BrazilSustainable cattle farming can be a triple win for Brazil
Cattle farming in Brazil – a pillar of the economy – is dipping in productivity and profitability, all while causing devastating damage to the Amazon rainforest. Sustainable methods could preserve the environment, benefit farmers, and subsequently boost the economy.
In collaboration with The Nature Conservancy, Bain & Company ran a vast study of Brazil’s cattle market, using data on deforestation in the Amazon, property registers and animal permits for a comprehensive overview. In total, the study covered over 30,000 properties somehow related to the beef value chain.
The backdrop is a thriving cattle industry facing an imminent crisis. The beef trade made up more than 8% of Brazil’s GDP in 2019, spurred on by a nearly 17% jump in sales value from the year before. Today, Brazil has a cattle herd of more than 230 million animals – nearly 20% of which are destined for export. With the United Nations predicting growth in protein demand, Brazil is ideally situated to dominate this market.
The problem is that Brazil’s strong numbers are driven by the sheer volume of cattle farming, while the quality of this farming is more a barrier than anything else. Carlos Libera, a Bain & Company partner based in São Paulo, explained the challenges.
“While home to the world’s largest commercial cattle herd, Brazil lags the US and other countries in cattle-raising productivity. One major culprit is the extensive cattle ranching system still prevalent in Brazil: Low-tech operations that invest little in land and pasture care, or in animal husbandry, account for about 90% of the country’s production, according to IEG FNP Agribusiness.”
“Without proper management, pastures lose their nutrients, reducing cattle productivity. Of the country’s 180 million hectares covered by pasture, the state-owned Brazilian Agricultural Resarch Corporation, Embrapa, estimates that more than half is in some stage of degradation.”
Over time, these unsustainable practices have started to show their ill-effects, on production and consequently on profitability. JBS, Minerva Foods and Marfig Global Foods are the three largest meat packers in Brazil – together accounting for 35% of the beef market. Between 2016 and 2019, JBS saw its earnings fall by a third; Minerva Foods lost nearly half, while Marfig Global Foods clocked meagre sub-1% growth.
Deforestation
And its not just land degradation that is hitting met producers. Indeed, the vast deforestation they cause is affecting their brand value among consumers and investors alike. In 2019, Brazil’s National Institute for Space Research revealed that deforestation in the Amazon rainforest had reached its highest point in over a decade.
Up to 17% of the rainforest had been destroyed at the time, and cattle farming has a decisive role to play here. “A Bain analysis shows that in the Brazilian state of Mato Grosso, around 40% of deforested areas can be associated with cattle ranching. The study also showed that the number of producers associated with deforestation is small, as 10% of cattle producers account for 60% of deforestation linked to cattle production,” noted Libera.
These numbers, combined with satellite images circulating in the media, sparked outrage in Brazil and around the world – which threatens to further lighten the pockets of meat farmers. Indeed, 97% of Brazilians indicated that they have changed their consumption habits in line with environmental concerns at least to some degree.
Nearly 30% of these have completely changed their consumption patterns, which doesn’t bode well for the cattle industry. Investors have picked up on this too. Bain points to the investment arm of Finnish banking group Nordea, which dropped a Brazilian meat packer from its investment portfolio in July last year for environmental reasons.
In June, a global investment group with nearly $4 trillion in assets under management wrote an open letter to the Brazilian government, warning that investment would dry up if deforestation continued to increase. These are some of many incidents that indicate a shift in investor sentiment towards sustainability.
Making the switch
While this poses unprecedented challenges for Brazilian cattle farmers, simply making the switch to sustainable farming could ease all this pressure almost overnight. Silvio Marote, fellow partner at Bain & Company in São Paulo explained.
“Studies indicate that adapting a deforestation-free business model creates value for companies, ranchers and investors across the entire value chain, compared with the business-as-usual approach of continued forest clearing, with its associated risks.”
And now is a better time than ever to make the switch. Indeed, more sustainable farming has been on the cards for more than a decade now, but most farmers lack the capital to make the fundamental transition. Today, farmers have more funding options than ever to finance a sustainable shift.
The Nature Conservancy itself is working with lenders in Brazil, to minimise credit risk while securing loans for farmers. This is in addition to the broader focus on sustainability amongst investors worldwide, adding up to nearly $30 billion in impact investments – aimed at driving social and environmental change.
All this available capital and stronger cooperation among cattle industry stakeholders could deliver a triple win: better value for cattle farmers, Brazil’s maturing economy, and the environment.
