Company is adding two new bottling lines in the country to start operating in the second half of the year
07/25/2024
Coca-Cola Femsa, the world’s largest bottler by sales volume, told analysts it must open new factories in Brazil and Mexico to meet increasing demand. Currently, the company has “maxed out” its existing factory capacity to handle orders.
In this scenario, focusing on maximizing its installed capacity, the company is adding two new bottling lines in Brazil, set to begin operations in the second half of the year. “As long as we can add lines, that’s the way to go,” said CEO Ian Craig García.
The company did not immediately respond to Valor’s request for comment.
In a conversation with analysts, the company revealed details about the impact of the floods in Rio Grande do Sul, which had a non-recurring effect on the balance sheet, costing nearly R$40 million. The tragedy led to lower margins in Latin America.
In addition to Coca-Cola, the group’s portfolio includes brands like Fanta, Sprite, Schweppes, Leão, Sucos Del Valle, Ades, beers such as Therezópolis, Eisenbahn, Sol, and Kaiser, and Crystal mineral water.
During the second-quarter earnings conference call on Friday (19), the management team was asked about investments in Brazil and Mexico, in light of the addition of seven new bottling lines in Latin America this year. Mr. García said the company is trying to “max out” current facilities before making new investments.
Regarding the lines, CFO Gerardo Cruz Celaya explained that of the seven planned, two will be in Mexico, two in Guatemala, two in Brazil, and one in Colombia.
Despite this expansion, the CEO admitted that a new plant would eventually be needed in southeastern Mexico and, at some point, a “completely new greenfield project” for Brazil and Mexico, though he did not specify timelines or product focuses for this investment.
According to him, the bottler is executing a production capacity expansion plan initiated last year, which aims to add 15% production from 2023 to 2025. However, in the distribution area, he said they are “a bit behind” and need to increase capacity by 30% over the same period.
Earlier this month, Valor reported that Uberlândia Refrescos, a Coca-Cola System franchisee and distributor in the Triângulo Mineiro, Alto Paranaíba, and northwestern Minas Gerais regions, will invest R$1.5 billion in the region from 2024 to 2030, with R$860 million allocated for a new factory in Uberlândia.
The CEO also noted that the operating profit margin in Latin America reached 14% from April to June, and would have been 14.2% excluding the negative impacts of the floods in Rio Grande do Sul.
According to Mr. García, operating profit rose 13.8% to 9.7 billion Mexican pesos ($540 million) in the quarter, with a profitability rate of 14%—compared to 13.9% a year earlier. Coca-Cola Femsa managed to partially shield itself from the impacts in Brazil and global cost increases, avoiding a downturn compared to last year. Excluding the extraordinary effects related to the floods in Brazil, the margin would have been 14.2%.
The CFO added that in the South American division, operating profit grew 19.6% in the quarter, with a margin of 10.1%. However, gains in the region were impacted by pressures in Argentina and costs from the tragedy in Brazil.
Mr. García mentioned that the supply chain team in Brazil had to adapt the sales and distribution network in Rio Grande do Sul, setting up two distribution centers around Porto Alegre. Finished products were sent from Uruguay, Argentina, and other bottlers in the system to mitigate production losses while working to reopen the Porto Alegre base.
Due to the tragedy, over 5,000 tonnes of debris and lost products had to be cleaned and removed from the facilities. “We are working with our equipment manufacturing partners for a gradual reopening in the fourth quarter of the year,” said the CEO.
Despite the challenges, Mr. García noted that sales volume in Brazil increased by 12.1% from April to June, reaching 269 million units, but did not specify what the increase would have been without the tragedy. From January to June, the growth was 11.2%.
Itaú analyst Alejandro Fuchs asked the company about non-recurring effects in Brazil, estimating a negative impact of 200 million pesos on the balance sheet due to the floods in Rio Grande do Sul. The effect, absorbed in the second-quarter balance sheet, amounted to 130 million pesos (R$39 million, according to June’s exchange rate), Mr. Celaya calculated.
Regarding Femsa’s operations, the Oxxo supermarket chain, created in a joint venture with Raízen, saw an 89% increase in net sales in Brazil from April to June, driven by new store openings that boosted total sales. There were 179 net openings (balance between openings and closings) in 12 months until June. From April to June, 14 new stores were added, bringing the total to 525 stores in the country. Same-store sales increased by 22%, well above the market average, which has been in single digits during this period.
New measures for unemployment insurance and pensions for poor elders and disabled people wil be analyzed by lawmakers amid fiscal adjustments
25/07/2024
Marcos Mendes — Foto: Gesival Nogueira/Valor
The Lula administration is considering changes to the criteria for granting the Continuous Cash Benefit(BPC, a pension for impoverished elders and disabled people) and altering unemployment insurance rules as part of another effort to reduce mandatory expenses and ensure they fit within the limits of the newfiscal framework.
These would be additional measures in the cost-cutting agenda, not included in the R$25.9 billion already announced for 2025 by Finance Minister Fernando Haddad. Both measures would require changes in the law but are being considered for submission to Congress by the end of this year.
According to two sources, the studies have already been requested and are underway. However, the proposals still need to be drafted and will undergo political scrutiny by President Lula at the “appropriate time.” A source from the economic team assured that the topic is not taboo within the government and will be addressed.
BPC is a social benefit amounting to one minimum wage paid monthly to people with disabilities and impoverished elderly individuals. To qualify, a person must have a per capita household income equal to or less than a quarter of the minimum wage. However, a 2021 law eased this criterion, allowing deductions for health-related expenses and granting the benefit to families with incomes up to half the minimum wage in specific cases.
Additionally, a 2021 ordinance changed the procedure for granting BPC to people with disabilities. The so-called “medium standard for social evaluation” was adopted, replacing the individual social evaluation in cases where the medical examination had already been performed and long-term impediment was confirmed. The measure was intended at the time to reduce the waiting delays.
The government assesses that these measures, even with subsequent changes, have helped expedite granting benefits in recent years, especially those granted judicially, due to ambiguous interpretations of the law.
As of June this year, 6 million people were receiving BPC. Ten years ago, in the same month, that number was 4 million. In 2021, it was 4.7 million. Data also shows that until 2022, the growth in the number of beneficiaries ranged between 1% and 5%. Now, it is in double digits, driven by the increase in BPC for people with disabilities and elderly individuals over 65 years old.
In the case of unemployment insurance, the economic team believes the program, as currently designed, is procyclical and needs changes. Currently, to receive the money, a worker must have been employed for at least 12 months in the 18 months prior to dismissal for the first application. The period drops to 9 from 12 months for the second application and then to 6 months.
The economic team advocates for standardizing these rules and making the program less procyclical. According to a source, “this is a good time” to make the changes, as the country is experiencing a “good employment situation.”
Bruno Ottoni, a labor market specialist at the Getulio Vargas Foundation (FGV), agrees that the current unemployment insurance format is procyclical. According to him, in most other countries, insurance is counter-cyclical, meaning that when the economy worsens and unemployment rises, spending on unemployment insurance increases.
In January and February this year, the government spent 29.75% more than in the same period last year on unemployment insurance, despite a heated labor market. A projection made on May 13 by the Ministry of Labor and Employment shows that spending on the policy would continue to rise in the coming years, costing R$51.6 billion in 2024 and reaching R$64.6 billion in 2027. Therefore, according to Mr. Ottoni, it makes sense for the government to seek to stabilize this expense over a ten-year period, for example, to fit within the new fiscal rules.
