Structural Changes in the Brazilian OJ Chain by CitrusBR

World Juice - Madrid

STRUCTURAL CHANGES IN THE BRAZILIAN ORANGE JUICE CHAIN MARCOS FAVA NEVES Full Professor University of São Paulo │ USP FEA │ Campus of Ribeirão Preto

OCTOBER │2011 1

AGENDA 1) Markestrat Presentation 2 ) The Orange Juice Chain in Brazil 3) Structural Changes in Brazil: Press Evidences of Costs Increases 4) Structural Changes in Agricultural Costs 5) Structural Changes in Industry & Logistics Costs 6) Final Messages

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CITRUS PRODUCTION CHAIN IN BRAZIL GDP: US$ 6.5 billion

QUANTIFICATION OF BRAZIL S CITRUS CHAIN: Brazil s singularity and leadership in citriculture is once again recognized in this quantification study, completed in 2010.

GDP estimate for the Brazilian citrus production chain based on final goods

Product



GDP value of US$ 6.5 billion in the agricultural year of 2008/09  2% of Brazil s agribusiness GDP



US$ 4.39 billion were generated in the internal market



US$ 2.15 billion in the external market



34% came from the sales of fresh fruit in the internal market



28% from orange juice exports (FCOJ and NFC)

Orange Lemon Tangerine FCOJ NFC Citrus pulp Essential oils Terpene Frozen cells D-Limonene Orange Juice/Nectar TOTAL

Internal External Total (IM + Market (IM) Market (IM) EM) US$ (million) US$ (million) US$ (million) 2,323.9 19.1 2,252.0 673.1 48.2 721.2 945.9 5.8 951.7 1,545.9 1,545.9 299.5 299.5 85.2 93.5 178.8 72.9 72.9 55.2 55.2 9.1 9.1 0.9 0.9 459.1 4,396.21

21,150.10

459.1 6,546.31

Source: Neves, Trombin and Milan from data elaborated by Markestrat (2010)

METHODOLOGY ADOPTED TO GENERATE COMPILED DATA FOR THE SECTOR The data was given to Markestrat along with one of the biggest international companies for independent auditing by the industries, individually, that compiled it confidentially and then delivered the mean values to CitrusBR. The companies that provided the data were responsible (in 2000/01 and 2009/10 seasons) for 98% of the Brazilian exports of FCOJ to Europe and 77% of Brazilian exports of FCOJ to North America, then representing a significant sample of the sector.

Data delivered individually

Audit Independent

Data compiled confidentially and mean values verified Brazilian Association of Citrus Exporters

 The boost in Florida’s production since the 1990s imposed new scale and productivity standards to the citrus sector. Even though, 44% of the harvested area in the Brazilian citrus belt show a productivity under of that required to achieve economic viability. STRATIFICATION OF GROWERS IN THE BRAZILIAN CITRUS BELT, BY NUMBER OF TREES x 1000 Trees > 400 200 to 399 100 to 199 50 to 99 30 to 49 20 to 29 10 to 19 <10 TOTAL

2001 Trees Growers Number of (%) (%) Growers 16.15 0.15 23 7.65 0.25 38 10.6 0.7 105 12.4 1.75 263 12.3 3.15 473 8.95 3.9 585 16.45 14.5 2,175 15.45 75.55 11,333 100% 100% 15,000

2006 Trees Growers Number of (%) (%) Growers 33.65 0.35 46 8.05 0.55 73 8.1 1.05 139 11.45 2.7 356 7.7 3.35 442 5.5 3.8 502 9.45 11.35 1,498 16.15 76.9 10,151 100% 100% 13,200

2009 Trees Growers Number of (%) (%) Growers 39.25 0.4 51 7.35 0.55 69 8.95 1.3 164 10.75 2.95 372 7 3.5 442 5.3 4.1 518 8 11.15 1,408 13.4 76.05 9,603 100% 100% 12,627

In 2009, around 650 growers (5.2% of the total) owned nearly 66% of the trees

Source - Prepa red by Ma rkes tra t ba s ed on i nforma tion from Ci trudBR, cons i deri ng da ta obtai ned from member-orga ni za tions

STRATIFICATION BY PRODUCTIVITY RANGE (BOXES PER HECTARE) OF ORANGE PRODUCTION IN 2009/10 SEASON Range of Volume of boxes produced per % of hectares % of boxes Yield (boxes/ha) Productivity productivity range (x million) (boxes/ha) > 1,400 2% 5% 16 1,655 1,100 - 1,399 7% 13% 41 1,209 800 - 1,099 19% 29% 92 933 500 - 799 28% 30% 95 639 200 - 499 36% 21% 67 345 < 200 8% 2% 6 138 TOTAL 100% 100% 317.4 607 TOTAL > 500 56% 77% 244.4 909 TOTAL < 499 44% 23% 73 280 Source - Prepa red by Ma rkes tra t ba s ed on i nforma ti on from Ci trudBR, cons i deri ng da ta obta i ned from member-orga ni za ti ons

44% of the harvested area in the citrus belt have a productivity of less than 1/3 of the others; in other words, they show a productivity under the necessary to have a profitable business.

