MONTHLY AGRIBUSINESS BRAZIL MONTHLY AGRIBUSINESS BRAZIL. Macroeconomic Outlook. July 2017

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1 MONTHLY AGRIBUSINESS BRAZIL MONTHLY AGRIBUSINESS BRAZIL July 2017 Macroeconomic Outlook We revised our outlook last month, making downward adjustments to our economic growth and inflation forecasts. In general, the indicators released in June and July point in the same direction: activity data continued to suggest a moderate but uneven recovery, with the GDP expected to shrink in both the second and third quarters, while consumer inflation (IPCA) surprised to the downside. In light of these surprises, we believe that the outlook remains asymmetric. For the time being, we decided to collect more data before updating our forecasts. There is little doubt on the general trend for inflation and, to some extent, we could say the same about GDP, despite some lingering uncertainties on the intensity of the latter. Therefore, our forecast still expects the GDP to stabilize this year and grow 2.0% next year. We now expect the Broad Consumer Price Index (IPCA) to climb 3.4% and 4.0% in 2017 and 2018, respectively. As a result, we have reinforced our outlook that the interest rate will continue to drop in the coming months, reaching 7.50% by the end of the year and staying at that level next year, or below that if the exchange rate stays within an expected range. In the exchange rate scenario, the domestic scene continued to influence the behavior of rates. The low external vulnerability and a favorable global environment were still major influencing factors. In fact, the recent recovery in commodity prices and the weaker USD on a global scale allowed the Brazilian currency to rise at a faster rate. We have maintained our forecast that the Brazilian Real rate will end the year at BRL/USD The global economy provided more positive signs in June, after somewhat frustrating results in May. We highlight the improvement shown by recently released U.S. and Chinese indicators, and the acceleration of the European economy at the end of the second quarter. Meanwhile, consumer inflation raised little concern due to widespread deceleration especially in developed countries while wage gains remain tepid, despite the improvement in these countries labor markets. This combination of growth without significant price pressures suggests that the normalization of developed economies monetary policies will remain gradual, with some movements expected towards the end of the third quarter. As a result, we should not rule out the possibility that the Fed will start to reduce its balance sheet between September and October. Executive Summary Soybeans After retreating since the since the beginning of the year, reflecting the strong harvest in Brazil, domestic prices should not show significant drops, since the harvest has already been completed. International prices tend to increase due to higher global consumption rates and the weaker harvest in the U.S. However, this increase will be limited by global inventories at very comfortable levels. Corn International prices should rise moderately, reflecting the weaker U.S. harvest volume. Although lower than the last harvest, comfortable global inventory levels will limit this increase. Domestic prices have fallen significantly, reflecting the record harvest, and may still fall as the second harvest advances albeit at a slower pace than the drops recorded over the last few months. Coffee International prices should remain moderately high in the coming months, reflecting the reduced ratio between inventories and global consumption and the Brazilian crop s off year in the biannual production cycle. Domestic prices will remain high due to a smaller Brazilian crop. Cattle Cattle prices should continue to show a slight increase, reflecting the seasonal nature of the period. However, such increase will still be limited by weaker domestic consumption rates, the drop in exports, and the higher offer of animals ready for slaughter, due to the greater supply of calves. Sugar and Ethanol International prices should show a slight increase, reflecting a greater balance between supply and demand, which should be limited by the global surplus. Domestic ethanol prices may increase due to a lower production output, but this trend will be restricted by the drop in oil and, subsequently, in gas prices, as well as ethanol imports. Note: the text above already reflects Bradesco forecast revisions published on August 4, contrary to the original document of this publication in Portuguese, published on July, 21.

2 Soybean Prices should not decline significantly in the coming months, since the crop has already been harvested. International prices tend to increase, due to a higher global consumption rate and the weaker U.S. harvest, limited by global inventories at very comfortable levels SOYBEANS Fundamentals The USDA released the 3 rd report for the 2017/18 grain harvest, which was already planted in the U.S. and will start being planted in Brazil and in Argentina in September. U.S. soybean production is estimated at million tons, or 1.1% lower than the previous harvest (117.2 million tons). Planted acreage is expected to be up 7.3%, but productivity is forecast to drop 7.8%. Global consumption is expected to grow 4.2%. Therefore, the global stock-to-consumption ratio is estimated at 27.1%, down from 28.6% in the last harvest. Despite the declining production, the output of the last four crops has allowed global stocks to rebound to comfortable, albeit still lower levels. Argentina is expected to produce 57 million tons, same volume of the crop currently being harvested in the country. For Brazil, the USDA forecasts 107 million tons, or 6.1% lower than the current harvest (114.0 million tons). Conab released the 10 th harvest estimate for 2016/17, which is already underway in Brazil. Production reached a record high of million tons, up 19.4% (or 18.5 million tons) from the previous harvest. Compared to last month s report, Conab revised its estimate upwards for the seventh consecutive month, this time from to million tons, which reflects the improved yield estimates. Domestic prices have been retreating since the beginning of the year, reflecting positive surprises for the Brazilian crop estimates. Prices should not show significant drops in the coming months, since the crop has already been harvested. International prices, on the other hand, tend to increase over the next few months due to higher global consumption rates and the weaker harvest in the U.S., which will be lower than last year s harvest. However, such increase will be limited by global inventories at very comfortable levels National production of soybeans in 000 tons /91 91/92 92/93 93/94 94/95 95/96 96/97 97/98 98/99 99/00 00/01 01/02 02/03 03/04 04/05 05/06 06/07 07/08 08/09 09/10 10/11 11/12 12/13 13/14 14/15 15/16 16/17* Source and Estimate: Conab 2