Changes to BPC and unemployment insurance are also being studied as an alternative to disconnecting these expenses from the minimum wage appreciation policy, a proposal raised by Planning and Budget Minister Simone Tebet but publicly dismissed by President Lula. “To maintain the link to the minimum wage, I need to improve social policies,” said a source.
Changes in the association of health and education floors to revenue growth would also not be adopted until 2026, as there is an assessment that the political cost of altering the growth rate is high. The economic team’s focus is on a thorough review of pension and social benefits and changes to the benefit for fishermen and agricultural insurance programs, measures included in the R$25.9 billion savings announced by Mr. Haddad for 2025.
In the case of the salary bonus, another policy contested by experts and attached to minimum wage growth, sources said that it would require a Constitution amendment, which tends to be difficult to pass by Congress.
Marcos Mendes, a doctor in economics and an associate researcher at business school Insper, believes there is room to change both the BPC and unemployment insurance. However, the researcher advocates for stricter changes than those being considered by the government and argues that it doesn’t make sense to equate the BPC amount to the minimum wage.
“The BPC is a benefit that a person receives without having contributed before. Therefore, it cannot be equated to another benefit paid to those who have contributed,” said Mr. Mendes. “Today this happens because the social security contributor retires at 65, and the BPC beneficiary also receives as of 65. It would be correct to return the BPC age to 70, as it was initially,” the economist said. He also argues for more selective criteria in defining disability and a “significant effort” to prevent fraud.
In the case of unemployment insurance, the economist said that it is necessary to redesign the three instruments to protect the worker who loses their job: unemployment insurance, the Workers’ Severance Fund (FGTS), and the contract termination fine paid to the employee fired without cause. “It would be necessary to redesign this protection to reduce costs for the government, employers, and employees, as there are negative fiscal and incentive effects for formalizing the workforce and job retention,” he said.
If confirmed, the change in unemployment insurance would not be the first time a government has altered the rules to restrict access and thus reduce expenses. At the end of 2014, then-president Dilma Rousseff issued a provisional presidential decree, signed into law in 2015, adjusting the criteria for granting unemployment insurance.
Out of about 70 selected portfolios, only 22% surpassed the investment benchmark over two and a half years; in 2022, this figure was 67%
07/24/2024
Luis Stuhlberger — Foto: Gabriel Reis/Valor
In the “astral hell” that led to the poorest half-year performance on record for multimarket funds, the Anbima Hedge Fund Index (IHFA) edged up by a mere 0.20%. Funds that base their investment decisions on macroeconomic trends have nearly depleted the cushion they once had over the CDI (interbank short-term rate).
Out of approximately 70 portfolios monitored by Guia Valor de Fundos, only 22% outperformed the benchmark over a two-and-a-half-year period ending in June. This figure was 67% in 2022, but it dropped to 24% last year and just 6% since January, according to calculations by economist Marcelo d’Agosto, coordinator of the guide.
The roster of those who have weathered the storm of double-digit CDI rates and rapid shifts in scenarios both in Brazil and globally includes established players from the independent sector, such as Absolute, Neo, Verde, MAPFRE, Quantitas, and JGP. Newer asset management firms are also on the list, including Capstone (founded by former SPX professionals), Genoa (started by a team from Itaú), and Asa Investments, part of Alberto Safra’s group.
“The past two years have been some of the toughest for this asset class because, although they have managed to capture many themes, the majority of strategies revolve around monetary policy, and the disparity in information between interest rates and inflation has been significant,” said Luca Spinogardo, fund analyst at Arton Advisors.
He notes that the year began with renewed expectations that the U.S. Federal Reserve would begin to cut interest rates. However, these hopes did not materialize as activity and price index data came in higher than expected. “Many managers bet on this scenario and lost money; it was a significant detractor from performance,” he states.
Despite a substantial outflow of funds from mixed funds, totaling R$348 billion since 2022, the expert maintains no better tool for portfolio diversification can prove its worth over time. However, he acknowledges that the industry is undergoing a period of change. “Numerous new asset managers are encountering serious issues and are likely not sustainable. In contrast, well-established managers with billion-dollar assets and experienced teams capable of navigating these turbulent times will endure,” asserts Mr. Spinogardo.
He believes that, in the medium to long term, well-positioned asset managers will profit. “But it requires patience and correct allocation within the asset class; over-allocation starts to cause problems. If there is a reversal in results, investors will undoubtedly be disappointed.”
Additional factors have contributed to the redemption pressures. One significant element is the growth in the stock of tax-exempt bonds, which has increased by 8.2% to R$1.77 billion, according to Verde’s analysis. Changes in the taxation of exclusive and restricted closed-end funds have also played a role, including the new requirement for mandatory income tax withholding on investments and the semi-annual tax levied on fixed-income, multimarket, and foreign exchange open-end funds. With the advantage of tax deferral no longer in play, which traditionally boosted returns, wealthy families have reevaluated their investment strategies.
“It’s clear that our main challenge—not just for our asset class—is to perform better,” Luis Stuhlberger, Verde’s chief executive and investment officer, told Valor. “Last year, we didn’t do poorly; we achieved CDI plus 1.5% net, and this year, it’s key to understanding the complexities of the Brazilian tax system. I don’t mean to suggest that Brazil is at fault; far from it. We need to improve, and we are actively working on it.”
The first half of 2024 presents a typical landscape for funds with a macroeconomic focus, according to Philippe Santa Fé, interest rate manager at Asa Hedge. “The scenario shifted because the data changed, not due to a misinterpretation by managers. The cost of repricing interest rate trajectories, both domestically and internationally, significantly impacted everyone’s profitability.”
Mr. Santa Fé reflects on the unusual clarity of trends from 2022, which saw Brazilian multimarket funds perform exceptionally well. Their strategies, which were tied to international interest rates, anticipated inflationary pressures and a more stringent tightening cycle in the U.S. following the pandemic’s monetary and fiscal stimuli.
He attributes this accurate diagnosis to the experience of emerging market managers who have navigated complete economic cycles, where inflation impacts productive capacity, compelling monetary policymakers to respond.
“The return of the industry as a whole was significantly better than in the past, ours included,” remarks Mr. Santa Fe. “However, the persistent concern among shareholders is their inability to sustain this level of performance, which is largely influenced by the macroeconomic horizon. That period of visibility was an exception.” He admits that the job will not get easier, even if the U.S. Federal Reserve begins to cut rates in September, which is the baseline scenario projected by his firm.
The situation remains uncertain, especially due to the U.S. electoral process and the potential re-imposition of trade tariffs if former President Donald Trump returns to the White House, which could impact inflation. “I don’t anticipate any major directional movements while the U.S. election is underway and its outcomes are being debated. Generally, it’s a tougher environment for emerging assets,” adds Mr. Santa Fe.
Absolute’s macro funds, which underperformed the CDI from January to June, have regained some ground in July. Over their history, they have managed a cumulative return that allows some breathing room. “It’s somewhat frustrating because we accurately predicted the scenario, and it could have been better,” shares Fabiano Rios, founding partner and chief investment officer (CIO) at Asset. “The first half wasn’t great, but it wasn’t ‘horrible’ either, and it was within the normal scope of our mandate.”
