Cost structures of Brazilian and U.S. broiler production are similar, largely because feed costs in both countries are closely linked to global corn and soybean prices, but increasing costs are eroding Brazil’s advantages, according to a new report entitled  “Brazil: Competitive Factors in Brazil Affecting U.S. and Brazilian Agriculture Sales in Selected Third Country Markets” by the U.S. International Trade Commission.

Brazil’s competitiveness in broiler exports compared with the United States is enhanced by product differentiation and Brazil’s reportedly being free of avian influenza.  The two countries dominate global export markets for poultry because they are the most cost competitive in the world.  At the same time, competition between the two countries is limited.  Brazil and the United States tend to export different products to different countries. While U.S. producers focus primarily on the domestic market, exporting mostly “surplus cuts,” the Brazilian poultry industry is more dependent on overseas customers, especially those requiring halal standards (Middle East) and hand-cut production (Japan).

Also, Brazil’s competitiveness is enhanced by its industry’s willingness to produce poultry that is processed and packaged to the preferences of major customers. Further, Brazil’s avian-influenza-free status gives it an advantage over the United States in certain markets, such as Japan and China. Offsetting these Brazilian competitive advantages are high transportation costs, the higher value of  Brazil’s currency (the real), and rising labor costs. In 2011, Brazil’s top five agricultural exports in terms of value were soybeans, cane sugar, coffee, frozen chicken cuts, and frozen boneless beef.  For the United States, the top five were soybeans, corn, wheat, cotton, and processed foods.

Impacting Brazilian agricultural export potential are a number of  significant obstacles.  These issues will continue to create a drag on Brazil’s agricultural production and exports.  Brazil has natural endowments and untapped land, but much of the available farmland is in areas that lack good access to transportation infrastructure. Increasing demands for transportation, storage, and port infrastructure and capacity will likely outpace supply for quite some time, despite government efforts in this area. High interest rates and currency appreciation appear likely to persist in the near future, making exports more expensive.

In addition, livestock disease issues are years away from being resolved, and growing environmental and social demands will take government resources away from other investments. Brazil’s burdensome labor laws and tax structures also increase costs. Brazilian exports are likely to grow more slowly in this environment, particularly if rising domestic demand siphons Brazilian agricultural supplies from third-country markets, the report noted.

The “Big Four” multinational agribusiness firms (Cargill, Bunge, Archer Daniels Midland, and Louis Dreyfus) play a major role in Brazil’s agricultural competitiveness and Brazil’s approach to world markets.  These four firms account for a significant share of Brazilian agricultural exports, particularly in the grain and soybean markets. Because of their global presence, these companies generally do not view global markets in terms of competition between large producing countries, such as Brazil and the United States. Instead, they see the principal exporting countries as an integrated system on which they depend to supply growing worldwide demand. Increasing animal protein consumption in particular is boosting demand not only for beef, pork, and poultry, but also for grains and soybean meal used for animal feed.

The U.S. International Trade Commission produced this report in response to a request made by the Senate Committee on Finance.  The committee sought information on and analysis of competitive factors in Brazil affecting U.S. and Brazilian agricultural sales in major third-country markets. The 422-page report can be viewed here.