3 Soybean productivity in kg per hectare /91 91/92 92/93 93/94 94/95 95/96 96/97 97/98 98/99 99/00 00/01 01/02 02/03 03/04 04/05 05/06 06/07 07/08 08/09 09/10 10/11 11/12 12/13 13/14 14/15 15/16 16/17* Source and estimate: Conab Soybean producer price Paraná in R$ per 60 kg bag 90,0 80,0 70,0 60,0 73,92 61,83 80,96 58,31 50,0 43,93 48,15 44,37 45,68 50,53 53,38 40,0 30,0 26,63 32,42 28,62 39,81 30,59 40,14 Source: Deral Production and Estimate: BRADESCO 20,0 18,04 10,0 jan/00 jan/01 19,98 jan/02 jan/03 jan/04 jan/05 22,57 jan/06 jan/07 jan/08 jan/09 jan/10 jan/11 jan/12 jan/13 jan/14 dez/ , , , International soybean prices (US$ cents/bushel) 1.200, ,0 800,0 600, ,0 jan/ jan/01 jan/ jan/03 jan/04 jan/ jan/06 jan/07 jan/ jan/09 jan/10 jan/ jan/ jan/13 jan/ dez/ Source: Bloomberg 3

4 Corn International prices will likely rise moderately, reflecting the weaker U.S. harvest volume. However, global inventories at comfortable levels will limit the increase. Domestic prices may still fall as the second harvest advances, albeit at a slower pace than the drops recorded over the last few months CORN Fundamentals The USDA released the 3 rd report for the 2017/18 grain harvest, which was already planted in the U.S. and will start being planted in Brazil and in Argentina in September. U.S. production is estimated at million tons, 5.9% lower than the previous harvest. Planted acreage, most of which is reserved for soy production, will be 3.3% smaller. Expect yield is 2.2% lower. Global consumption is set to grow 0.9%. The stock-to-use ratio is estimated at 18.9%, below the 21.6% recorded in the previous harvest. Despite a drop in U.S. production, the positive output of the last four crops has allowed global stocks to rebound to comfortable, albeit still lower levels. Argentina is expected to produce 40 million tons, same volume of the crop currently being harvested in the country. For Brazil, the USDA forecasts 95 million tons, or 2.1% lower than the current harvest (97 million tons). Conab released the 10 th harvest estimate for 2016/17, which is already underway in Brazil. Total corn production should reach 96.0 million tons, 44.3% or 29.5 million tons above last year s harvest. The first harvest yielded 30.4 million tons, up 18%. Meanwhile, the second harvest which saw a considerable drop in production due to drought conditions last year should reach 65.6 million tons, up 61.0%. Conab revised this total from 63.5 to 65.6 million tons in the comparison with the previous month s assessment. Given the robust growth of Brazilian corn output in 2017, producers may look at exports as an outlet for surplus production. In the last harvest, 18.9 million tons were exported. For this year, Conab expects exports to rise by 9.1 million tons, for a total of 28 million tons. Still, domestic corn stocks should go from 8 to 20.4 million tons, which amounts to 36% of consumption, up from 15% in International prices should rise moderately, reflecting the weaker U.S. harvest volume. Although lower than the last harvest, comfortable global inventory levels will limit this increase. Domestic prices have dropped since the beginning of the year, due to the record crop harvesting. Prices may continue to fall as the second harvest advances, albeit at a slower pace than the drops recorded over the last few months /91 91/92 92/93 93/94 94/95 95/96 96/97 97/98 98/99 99/00 00/01 01/02 02/03 03/04 04/05 05/06 06/07 07/08 08/09 09/ /11 11/ /13 13/14 14/ / /17* Domestic corn production in 000 tons Source and estimates: Conab 4

5 Corn productivity in kg per hectare /91 91/92 92/93 93/94 94/95 95/96 96/97 97/98 98/99 99/00 00/01 01/02 02/03 03/04 04/05 05/06 06/07 07/08 08/09 09/10 10/11 11/12 12/13 13/14 14/15 15/16 16/17* Source and estimate: Conab Corn producer price Paraná in R$ per 60 kg bag 45,0 40,0 35,0 39,98 30,0 25,0 22,28 24,94 26,92 23,29 24,34 20,0 15,0 11,95 10,0 11,40 18,96 16,26 10,44 14,14 13,07 17,26 19,17 19,49 Source: Deral Production and Estimate: BRADESCO 5,0 jan/00 7,05 jan/01 jan/02 jan/03 jan/04 jan/05 jan/06 jan/07 jan/08 jan/09 jan/10 jan/11 jan/12 jan/13 jan/ International Corn prices (US$ cents/bushel) jan/00 jan/ jan/02 jan/03 jan/04 jan/ jan/ jan/07 jan/ jan/09 jan/ jan/11 jan/12 jan/ jan/ dez/ Source: Bloomberg 5