According to Mr. Rios, positions in global interest rates and the stock market in Brazil resulted in losses, whereas overseas variable income and local fixed income yielded gains. He is currently favoring bank shares and mid-cap companies outside the technology sector internationally. He believes this strategic rotation will also benefit local stocks.
Looking ahead, the firm anticipates that the U.S. Federal Reserve will begin easing its monetary policy in September, expecting inflation to converge towards the target without triggering a recession. “I don’t foresee a major cycle; the cuts will be gradual, and I feel the adjustment will be midway.”
Despite Absolute’s successful fund-raising in the first half of the year, driven by its credit strategy, and over the last two years, Mr. Rios notes that a more structural commitment to multimarkets hinges on a resurgence in performance.
“If investors trust in the alpha-generating potential of these firms, they should see this as a temporary setback that will pass, as it has before,” Mr. Rios explains. “New trends will emerge, and adept multimarket funds are likely to capitalize on these opportunities. I remain optimistic about the sector. My focus is on creating value and concentrating intensely on client needs. Over time, the advantages of this approach will become increasingly apparent.” He stresses that it is crucial for investors to avoid making short-term decisions and to allow strategies to mature over time, as this is the essence of investing in multimarket funds.
President Lula’s criticisms of Roberto Campos Neto’s leadership at the Central Bank negatively impacted Neo’s share price in the second quarter, deviating from its historical performance. In response to the uncertainty, the real weakened, causing interest rates projected on the futures market to anticipate increases of up to 2 percentage points for the Selic, Brazil’s benchmark interest rate, which stands at 10.5% annually, according to Fabio Dall’Acqua, the partner in charge of investor relations at the firm. “For us, the exact point at which the cuts might stop—be it 10.5% or 10%—was less critical. What mattered most was the forecast for 12 months out, ensuring that the Central Bank wouldn’t need to raise rates again.”
The recent dip in confidence, perceived as temporary, has not prompted Neo to adopt negative positions on Brazil, according to the executive. Mr. Dall’Acqua notes that the increase in the risk premium has not been driven by rising inflation or signs of economic derailment, but rather by the uncertainty surrounding the future leadership of the Central Bank as Mr. Campos Neto prepares to step down at the end of the year.
Employing a management style that favors relative positions, multimarket funds even had exposure to long rates as a protective measure, although the stress during the second quarter impacted short rates more significantly.
Over the past two decades, Neo’s partner highlights, there have been few periods of negative returns, with the fund typically recovering quickly from downturns. The multimarket fund outperforms the CDI on 70% of trading days, and more than 90% of months conclude with positive results. In an internal analysis conducted by the firm, the executive points out that those funds that navigate stressful periods stably, without the need to liquidate positions to curtail losses, tend to recover well subsequently.
He credits the long-term consistency of the fund to the strategy of building relative value positions. This approach causes the fund to experience less impact during adverse periods but also means it does not capture gains as aggressively as more directional portfolios might. “We accumulate a bit of profit each month; it’s a characteristic of the product. This strategy is particularly effective in Brazil, where pricing inconsistencies are common.”
Assets across the board have felt the strain, from the stock market to the National Treasury Notes series B (NTN-B), and the high CDI has posed challenges for managers, states Rogério Braga, partner and multimarket fund manager at Quantitas. “Moreover, the number of managers has significantly increased over the last four years, intensifying the competition for alpha [returns above CDI] in an already competitive market.”
With U.S. interest rates at historic highs, NTN-B notes offering Brazil’s benchmark inflation index IPCA plus 6.3%, and Brazil’s economic and fiscal challenges unresolved, Mr. Braga notes, “It has become more difficult for most of the industry to outperform the CDI.” However, he adds, “There are skilled managers who, over slightly longer periods, consistently surpass the benchmark.”
This year, Quantitas Mallorca is performing close to the CDI, but historically, it has never fallen below the index in any year, the manager reports. The fund’s strategy focuses on relative value and tactical position management, which are less reliant on macroeconomic shifts. Mr. Braga explains that it is during the periods of greatest market depreciation that he typically builds positions. Currently, the fund holds 22% of its assets in the stock market, the highest proportion in the last 24 months. “As the risk premium diminishes and the outlook clarifies, we reduce our positions. Typically, you see market participants wait for clearer conditions. However, greater uncertainty carries a higher risk premium.”
Following Dasa-Amil and Rede D’Or-Bradesco Seguros mergers, consolidation will now focus on units in cities with over 200,000 inhabitants
24/07/2024
Kora’s Meridional hospital in Espírito Santo — Foto: Divulgação
In the wake of recent hospital mergers between Dasa and Amil and Rede D’Or with Bradesco Seguros, the healthcare sector is starting to map out future scenarios and steps. Although the current environment isn’t ideal for acquisitions, there is potential for new deals in the market.
There are assets on the radar and consolidators with less leverage and greater working capital, such as the Moll family’s company, the controlling shareholder of Rede D’Or, and Hapvida, which can pursue new fronts. A survey by investment boutique BR Finance shows that 139 hospitals have already been acquired by major groups. Currently, around 270 units remain in the hands of their founders, located in cities with more than 200,000 inhabitants. Of these, 96 have over 100 beds, and 176 have between 50 and 100 beds.
Targets are primarily professionally managed assets, which present less risk. According to sources, there is market interest in Grupo Santa, which has six units, including Hospital Santa Lúcia in Brasília. Last year, Bradesco Seguros acquired 20% of the network, and there is no preference from the insurer to purchase the remainder. Generally, insurers like Fleury and OdontoPrev control their assets. However, in the hospital sector, Bradesco Seguros opts for partnerships, holding around 50% stakes with various groups like Mater Dei, Albert Einstein, and Rede D’Or, with these companies managing the hospitals, which is not Bradesco’s core business.
The market is also watching Hospital Care, backed by Crescera and Abaporu funds (from the family of Elie Horn, founder of Cyrela), and Kora, controlled by private equity firm H.I.G. However, interest in these cases is in some of their hospitals, not the entire group, making it difficult for controlling shareholders to retain less liquid assets.
Kora is valued at around R$540 million on the stock market, with some of its hospitals commanding higher figures in negotiations. The group owns the Meridional network, with seven units in Espírito Santo, and Hospital Anchieta in Taguatinga (Federal District), boasting a substantial number of beds and well-known brands. Kora is currently at an impasse, with minority shareholders and the controlling shareholder in conflict over a delisting offer at R$0.70 per share, which displeases smaller shareholders. “One solution could be selling assets to reduce leverage, even if it makes the company smaller,” a source familiar with the matter said.
Hospital Care, which operates in six cities nationwide, attempted a public offering in 2021 and negotiated selling about a third to Bradesco Seguros in 2022, but the talks did not advance. Since last year, its main asset, Hospital Vera Cruz in Campinas, São Paulo, has faced new competition from a large hospital built by Rede D’Or nearby.
In 2023, Hospital Care reported a loss of R$228 million, up from R$43.8 million in 2022. Its operating cash flow was negative by R$150 million. The first quarter of this year showed improvement, with losses halving to R$22 million.