SUGAR CANE VERSUS ORANGE CROP ď&#x192;ź Less efficient growers, both small and big ones, are leaving the citrus sector and dedicating themselves to other cultures or activities. ď&#x192;ź The competition against sugar cane, which disputes for the same area and involves less risks, requiring less technical and managerial capacity, has great effects in the migration of citrus growers to this culture.

The farmer can lease his land to the sugar cane industry, what will generate a revenue without risks of approximately US$ 1,000.00 /hectare/year.

If he decides to grow oranges instead, he must produce 1,000 boxes/hectare in order to obtain the same revenue and a profit of US$ 1.00 per box.

The operational costs of the orange orchards owned by CitrusBR associates show a significant increase.

R$ 7.28 R$ 7.26

R$ 7.50

US$ 4.50

FREIGHT OF THE FRUIT US$ 3.96 R$ 5.81 R$ 6.00

R$ 5.65 R$ 4.98

US$ 3.67

HARVEST

R$ 5.67 R$ 5.59 US$ 3.15 MAINTENANCE, UPKEEP AND OTHER EXPENSES

US$ 3.00

R$ / Orange box

US$ / Orange Box

US$ 2.58

R$ 4.25 R$ 4.50

US$ 2.41

R$ 4.01 Total in R$

R$ 3.00 Total in US$

R$ 3.30

US$ 1.74 US$ 1.66

US$ 1.90 US$ 1.75

EXPENSES WITH OWN VEHICLES AND SERVICES OF THIRD PARTIES

ELECTRIC ENERGY

US$ 1.31 US$ 1.50 FERTILIZERS

R$ 1.50

PESTICIDES AND HERBICIDES

US$ 0.00

R$ -

2000/01 2001/02 2002/03 2003/04 2004/05 2005/06 2006/07 2007/08 2008/09 2009/10

Source: Elaborated by Markestrat based on CitrusBR data. Production costs in 2000/01 and 2001/02 were reported by only one of CitrusBR associate companies.

LABOR COSTS

About 65% of the orange processed by the industry is acquired through different contractual arrangements. 237 215

Average price of the orange box (US$)

US$ 6.00

205 US$ 5.43 US$ 5.28

200

197

US$ 5.50 US$ 5.00

US$ 4.50

171

150

123

US$ 4.00 US$ 3.50

US$ 2.96

US$ 3.03 US$ 3.16

US$ 3.00 US$ 2.50

US$ 3.37

US$ 3.85

US$ 2.81

0 00/01

01/02

02/03

03/04

04/05

05/06

06/07

07/08

08/09

09/10

Relationship Typology between Brazilian Citrus Growers and Processors

Long Term Agreements

Leasing Cropsharing

100

US$ 2.12

US$ 2.00

Spot Market

200

US$ 4.63

148

136

250

226

Orange purchase agreements during the season period, at the price of the day Pre-determined fixed prices With or without granted minimum prices and with participation bonus indexed to the actual audited averages, obtained from the prices of the concentrate orange juice sold by each industry in the external market between july and june of each season. With or without granted mininum prices directly connected to the daily quotation and annual commodity prices at the NYSE. Rent of agricultural properties by a pre-determined fixed price or in goods at the market price, by a long term, in which the citrus activity is developed. The grower comes with the land and the industry with the inputs and technical assistance, and producion is divided by them. The grower freely sells its share in the production.

Source: Elaborated by Markestrat based on CitrusBR data.

Amount of orange boxes acquired from providers (in million boxes of 40.8 kg)

US$ 6.50

Between 2002/03 and 2009/10, the average price of FCOJ has had an increase of 11%. On the other hand, the elevation of FCOJ costs (both agricultural and industrial) was 244% (considering and exchange rate of US$ 1.83).

ITEMS / SEASON

UNIT

AVERAGE EXCHANGE RATE OF DISBURSEMENT IN PERIOD OF THE SEASON

R$ per US$ 1,00

AVERAGE PRICE OF FCOJ IN EUROPE IN THE NYSE AVERAGE OPERATIONAL COST OF FCOJ USING ORANGES FROM INDUSTRY-OWNED ORCHARDS Average operational costs of orange production in the orchards owned by the industry Average operational costs of the orange processing; production, storage and international logistics of FCOJ

2002/03

2009/10

VARIATION

US$ 3.23

US$ 1.83

-43%

US$ per TON of FCOJ 66 Brix

US$ 1,045

US$ 1,162

11%

US$ per TON of FCOJ 66 Brix

US$ 458

US$ 1,575

244%

US$ per Box of 40.8 Kg

US$ 1.31

US$ 3.96

202%

US$ per TON of FCOJ 66 Brix

US$ 165

US$ 534

224%

Source: Elaborated by Markestrat based on CitrusBR data.

