.7% market share), the 22 countries of the Arab League (16.3%), and the European Union (15.3%).

In the orange juice sector, where Brazil developed technology to export the product without contact with oxygen, the country accounts for 75% of global trade, generating $2.7 billion annually and creating 200,000 direct and indirect jobs, according to Ibiapaba Netto, executive director of the National Association of Citrus Juice Exporters.

According to Lia Valls, coordinator of Foreign Trade Studies at Ibre-FGV, one of Brazil’s recent major gains on the international agenda is being reliable regarding food security.

“But there is always the question: is it sustainable in the long run?” Valls points out that some countries heavily dependent on commodities, such as Norway (oil), have created funds with resources to be used in times of falling revenue flows. “But these are policies that require permanence. You don’t change a structure overnight,” she says.

In the steel industry, the rise and processing of commodities have led to annual investments of BRL 12.5 billion. “The goal is to improve the mix of products and add value,” says Marco Polo de Mello Lopes, CEO of the Brazilian Steel Institute.

At the moment, however, there is a risk of expansion plans being thwarted by what Lopes calls “predatory” marketing of Chinese steel in Brazil.

According to him, there is a surplus production of 560 million tonnes of steel worldwide (190 million in China). While the USA, European Union, United Kingdom, and Mexico have import tariffs of 25%, Brazil maintains customs protection at 9.6%.

Despite the increase in industrial production related to commodities in recent years, Brazil consistently accumulates deficits in the trade balance of manufactured goods: $128 billion last year and about $115 billion forecasted in 2023.

According to Silvia Matos, coordinator of the Macro Bulletin at Ibre-FGV, despite advances in industries such as food, steel, and oil, with the creation of better jobs, Brazil still faces great difficulty finding a path to reindustrialization.

“We have bad policies created in the past, but they never die. We don’t have enough human capital, and the cost of money for investment is high [due to fiscal imbalance and high-interest rates],” she argued.

“Yes, there is an increase in income in cities and regions near agribusiness and the oil industry, but this mostly influences services, which employs many people with low qualifications, informal workers, and lower salaries,” says Matos.

Source: Folha de S. Paulo

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