There are also movements involving recently acquired assets being sold off. Last year, Hospital Care sold the São José hospital, Austa, which it had acquired in 2020, to a group from Goiás. In May, Mater Dei reversed the acquisition of Hospital Porto Dias in Belém, which was repurchased by the founders. This operation, incorporated in 2021, faced working capital difficulties, negatively impacting Mater Dei’s balance sheet.
“Many assets acquired during the last M&A wave have not yet captured synergies or integrated fully in a market that has undergone significant changes in recent years,” said Luiza Mattos, a partner at Bain & Company.
Fernando Kunzel, a partner responsible for mergers and acquisitions at JGP, stated that the healthcare sector’s chessboard is moving but awaiting a less intense wave compared to the pandemic period when dozens of operations took place. He anticipates a valuation disconnection, potentially delaying some transactions. “There are buyers for hospitals, but the numbers aren’t adding up. Some hospitals were acquired at up to 12 times EBITDA, and now offers are around six times,” he said.
Renata Rothbarth, a partner at Machado Meyer, noted that today’s healthcare landscape is quite different from 2021, when there was an acquisition boom. “Consolidators are now very attentive to hospitals’ credentialing agreements with health plan operators,” the lawyer said. Currently, one of the biggest problems for hospitals is working capital due to extended payment terms from health insurance plans.
Other assets that may draw interest are those excluded from the Amil and Dasa merger. Sources indicate that there are interested buyers for Klinikum hospital in Fortaleza and Promater in Recife, both owned by José Seripieri Filho. There are also Dasa units not included in the deal, and the Bueno family’s company has indicated the possibility of divestment. These include hospitals in Bahia, São Domingos in Maranhão, and the AMO oncology clinic network in Bahia.
These assets are expected to become acquisition targets since standalone hospitals without a network lack scale and profitability. Hospitals with fewer than 150 beds are not considered profitable; most hospitals in the country have less than 50 beds.
“Currently, there are few transformational combinations, and most significant hospitals have already been acquired by consolidators,” said Ms. Rothbarth of Machado Meyer.
Additionally, movements from Aliança, controlled by businessman Nelson Tanure, are anticipated after an unsuccessful bid for Amil. About two months ago, Oncoclínicas announced the entry of Banco Master, which frequently collaborates with Mr. Tanure.
Enrico De Vettori, CEO of Gestão Hospitalar Ltda and a partner at HSI, said the sector is now adjusting post-pandemic. “We are observing two movements: companies merging to improve efficiency and balance sheets and those seeking alternatives without merging,” he said. This includes asset sales and sale-leaseback transactions.
Maximo Lima, CEO of HSI, noted this trend follows a market cycle where capital costs were very low, leading to an expansionist phase for many groups through acquisitions. “This industry is transforming, moving from a tough period [financial restructuring] to reorganization,” he said.
Grupo Santa declined to comment on its partnership with Bradesco due to confidentiality clauses. Hospital Care and Kora did not respond to Valor’s request for comment.
Weakening Brazilian real, commodities to boost results in the period, analysts say
07/23/2024
Iron ore was one of the commodities helped by the real’s depreciation over the dollar — Foto: Leo Pinheiro/Valor
The weakening of the Brazilian real against the dollar and the increase in the price of some of the world’s main commodities likely boosted the results of large Brazilian exporting companies in the second quarter and should turn them into the highlights of the earnings season, which accelerates this week.
After a few quarters moving sideways, companies trading oil, iron ore, and pulp, among other commodities, had their revenues helped by the real’s depreciation over the dollar. The exchange rate returned to a level above R$5 between April and June, at an average of R$5.21, an increase of 5.5% in the year and 5.2% over the first quarter.
The prices of some of the main commodities traded by Brazilian companies also rose during the period. The Brent reference barrel closed the second quarter at an average of $84.64, 8% up in the year and 2% up over the first quarter. Pulp traded in China increased by 27% in the year and 9% over the first three months of 2024, close to $700 per tonne.
“Brazilian pulp and paper manufacturers are expected to post more robust results in the second quarter, reflecting the combination of increasingly higher prices and the depreciation of the real,” said Bank of America’s team of analysts led by Caio Ribeiro. Suzano, with greater exposure to the commodity, should especially benefit from the trend.
In the case of Petrobras, Alejandro Demichelis and Pedro Baptista, analysts at Jefferies, say the company’s numbers will benefit from fewer maintenance stops and a higher refinery utilization rate. The company has not yet released its operational preview for the quarter. That, combined with higher oil prices and the depreciation of the real against the dollar, should generate an EBITDA of $13.7 billion.
Iron ore went in the opposite direction and ended the period at an average of $112 per tonne, practically stable in the annual comparison and 9.7% down compared to the first quarter, amid doubts about the sustainability of China’s iron ore demand.
“We expect mining companies to have increasingly better results over the first quarter, driven by higher seasonal volumes and lower costs more than offsetting lower realized prices,” Santander analysts Yuri Pereira and Arthur Biscuola wrote in a report. Vale and CSN are expected to benefit from this move.
Vale released its operational results for the second quarter, posting production of approximately 81 million tonnes of iron ore and sales of 80 million tonnes. Analysts welcomed the result but warned that lower realized prices could hurt the company’s financial numbers.
On the other direction, steel companies are expected to post weak results. Itaú BBA team of analysts led by Daniel Sasson said that still pressured steel prices due to the entry of Chinese products into the Brazilian market, in addition to a weaker U.S. market, could harm the results of Gerdau, Usiminas, and CSN.
Companhia Brasileira de Alumínio (CBA) could be an outlier, with banks projecting its EBITDA could double in a year, helped by better aluminum prices and reduced production costs.
Companies operating primarily in the domestic market should follow the same trends seen in the first quarter, according to bank analysts. They say it will be key to pay attention to the signal these companies’ executives will give amidst the scenario of high interest rates for longer and household consumption not recovering as expected.
BTG Pactual analysts Luiz Guanais, Gabriel Diselli, and Pedro Lima wrote that the fundamentals of retail companies showed signs of improvement earlier in 2024 and the trend is expected to continue over the next few quarters. However, the bank noted that share moves are driven by political and macroeconomic news.
With the prospect of higher interest rates for longer and its possible effects on consumption, estimates are impacted. “We see little room for a positive review in the estimates this year,” they say. The companies carried out a strong cost rationalization process and benefited from greater revenue generation in the annual comparison.
Companies in the electricity sector could be a positive highlight among domestic companies. In the second quarter, extremely high temperatures in Brazil and the lack of rain boosted power prices—helping energy-generating companies—and consumption—benefiting distributing companies—, said Bradesco BBI analysts Francisco Navarrete, João Fagundes, and André Silveira.
Fuel distributing companies are also expected to post positive results in the quarter, with normalization of inventories boosting their margins, although diesel and gasoline prices are still lagging behind international parity.
Healthcare and education providers tend to post weaker results due to the unfavorable seasonality of the second quarter and the margin recovery process they have been implementing. For health insurance operators and service providers, margin trends will be important to monitor, Bradesco BBI analyst Marcio Osako noted.
Itaú BBA analysts Vinícius Figueiredo, Lucca Generali Marquezini, and Felipe Amancio expect no surprises for education providers and say investor attention should remain focused on the evolution of margins and cash conversion.