Average cost of orange processing: production, storage and logistics of FCOJ (does not include depreciation or amortization of goods or the right of fixed assets)

ITEM / SEASON

UNIT

(I) Average costs of maritime logistics, port operations, administrative, sales and financing of w orking capital abroad

Dollars per ton of FCOJ

U$ 130

U$ 128

U$ 118

U$ 127

U$ 120

U$ 141

U$ 160

U$ 181

U$ 179

U$ 156

(II) Average costs of overland flow , operations and port charges in Brazil

Dollars per ton of FCOJ

U$ 39

U$ 35

U$ 28

U$ 33

U$ 38

U$ 48

U$ 53

U$ 66

U$ 70

U$ 79

(III) Average costs of orange processing and production of FCOJ and by-products, Dollars per ton of FCOJ administrative and financing of w orking capital in Brazil

U$ 300

U$ 265

U$ 164

U$ 234

U$ 230

U$ 293

U$ 326

U$ 432

U$ 447

U$ 497

(IV) Total average costs = (I) + (II) + (III)

U$ 469

U$ 428

U$ 310

U$ 394

U$ 388

U$ 482

U$ 539

U$ 679

U$ 696

U$ 731

-U$ 121

-U$ 132

-U$ 145

-U$ 173

-U$ 117

-U$ 148

-U$ 162

-U$ 219

-U$ 247

-U$ 197

U$ 348

U$ 296

U$ 165

U$ 221

U$ 271

U$ 334

U$ 377

U$ 460

U$ 449

U$ 534

246

236

224

226

242

227

232

230

255

263

R$ 1.93 U$ 0.90

R$ 2.44 U$ 0.89

R$ 3.22 U$ 0.99

R$ 2.99 U$ 1.08

R$ 2.79 U$ 1.14

R$ 2.30 U$ 1.13

R$ 2.13 U$ 1.15

R$ 1.82 U$ 1.22

R$ 1.97 U$ 1.26

R$ 1.85 U$ 1.23

Dollars per ton of FCOJ

(V) Subtraction of by-products revenue FOB Dollars per ton of FCOJ factory plant (VI) Average total costs subtracting the Dollars per ton of FCOJ revenue w ith by-products = (IV) - (V)

Average industrial yield including the Orange boxes needed to recuperation of secondary and tertiary solids obtain 1 ton of FCOJ 66 Brix Average disbursement exchange rate in the period of the season

Reals per 1 Dollar Dollars per 1 Euro

2000/01 2001/02 2002/03 2003/04 2004/05 2005/06 2006/07 2007/08 2008/09 2009/10

Source: Elaborated by Markestrat based on CitrusBR data.

FINAL MESSAGES 

Brazil is the major supplier of orange juice to Europe



Due to structural changes as the economy of the country

emerges, the traditional comparative advantages that Brazil used to have in relation to other orange producers erode. 

The main problems faced by the Brazilian citrus sector are

the increase of land prices and labor costs, the spread of citrus diseases and exchange rate. This scenario will also happen in other countries that produce orange, as it

happened in Florida. 

How to solve these problems?

HOW TO SOLVE THESE PROBLEMS?

HOW TO SOLVE THESE PROBLEMS? 1) INCREASE EFFICIENCY A lot has been done, but there is room for more improvements in Brazil, mostly at the farm level.

590,1

601,3

625,4

616,1

612,9

613,6 545,1

550,0

486,7

400,0 566.652

592.568

584.096

571.532

574.510

587.935

600.060

450,0 586.937

609.475

370,3

416,0

429,3

600,0

550000

350,0

300,0 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 Area

Productivity

Source: Elaborated by Markestrat - University of S達o Paulo with data from IBGE (Brazilian Institute of Geography and Statistics), 2010

Boxes/hectare

570,3

616,4

776.690

650,0

500,0

581.487

600000

406,3

650000

432,7

700000

620.770

Hectares

750000

736.770

719.735

800000

766.640

Area x Productivity - Oranges in the state of S達o Paulo (Brazil)

HOW TO SOLVE THESE PROBLEMS? 2) INCREASE PRICES TO THE FINAL CONSUMER  The question is how to transfer the increase of production costs to the end consumer, when there are many new beverages competing with the traditional orange juice.  This can be a matter of marketing: orange juice could be advertised differently, aligned to new consumer tendencies, allowing it to have a price increase.  Would it be enough an increase of 15 cents/package at the retail sector? For a person who consumes 20 liters of OJ/year, the increase would cost less than a cigarettes package per year.

HOW TO SOLVE THESE PROBLEMS? 3) A KEY FACTOR: SUSTAINABILITY ď&#x201A;§ The price of the orange juice should be higher not only because of the increasing costs of production, but also because of the sustainability of the sector. ď&#x201A;§ Besides complying with rigorous patterns of environmental and social sustainability, the Brazilian citrus sector will improve its economic viability with the Consecitrus, a mechanism that after being implemented will help to avoid huge fluctuations in prices.

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