Marcos Fava Neves
The Future of Food Business

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Agri-Food Business Impacts with the Recent Devaluation of the Brazilian Real

Popularity 4Viewed 4386 times 2015-10-6 06:23 |System category:News| Business

                                                                                            Special to China Daily by Prof. Dr. Marcos Fava Neves

 

Brazil is going through a strong political and economical crisis brought by a 13 years sequence of a left handed populist and corrupt Government that as a consequence, removed competitiveness of most of the businesses (GDP will decline 3% in 2015), bringing inflation back, unemployment and worst, losing social inclusion gains of the last 20 years. Linked to this, Brazilian currency (the Real) lost its value. From 1 US$ = 2,20 Reais in the beginning of 2014, we are reaching now a range of 1 US$ = 3,5 to 4,2 Reais.

 

Staying at this level a new moment comes for Brazilian agribusiness and for competing countries in food supply or are importers, like China. With the lens of a Brazilian participant, this devaluation has positive and negative impacts, and the objective of this article is to raise them, starting with the positive:

 

- Prices of products exported by Brazilian food chains are now much higher in Reais helping the country to catch up with strong cost increase in the last years and the negative impact of poor logistics and lack of reforms towards competitiveness;

- Some of the cost components in Reais became cheaper in a worldwide comparison, like labor, land, taxes and other inputs that are nationalized (produced locally and not directly linked to US$);

- International competitors (imported products) in the Brazilian market became more expensive, opening space for local supplier to gain market share in business-to-business contracts or even raise prices at supermarket shelves;

- As a consequence of possible increase in margins, companies start directing a larger share of its production to international markets. This helps even more in a moment of economic crisis and decline in sales in internal market for several products;

- This reduction in food and agribusiness products imports and increase in exports impacts positively in the trade balance of the country;

- Attractiveness of Brazilian companies increase, since they became cheaper and are more competitive, so a wave of international investments in assets and expansion of production may occur;

 - Competitor countries that didn`t have in their local operations a currency devaluation are impacted negatively to face competition from Brazilian based production and companies;

 

The other side of the moon shows possible negative impacts of the new exchange rate for food and agribusiness participants and for Brazil:

- Strong stimulus to inflation, since imported products became more expensive in Reais and a bigger part of production is exported;

- Also, due to larger exports, risks to adequately supply the Brazilian market may appear. At current moment, due to economic crisis and high unemployment, consumption is declining, but if consumption recovers, there might be a problem;

- Commodities that Brazil occupies a large share in exports may face prices decrease due to the effect of the weaker Real;

- Farm input costs directly linked to US$ increase considerably (the biggest impacts are in fertilizers);

- As a consequence, production costs in Reais increase;

 

We can’t generalize and say that this devaluation is positive for all chains and for all companies. For a company focused in the internal market and with a high level of debt in US$, the impacts are more negative, since the level of debt in Reais exploded. In this case we have to analyze hedge and the share of production exported/total production (a natural hedge).

 

The biggest winners would be companies that have a low imported input ratio (% of imported inputs/total value of product) and face reasonable international prices.

 

But one thing is definitely true… the nightmares to plan and establish scenarios with all these uncertainties are more frequent.

 

The author is professor of strategic planning and food chains at the School of Economics and Business, University of Sao Paulo, Brazil (www.favaneves.org) and international speaker. Author of “The Future of Food Business” and coordinator of other 50 books published in 8 countries and in China, “The World on the Tongue”.

 

 

(Opinions of the writer in this blog don't represent those of China Daily.)

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Comment Comment (3 comments)

Reply Report voice_cd 2015-10-6 12:26
thanks for sharing your idea here, we have recommended your blog to the homepage of our blog platform.
Reply Report MarcosF.Neves 2015-10-7 03:57
Tks!!!
Reply Report Dracarys 2015-10-30 16:16
its economic structure needs changing ..

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MarcosF.Neves

Professor of strategic planning and food chains at the School of Economics and Business, University of Sao Paulo, Brazil (www.favaneves.org) and international speaker. Author of 25 books published in 8 countries and in China, “The World on the Tongue”.

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