Investment rates are expected to stabilize at 15-16% of GDP, positioning Brazil near the end of IMF’s global rankings
07/23/2024
Ernesto Revilla — Foto: Divulgação
After recent upticks in 2021 and 2022, Brazil’s investment rate is projected to stabilize at 15% to 16% of GDP from 2024 through 2029, positioning it among the bottom 20 of approximately 170 nations in the International Monetary Fund (IMF) rankings.
The IMF anticipates that Brazil’s investment rate will reach 15.9% of GDP in 2024, ranking it as the 20th lowest globally. This rate is expected to slightly decrease to 15.4% by 2029, pushing Brazil to the 19th worst position, up from the projected 18th in 2028. These figures fall below the projected rates for Latin America (19.7%) and emerging economies overall (32.4%) in 2029.
In contrast, Brazil ranked 24th worst last year with an investment rate of 16.1%. Following the economic rebound from the pandemic, the rates peaked at 19.5% in 2021 and 18.1% in 2022, placing Brazil at the 46th and 34th worst positions, respectively. The country’s lowest ranking since 2010 was 72nd place in 2011, when the investment rate nearly reached 22% of GDP.
Francisco Pessoa Faria, senior economist at LCA Consultores, said that, according to the IMF’s analysis, only 9% of countries are expected to have a lower Gross Fixed Capital Formation (GFCF, a measure of investment in GDP) than Brazil in the medium to long term.
Economists argue that an investment rate of around 15% of GDP, as projected by the IMF for Brazil, is insufficient and hovers near historic lows of about 14.5%, as seen in 2016 and 2017 following the recession that started in 2014. They believe that a healthier range would be between 17% and 19%.
Mr. Faria also notes that global figures are skewed by China’s performance. According to the IMF’s projections, the world’s average investment rate from this year to 2029 is 26.8%, but excluding China, it falls to 23.5%.
For emerging markets, the average drops from 32% to 26% when China is not considered. “Our comparison with the world is unfavorable, but it’s not as dire as it appears because China is skewing the data,” Mr. Faria explains.
Nonetheless, even with an IMF-projected rate of 18%, Brazil would still rank among the 20% of countries with the lowest investment rates. “This places us in the last quintile, with no immediate prospect for improvement,” Mr. Faria adds.
Felipe Camargo, senior economist for emerging markets at Oxford Economics, describes Brazil as having “a cascade of issues that contribute to reduced investment and subdued long-term growth.”
He projects Brazil’s investment rate to hover between 18% and 19% of GDP in the medium to long term, emphasizing that historical averages are insightful for projections as rates typically trend towards these averages over time.
According to Oxford Economics, Brazil’s investment rate average stands at 18.9% of GDP. Among the 20 emerging countries analyzed by the consultancy, this rate is only higher than that of Colombia (17.9%), Argentina (17.9%), Egypt (17.2%), and South Africa (15.1%). However, it trails behind countries like India (30%), Turkey (23.6%), Mexico (22.2%), Peru (21.9%), and Chile (21.7%). Notably, although Brazil currently leads Colombia, Oxford Economics forecasts Colombia’s investment rate to rise to 21.2% by 2030, while Brazil’s is projected at 18.7%.
Mr. Camargo explains that the investment rate mirrors the country’s savings rate and its current account, which encompasses trade, services, and income transactions between residents and non-residents. “When the current account is in deficit—as it is in Brazil and many emerging markets—it essentially means leveraging external resources to supplement the country’s internal savings for investment purposes.”
Brazil, according to Felipe Camargo, borrows relatively little from the international market. “When domestic savings are insufficient, a country needs to draw on foreign resources. Like Brazil, Colombia, Chile, and Peru also save relatively little and consequently import more capital,” he explains.
Mr. Camargo suggests that Brazil could afford a slightly larger current account deficit, which would utilize more of its substantial international reserves yet remain within healthy limits. “Brazil’s reserves are quite robust,” he remarks.
Despite these ample reserves, which surpass those of some previously mentioned nations, the Brazilian exchange rate remains more depreciated than it arguably should be. Mr. Camargo attributes this to Brazil’s poorer fiscal health and lower credit ratings. “This contributes to Brazil importing fewer capital goods. Lacking domestic production capabilities for these technologies, Brazil inevitably lags behind,” he observes.
He also points to taxation as another crucial factor influencing investment rates across countries. “Much of a country’s investment is driven by its corporate sector. Heavier taxation and higher operational costs reduce corporate profit margins, which in turn dampens investment activity,” Mr. Camargo says.
In Brazil, the linkage between imports and investment is notably weak, observes Mr. Camargo. He suspects that the importation rates are lower partly because of how the ICMS (similar to Value-Added Tax) is applied to imports. “For those importing heavy equipment like ships, machinery, and the like into Brazil, the ICMS calculation basis exacerbates costs significantly. Not only do they face steep import taxes, but also a high ICMS rate on those taxes,” he explains.
While Mr. Camargo acknowledges that the proposed tax reforms won’t reduce Brazil’s overall tax burden, he believes they could make a significant impact by simplifying the tax structure. “Removing compounded taxation should indeed facilitate more investment,” he suggests. Companies could improve profit margins and enhance productivity. “This would allow companies to focus more on their core operations rather than spending resources on navigating complex tax regulations, potentially leading to more investments in essential machinery and equipment,” he adds.
However, Mr. Camargo cautions that without fiscal adjustments to control spending, it remains challenging to implement tax cuts. “This is the balance we are currently managing. It’s essential to align public policies to address this efficiently,” he remarks.
Echoing a broader perspective, Ernesto Revilla, chief economist for Latin America at Citi, attributes Brazil’s low investment rates to the lingering effects of the severe economic downturn the country underwent in 2015 and 2016.
“Then came the pandemic, and Brazil faced weak demand. So, for about the last eight years, Brazil has been trapped in a vicious cycle where strong growth is absent because there’s insufficient investment, and there’s insufficient investment due to the lack of strong growth,” observes Mr. Revilla.
He argues that breaking this cycle hinges on Brazil’s continued efforts on two fronts: reinforcing macroeconomic fundamentals, particularly fiscal policies, to instill confidence in long-term investors, and crafting a growth-centric narrative to assure sectors of the potential returns on their investments.
“This is a pervasive issue in the Latin American economy. With each change in government comes policy shifts, creating a level of uncertainty that long-term investors typically shy away from,” he notes.
Mr. Revilla emphasizes that fiscal sustainability is crucial for robust and enduring economic development, though it alone is not sufficient. “There’s a concern that an escalating debt trajectory could drive interest rates higher, and high interest rates are a significant barrier to investment,” he explains. He also highlights the importance of stable “rules of the game” and a favorable regulatory environment to encourage investment.
In Mr. Revilla’s view, Brazil stands as the most promising of the region’s emerging markets for attracting investment in the medium to long term.
“Brazil’s diverse economy is a significant advantage in today’s complex global environment, where supply chains are being restructured,” he notes. “While Mexico also has a favorable geographic position, the recent elections there have unfortunately heightened uncertainty.”
However, Mr. Faria of LCA, who authored a study for Valor comparing Brazil’s investment rate with that of Organization for Economic Cooperation and Development (OECD) countries, is less optimistic. He highlights that Brazil’s major disparities lie in construction and research and development investments. “And there seems to be nothing substantially new on the horizon that could drive significant progress in these sectors in the coming years,” he remarks.
Mr. Faria also points out that the government’s room to maneuver is limited, especially with interest rates expected to remain high.
