Sales in New Markets Fuel Growth of Brazil's Exports

By Jonathan Karp, Wall Street Journal

Sao Paulo, BRAZIL, Wednesday, April 2, 2003 -- CropChoice news: Amid shrinking economic-growth forecasts and war-stoked uncertainty, Brazil is being bouyed by a swelling trade surplus -- only months after investors feared the country might default on its heavy public debt.

The increased sale of Brazilian soybeans to China, car engines to Europe and meat to Russia reflects both opportunism and structural adjustments in an economy traditionally focused on a continental-sized domestic market of 175 million people. A 35% depreciation of Brazil's currency, the real, against the dollar last year reduced the country's already competitive production costs for commodities and semi-manufactured goods. Meanwhile, slack local demand discouraged the purchase of pricey imports.

Now, imports are beginning to pick up again, yet exports are accelerating even more. After rising 3.7% last year to a record $60.3 billion, exports are forecast to expand about 9% this year, providing the "main engine of growth for the Brazilian economy," Merrill Lynch economists Felipe Illanes and David Beker wrote in a recent report. While their forecast for Brazil's 2003 gross-domestic-product growth, 1.6%, is below the market consensus, they are predicting a higher-than-consensus trade surplus of $17.3 billion, which would be the best result since 1988.

Unlike exporters in countries such as Mexico, which rely largely on the U.S. market, many businessmen here aren't concerned that Washington might retaliate through trade talks for Brazil's opposition to the war in Iraq. Leftist President Luiz Inacio Lula da Silva harshly criticized the invasion initially, and his foreign-policy adviser Marco Aurelio Garcia offered Saddam Hussein political asylum -- only to quickly retract the statement.

Brazilian sales to the U.S. rose 8% last year to a record $15.5 billion, accounting for just one-quarter of all exports. For now, talks on accords that would give Brazilian products greater access to the U.S. -- through the World Trade Organization and the U.S.-proposed Free Trade Area of the Americas -- are at an impasse.

While the war in Iraq hurts Brazil's most-sophisticated export, passenger jets made by Empresa Brasileira de Aeronautica SA, or Embraer, it is a short-term fillip for two other important industries. Led by poultry and beef, Brazilian exports to the Middle East have soared about 60% this year due to the rush to stock up before war. At least one agribusiness company here is negotiating a large orange-juice contract with Saudi Arabia to supply U.S. troops.

"In every war or crisis, we normally have an important rise in agricultural exports," says Marcos Jank, a trade expert at the University of Sao Paulo. "If there are bad feelings toward the U.S., this could benefit Brazilian poultry and soy, two products for which the U.S. is our biggest competitor."

Brazil's latest trade figures show an impressive start to the year. Through March, Brazilian exports grew almost 27% from the year-earlier period to $15.1 billion, while imports rose just 3.9% to $11.3 billion. Agriculture Minister Roberto Rodrigues said Monday that the trade surplus for agribusiness, Brazil's biggest export industry, could beat last year's record of $20.3 billion, depending on the course of the war in Iraq.

Behind the boom is a bumper soybean harvest and rebounding commodity prices. Already the world's largest coffee, sugar and orange-juice exporter, Brazil has rapidly become a soy powerhouse, virtually doubling cultivation in the past five years. But even more than favorable exchange rates and global prices, Brazilian productivity gains and deregulation are generating the windfall.

Like competitors Bunge Ltd. and Archer-Daniels-Midland Co., multinational food processor Louis Dreyfus Group, Brazil's third-biggest farm exporter, has been investing heavily in Brazil's modernized farm industry. It is building a $30 million soy-crushing plant and doubling the capacity of two existing plants, says Kenneth Geld, president of Dreyfus's local unit Coinbra.

Improved transport due to the privatization of railroads brings greater efficiency to what has been the Achilles' heel of commerce in this vast country. Three years ago, Dreyfus trucked nearly all its soy, orange juice, sugar and coffee to ports. Today, more than half goes by rail, reducing freight costs by 20%, Mr. Geld says. He is even paying in advance to help a train company accelerate the purchase of rail cars.

With the U.S. all but closed to Brazil's main farm products, new markets are fueling the growth. Exports to Asia swelled 26.5% last year. "China is the swing factor for soy," Mr. Geld says. Also, Chinese consumption of orange juice, almost all supplied from Brazil, has doubled each of the past two years. "A few years ago, the Internet was the hot industry. Today, agribusiness is the place to be in Brazil," he says.

Industrial manufacturers are joining the fray, too. Ford Motor Co.'s export revenue from Brazil is expected to nearly double in the first quarter of this year, compared with a year earlier, says Richard Canny, president of South American operations. He forecasts export growth of 20% for the full year.

Renewed demand in Argentina, the main destination for Brazilian manufactured exports, is one factor: Ford has sent 1,641 cars there so far this year, compared with just 630 during the same period last year. The first sale of Brazilian-built car engines to Ford units in Europe also helps. But Mr. Canny says that trade agreements -- like one with Mexico, another under discussion with Andean countries and a third in planning stages with South Africa -- are critical to sustaining export growth. Still, he says, "Brazil is shaping up as a very solid export base."

Brazil's economic slowdown and the currency depreciation have kick-started some manufacturers' long-nurtured export hopes -- and helped them use excess factory capacity. Faced with stagnant demand for appliances in Brazil, Whirlpool Corp.'s Brazilian unit, Multibras SA Eletrodomesticos, has seen exports grow from less than 5% of output in 2001 to an expected 20% this year.

"It's not opportunistic," says David R. Whitwam, Whirlpool chairman and chief executive. "It's part of our integrated strategy. We're building a long-term capability."

To be sure, a strong recovery of domestic demand could weaken the export surge, and many economists expect the pace of growth to slow during the year due to capacity constraints. Already, one steelmaker, Cia. Siderurgica Nacional SA, has acceded to a government request to lower its export target this year to ensure domestic industry is served.

Write to Jonathan Karp at jonathan.karp@wsj.com