“Examining OECD nations and distinguishing between government and private investment—including companies that are not state-dependent, like Petrobras, and households—it’s evident that the government’s contribution to GDP has significantly deteriorated in recent years. Achieving an investment rate comparable to that of other countries is challenging without revitalizing public sector investment capabilities,” explains Mr. Faria.
Mr. Faria said that, unfortunately, there are no indications that this will change soon. He highlights that all projections suggest an ongoing increase in the country’s debt-to-GDP ratio. “Society has prioritized substantial social assistance—which is commendable in itself—but the critical question remains: How will the government fund increased investments? It seems unlikely, particularly in a country where the appetite for spending is high but the willingness to fund that spending is low. The numbers just don’t add up,” he states.
He also notes a lack of incentives for efficient expenditure, significant imbalances such as in the salaries of the judiciary and military pensions, bleak prospects for labor productivity enhancements—including the impacts of Covid-19 on the training of future workers—and limited opportunities to engage in more Public-Private Partnerships (PPPs).
“In my view, if Brazil continues on its current path, that might be the best we can expect; growth will remain sluggish, with no significant prospects for improvement,” he concludes.
Formal employment drives up employment rate; informal jobs continue to expand, with 40% of the total
07/22/2024
Lucas Assis — Foto: Claudio Belli/Valor
The Brazilian job market has shown a clear trajectory of expansion in the last two years, after the pandemic crisis hit the market, which had not yet recovered from the 2015-2016 recession. Month after month, new records are seen in the number of formally employed workers and the mass of income, among other indicators. Other components are returning to levels not seen for a decade, such as the number of unemployed workers, that were not seen for a decade, such as the number of unemployed workers, which is below 8 million for the first time since 2015. However, the country’s positive employment figures still include a high level of informality.
Nearly 40% of employed Brazilian workers are in the informal sector. This share has reduced recently but, as the total number of unregistered jobs grows along with formal work, the volume of people in informal work positions continues to expand.
Over the more than eight years of the Continuous National Household Sample Survey (PNAD Contínua) informality rate series—an indicator measured since the fourth quarter of 2015—, only in four moving quarters the share of informal workers remained below 38%. The highest number ever was 41%, indicating a 4.5 percentage point range between the minimum (36.5%) and the maximum.
All quarters measured below 38% were in 2020, the first year of the pandemic, when informal workers were expelled from the job market due to social distancing measures. The share of formal workers among employed people increased but that happened through the composition effect.
“The informality of a relevant part of jobs is a characteristic of the Brazilian job market and represents an important source of inequality,” said Lucas Assis, the economist at Tendências Consultoria in charge of monitoring the job market. “As a result, there is a large number of workers with no access to social benefits, such as social security and paid leave, including maternity leave or sick pay,” he said.
The informal segment has a less stable employment relationship and does not include labor rights—such as sick pay and retirement—and historically offers lower compensation. Reducing informality and increasing the level of formalization of the job market is part of the United Nations Sustainable Development Goals (SDGs), under the eighth topic, “Economic Growth and Decent Workdecent work.” The informality rate is used as a reference for monitoring this SDG.
While Brazil is below the world average (58%) and at the average of the least developed countries (89.1%), it is well above the level seen in European and North American countries, of 11.4%, according to 2023 data from the UN Statistics Division. More than 2 billion people are currently working in informal jobs worldwide.
In Brazil, the PNAD Contínua indicated 39.13 million informal workers in the quarter ended in May, which is the most recent data. When measuring the informal segment, the Brazilian Institute of Geography and Statistics (IBGE) includes private sector employees without an employment registration book, domestic workers with no registration, employers and self-employed workers with no corporate taxpayer ID number, and contributing family workers receiving no compensation.
Adriana Beringuy, IBGE’s coordinator of household sample surveys, emphasizes the high share of informality in the Brazilian job market, despite the role of the formal sector in recent growth.
“The increase in the number of employed workers driven by formal workers doesn’t mean the number of informal workers has been falling. It has only been losing share but remains a very important line of the employed population,” Mr. Assis said, about the new PNAD Contínua. “The increase of the employed population is happening through the formal employment but also the informal employment.”
Liana Carleial, economics professor at the Federal University of Paraná (UFPR), says the informality rate is now just a reference, as the poor conditions of the market as a whole are bringing workers in the formal sector closer to those holding informal jobs.
“The informal category is now just a reference; it means nothing else than that. Formal workers work 12 hours and in poor conditions. It makes more sense to talk about having or not social rights,” the professor argues when considering what makes the two categories of workers different from each other.
Among informal workers, one group deserves attention: the 25.5 million self-employed people, or 25.1% of the 101.3 million employed people. Ms. Carleial criticizes the increase in entrepreneurship, which she says acts to hide the low share of salaried workers in Brazil. “Less than 50% of workers are salaried. There is a large number of self-employed workers, representing 25% of all employed workers,” she said.
Ms. Carleial cites France as a successful story of job market conditions. She notes that 87.3% of workers there are salaried, of whom more than 70% have indefinite-term contracts.
“We can see Brazil’s situation is poor in different ways. In France, nearly 90% of workers are salaried, which is a successful story. It is a solid, salaried society. That’s not our case,” she noted.
One of the differences between formal and informal workers is income. It tends to be the highest among formal workers. Lucas Assis says the transition from informal to formal employment increases the probability of improving income from work, both in absolute and relative terms.
However, the economist points out that income gains with formalization do not benefit all workers equally. “The shift to formal employment has greater potential for improving income from work for the richest,” he noted.
Like other indicators in the country, the informality rate presents inequalities, with worse rates for the poorest. Lucas Assis highlights differences by region, level of education, color, or race. Informality predominates in the North and Northeast regions, decreases according to the level of education, and varies according to color or race, whether men or women.
In the first quarter of 2024, when the informality rate in Brazil was 38.9%, this share was 70.9% among workers with no education and 63.2% among those with incomplete primary education. At the other end, the rate was 19.1% for those with a higher education degree and 29.8% for those with incomplete higher education.
In the analysis by color or race, the share of informal workers was 33.6% for white employed workers, below 41% for Black people, and 43.5% for mixed-race people. Regional data also show inequalities and range between 30.5% in the South and 52% in the North region. The other rates are 51.3% in the Northeast; 34.1% in the Southeast; and 34.6% in the Central-West.
“The Brazilian productive structure still has elements and labor relations typical of underdeveloped economies, such as the large number of workers in domestic services, mostly women,” Mr. Assis said. “The construction segment, also characterized by low income and high informality, predominantly employs men.”
Americanas’s reorganization plan enters final stageCreditors will be paid after approval of capital increase is ratified, expected this week
07/22/2024
Americanas: fraud is now estimated at R$25bn — Foto: Domingos Peixoto/Agência O Globo
Americanas’s court-supervised reorganization plan reaches its final stage this week, a year and a half after negotiations between shareholders and creditors began. The outcome includes a series of almost simultaneous steps for paying off debts, in a design drawn up so that the parties’ commitment not to litigate becomes definitively valid.
Retail chain Americanas went into court-supervised reorganization on January 19, 2023, eight days after the revelation of an accounting fraud now estimated at R$25 billion.
The first event in this step-by-step process is the approval of the company’s capital increase, scheduled to take place on Thursday. The primary shareholders—Jorge Paulo Lemann, Carlos Alberto Sicupira and Marcel Telles—will make a contribution of R$12 billion, which includes new money and the conversion of loans made to the retailer under the debtor-in-possession (DIP) modality, used for companies in recovery. On the other hand, R$12 billion will be converted into debts to creditor banks, which will make them shareholders.
The bill for the trio of businessmen will not be distributed equally between them. Mr. Sicupira will foot most of the bill—more than R$7 billion— since Americanas has always been a business closely monitored by him, who even sits on the board of directors.
Although it is very likely that the approval will take place on the 25th, this is an estimate. With the plan approved and the adjustments made to it last week, it is possible that the document will be presented by the court to the Prosecution Service before this step, which could push the date further forward.
Once approval has been granted, the settlement begins. First, the new shares are issued and the debts converted. Next, R$2.04 billion will be paid to creditors who sold their debts at discounts of up to 73% in a reverse auction held in April.
After that, Americanas will issue debentures worth R$1.875 billion, with series in reais and dollars. The bonds will mature in five years, have a grace period of 24 months, and will be used to exchange old debts.
The last stage is the so-called downpayment, i.e. the payment in cash of the remaining debt at a discount. At this stage, the disbursement is expected to be R$6.7 billion. This money will come directly from the capital increase and will not even pass through the company’s cash flow. Labor debts and debts to suppliers have already been paid in the first half of the year, with the company’s own money.
All the remaining payment stages will be made concurrently. According to sources with knowledge of the matter consulted by Valor, it is unlikely that everything will be paid in a single day, but the idea is to reduce time lags to almost zero. This is important because it eliminates the risks in the agreement between creditors and shareholders not to litigate.
In order to close the company’s court-ordered recovery agreement at the end of last year, both sides agreed they would not take legal action against each other. Until then, some banks had gone to court to sue shareholders and directors if there was any sign that they had participated in or knew about the fraud. The agreement does not eliminate, but drastically reduces the chances of eventual liability.
So far, both the retailer and investigations by the Prosecution Service and the Federal Police maintain that the scheme to cook the books carried out by the former management, without the board’s knowledge. The investigations are still ongoing.
Last week, Americanas informed it had received the report of the independent committee it hired to investigate the problems. The document has not yet been released, but the retailer has signaled that the work corroborates the thesis of fraud committed by former directors.
Americanas’ recovery process involves the restructuring of R$50 billion in debts, including commitments between companies in the group itself.
The bases of the agreement were initially agreed with the main creditor banks—Bradesco, Itaú Unibanco, Santander, BTG Pactual, and Safra—and then extended to the others.
A team of lawyers from all sides worked on the operation. Senior executives from the banks and, at times, the CEOs of these institutions were involved in the negotiations. The Rothschild investment bank advised Americanas. CFO Camille Loyo, was the company’s main interface with the creditors. Roberto Thompson, a partner at Lemann, Telles and Sicupira, was the negotiator on behalf of the primary shareholders. Pinheiro Neto law firm was the central point for talks between the banks and the company.
Indicator expected to fall by 13.8% and reach R$953bn in 2024, the lowest figure since 2019; analysts see a normal adjustment
07/22/2024
Sérgio Vale — Foto: Claudio Belli/Valor
Agricultural revenue is expected to total R$953 billion in 2024, 13.8% less than last year, already discounting inflation, reflecting a smaller harvest and weaker exports, with some effect from the severe floods in Rio Grande do Sul. This will be the lowest figure since 2019, according to projections by consultancy MB Agro, a sign of adjustment after an exceptional period for the segment—and in a year when weather conditions are less favorable.
The sector’s weaker performance is one of the reasons for lower growth in the Brazilian economy this year. In terms of GDP, agriculture is expected to fall in 2024, after growing by 15.1% in 2023. The market consensus points to a 1.6% drop in the segment in the national accounts, one of the factors that will lead GDP to expand closer to 2% this year—last year it was 2.9%.
These figures, however, do not show a crisis in agriculture, according to analysts. For Sergio Vale, chief economist at MB Associados, 2024 “is a year of adjustment” after three very favorable years. Between 2021 and 2023, agricultural income was above R$1.1 trillion, in updated values at 2024 prices. The indicator takes into account prices and quantities produced.
According to Mr. Vale, the three key variables for the sector—price, volume and exchange rate—have cooled this year or in part of it, contributing to a weaker result. With the prospect of higher interest rates in the U.S., commodity prices have settled, and the harvest in Brazil is suffering the effects of El Niño, which is contributing to a drop in volumes, even more so after the exceptional performance of 2023, he said. In addition, only recently has the exchange rate come under pressure again, added Mr. Vale.
The exchange rate got stronger in the second quarter and rose further from June onwards, but spent practically the entire first quarter below R$5 to the dollar. It wasn’t a bad level for exporters, but a stronger real against the dollar is less favorable for those who sell abroad.
In 2024, agricultural income is expected to be R$642 billion, a drop of 12.9%, already discounting inflation, compared to last year, estimates MB Agro. Livestock income is expected to fall more sharply, by 15.4%, to R$306 billion.
According to the most recent figures from statistics agency IBGE, this year’s grain harvest is expected to be 295.9 million tonnes, 6.2% lower than last year. Mr. Vale noted the impact of soybeans, a product that is expected to see a sharp drop in exports in 2024.
According to MB Agro estimates, foreign sales of the soy complex (grain, meal, and oil) are expected to reach $51.8 billion this year, a 23% drop compared to 2023, with a 6% drop in volumes and 18% in prices.
“It’s the product that ended up showing the greatest loss in exports this year,” said Mr. Vale, noting that “there was a little more difficulty in the soybean crop, but nothing too dramatic. It’s not a significant drop, but because of the importance of the crop, it has a significant effect.”
Total agribusiness exports, including industrially processed products, will also fall this year. According to MB Agro’s forecasts, they should stand at $146.5 billion in 2024, 12% less than last year, with a 10% drop in volumes and a 2% drop in prices. Corn exports will also fall sharply, according to the consultancy. The decline is expected to be 42%, to $7.861 billion, with a 37% drop in quantities and 8% in prices.
The 2024 result, however, is not a trend for agriculture, said Mr. Vale. “This should be seen as a temporary factor,” he said. “The expectation for 2025 is a better harvest, with a higher exchange rate and slightly better prices in general, with the prospect of falling interest rates in the United States.”
Fernando Honorato, Bradesco’s chief economist, also sees the drop in agriculture in 2024 as a normal phenomenon. According to him, the decline was expected, given the exceptional advance last year, in a scenario in which soybeans in Argentina are recovering this year, after a 2023 in which the harvest of the product in the neighboring country was shaken by a severe drought. “The year 2023 was atypical; our production was very strong,” said Mr. Honorato.
For 2024, the weaker performance of agriculture this year will, of course, affect GDP performance. “Agriculture was essential for the almost 3% expansion last year, but this year it tends to take away from growth,” said Mr. Vale, projecting that the pace of GDP expansion will be slightly lower, between 2% and 2.5%. MB’s June estimate for agriculture in the GDP was a 0.5% drop, but Mr. Vale noted that the fall could be a little more intense.
Bradesco, on the other hand, sees a much stronger drop in GDP for agriculture in 2024. Two weeks ago, the bank revised its projection for the sector in this year’s national accounts to a fall of 5.2% from a drop of 3.5%. This revision incorporates the effects of the floods in Rio Grande do Sul on the sector, but also the expectation of a weaker result for the entire agricultural segment.
Mr. Honorato reiterated that he doesn’t see a crisis in the segment, but rather one-off problems. “There will always be some ‘uncovered’ farmers, who may have leveraged themselves and are now suffering the financial consequences of the drop in production,” he said. As a result, some have fallen into debt and have to deal with the problems caused by the fall in production. The bank expects the sector to recover in 2025, with a 3.9% rise in agricultural GDP. In June, the forecast was for growth of 1.9% next year.
For economists at the Fundação Getulio Vargas’s Brazilian Institute of Economics (Ibre-FGV), agricultural production is still negative “simply because of the less favorable weather conditions this year and the record harvest in 2023”. For the second quarter, they estimate a 2.2% drop in agricultural GDP compared to the previous quarter, seasonally adjusted.
“There will undoubtedly be a negative impact on the sector due to the disaster in Rio Grande do Sul, but this effect is more moderate due to the advance of harvests in the region until April 2024,” wrote researchers Silvia Matos, Caio Dianin and Bruno Issler in FGV Ibre’s most recent Macro Bulletin. For this year, they predict that GDP will grow by 2%, with agriculture and livestock falling by 2%.
The dominant bet is that next year will see a recovery in farming, but there are still unknowns in the scenario. “For 2025, the picture is still not very clear, as the climate has been much more volatile than in recent years,” said Mr. Vale.
“At first, I estimate a 3% expansion. But that will depend on the harvest, the combination of price and exchange rate,” he said. “With a drop in the U.S. interest rates, commodity prices could have a positive reaction. The exchange rate, in turn, depends on the fiscal situation,” said Mr. Vale. “As it doesn’t look like there will be a definitive solution, the exchange rate may be seeking a new equilibrium point above the R$5 to the dollar it was at previously. This tends to give the sector a sense of recovery next year.”
In GDP, the direct weight of agriculture and livestock is 7.1%, according to figures from the 2023 national accounts. The share of agribusiness is much higher, reflecting the sector’s effect on other segments of the economy. Last year, the share stood at 23.8% of GDP, according to estimates by the Center for Advanced Studies in Applied Economics at the School of Agriculture of the University of São Paulo (Esalq-USP), in partnership with the Brazilian Agriculture and Livestock Confederation (CNA).
The calculation takes into account agriculture, the input sector, agricultural industry, and agricultural services. Thus, an upturn in agriculture in 2025 will have a positive impact on various sectors, amplifying its effects on the Brazilian economy.
Federal government placed a preventive embargo on sales to certain countries following confirmation of case in Rio Grande do Sul
07/19/2024
Carlos Fávaro — Foto: Leo Pinheiro/Valor
The Brazilian government has preventively suspended sales of chicken meat, eggs, and other poultry products to some importing countries following confirmation of an outbreak of Newcastle disease on a commercial farm in Anta Gorda (Rio Grande do Sul).
Sales of poultry and poultry products from all over Brazil to Argentina and European Union countries have been temporarily suspended. The self-embargo of sales to 32 other markets, including China, is for specific poultry products from Rio Grande do Sul only.
There are also countries to which exports of chicken meat and other products originating in regions 50 km from the outbreak site are suspended. The restrictions follow the pre-established requirements in the International Health Certificates (ISC), agreed with each importing country. Valor learned that there may be changes.
Anticipating this scenario of export restrictions, investors drove down the shares of the meatpackers on exchange B3 on Thursday and led BRF, JBS, Marfrig, and Minerva to lose a combined R$6 billion in market capitalization
The outbreak of the disease was confirmed on Wednesday on a commercial farm. According to a market source, the poultry farmer is part of the integrated chain of BRF, which has slaughterhouses in Marau and Lajeado (Rio Grande do Sul)
After a meeting with farmers in Porto Alegre, Agriculture Minister Carlos Fávaro said on Thursday that the focus seemed to be an “isolated case”, but admitted that there could be restrictions from importers.
“As the disease needs to be notified to the World Organization for Animal Health (WOAH), it could lead to trade restrictions and embargoes,” said the minister. According to Mr. Fávaro, the government has already contacted all the buying markets to report the situation.
The last time Brazil had an outbreak of the disease, which is caused by a virus, was in 2006.
JBS, which owns Seara, did not immediately respond to a request for comment. BRF said that the position would be taken by the sector, by the Brazilian Animal Protein Association (ABPA). The two companies are the country’s largest chicken exporters.
ABPA and the Rio Grande do Sul Poultry Association (Asgav) said in a statement that the federal and state authorities acted quickly to identify the case and halt the farm, ensuring that no birds left the place. “The official protocols established to mitigate the specific situation have been activated and the surroundings are being monitored,” they said.
On the stock exchange, BRF was the most affected company in the sector, losing R$3 billion in one session. As a result, the company’s market capitalization fell to R$35 billion. JBS then lost R$1.8 billion and its market capitalization reached R$69.8 billion.
Considering a scenario of export restrictions, Gustavo Troyano and Bruno Tomazetto, with Itaú BBA, said in a report that “the operations of BRF and Seara will probably be affected by a scenario of oversupply in the domestic markets”.
The two companies would have to redirect shipments, increasing the product mix of the Rio Grande do Sul units for the domestic market, said Citi analysts Renata Cabral and Tiago Harduim.
XP Investimentos noted that neither BRF nor Seara have plants in Anta Gorda. BRF has three poultry plants in Rio Grande do Sul, while Seara has only one. The nearest BRF plant is located approximately 55 km from the municipality with the focus, while the Seara plant is around 80 km away. Thus, the impacts would be indirect and market-related.
BRF’s parent company, Marfrig, also lost R$1 billion on B3, and its market capitalization fell to R$10.5 billion.
Despite having no exposure to the poultry segment, Minerva felt the pressure on a bad mood day in the market. The company lost R$190 million in market capitalization, to R$4 billion.
Minister Fávaro said that the outbreak of Newcastle disease was identified in just one bird from a commercial farm with 14,000 animals in Anta Gorda.
After a meeting with farmers in Porto Alegre to discuss the situation of those affected by the floods in May, he said that the other birds on the property had no symptoms and were being monitored. “We think it’s an isolated case. There was a hailstorm on the property, the roof of the farm collapsed, and 7,000 animals died. The remaining animals show no symptoms of the disease,” he said.
According to Mr. Fávaro, the area of occurrence is isolated, and no spread of the virus has been identified on the property or in its surroundings. “It’s important to emphasize that we haven’t yet assessed it as an epidemic because it’s one animal that was found, from an accident that occurred on this farm, in a total of 14,000 animals,” he said.
The biosafety protocols provide for the sacrifice of other birds in the event of contamination. Still, when he made the statements, the minister noted that there would only be a cull if the virus spread, which would not have happened.
Valor has learned, however, that the cull of the animals at the farm in Anta Gorda will begin soon. The measure is indemnifiable by the state’s Sanitary Defense and Development Fund (Fundesa), but there is a possibility that BRF will assume the costs to speed up the process. The measure could speed up the extinction of any possible trace of the outbreak in the remaining animals.
*Por Rafael Walendorff, Nayara Figueiredo — Brasília, São Paulo
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