6 Coffee International prices will likely remain moderately high in the coming months, reflecting the reduced ratio between inventories and global consumption and the Brazilian crop s off year in the biennial production cycle. Domestic prices will remain high due to a smaller Brazilian crop COFFEE Fundamentals The USDA released its 1 st biannual report on coffee for the 2017/18 harvest this month. This crop is being harvested in Brazil and harvest will begin in other producing countries in October. Global production is estimated at million 60-kg bags, a slight 0.1% increase. Despite increased production estimates for several producing countries, Brazilian production will be 7.1% lower due to being an off year in the biennial production cycle. The USDA estimates the Brazilian harvest at 52.1 million bags, compared to 56.1 million in the last harvest. Global consumption was estimated at million bags, up 1.3%. As a result, inventories should fall 3.2% and the ratio between inventory and global consumption will reach 21.6%, lower than the level recorded in the last two harvests (22.8% and 28.6%). The global surplus should total 1.7 million bags this year, compared to 3.6 million bags in The next USDA report will be released in December of this year. In May, Conab released the 2 nd report for the 2017/18 coffee harvest report, which is currently underway. Total coffee production was revised slightly downwards (from to million bags). Arabica forecast dropped from 36.5 million bags to 35.4 million, 2.8% lower than the January estimate and 18.3% below last harvest, as it enters an off year in the biennial production cycle. Robusta production is expected to grow from 9.1 to 10.1 million bags, 11% higher than the January forecast and 26.9% above last harvest (which suffered from drought conditions). Despite the improved forecasts, the Robusta harvest remains below its potential for 13 million bags, which was last seen before the crop failure of the past two years. The next Conab report will be published in September. International coffee prices have dropped between January and May due to investment funds selling their positions amid tightening supply concerns. However, international prices should register moderate increases in the coming months, reflecting a better balance between global supply and demand, with decreased inventories and the off year in the Brazilian crop s biennial production cycle. Similarly, domestic prices will remain high due to a weaker Brazilian harvest Domestic coffee production in kg bags /95 95/96 96/97 97/98 98/99 99/00 00/01 01/02 02/03 03/04 04/05 05/06 06/07 07/08 08/09 09/10 10/11 11/12 12/13 13/14 14/15 15/16 16/17 17/18* Source and estimate: Conab 6

7 Arabica coffee São Paulo in US$ per 60 kg bag 750,0 650,0 550,0 530,8 480,1 556,7 531,5 450,0 350,0 250,0223,6 239,8 337,0 230,4 291,4 269,8 247,5 328,0 408,6 424,0 366,3 247,7 445,9 150,0 50,0 Source: BMF BOVESPA jan/00 jan/01 jan/02 jan/03 jan/04 jan/05 jan/06 jan/07 jan/08 jan/09 jan/10 jan/11 jan/12 jan/13 jan/14 dez/17 325,0 275,0 225,0 175,0 125,0 115,06 75,0 99,48 63,07 65,95 67,78 127,53 272,07 197,02 180,03 152,04 131,18 96,55 142,45 108,67 150,03 117,62 160,47 138,62 118,14 134,90 International Coffee Prices in US$ cents/ Lb 25,0 jan/00 jan/01 jan/02 jan/03 jan/04 jan/05 jan/06 jan/07 jan/08 jan/09 jan/10 jan/11 jan/12 jan/13 jan/14 dez/17 Source: Bloomberg 7

8 Cattle Cattle prices should show a slight increase, reflecting seasonal factors. However, this increase will be limited by weaker domestic consumption rates, the drop in exports, and the higher supply of animals ready for slaughter, due to the greater supply of calves BEEF Fundamentals In mid-march, the Federal Police launched the operation Carne Fraca ( Weak Meat ), which uncovered illegal practices in inspections of some Brazilian meatpackers. The main foreign buyers, including China, Hong Kong, Egypt, Saudi Arabia, South Africa and the European Union which together account for more than 50% of exports, immediately announced an embargo on Brazilian meat pending further investigations. Two weeks later, these countries lifted the temporary embargoes, but vowed to impose stricter control of shipments. As a result, beef shipments have been volatile since the beginning of the year, accumulating an 8.5% drop in volume compared to the same period in In terms of value, exports fell 3.4% in the same period. Domestic calf supply has risen due to the retention of cows in the last few years, leading to lower cattle prices. Calf prices have already dropped 21% since April last year. As a result, the exchange ratio between cattle for slaughtering and calves has improved, despite the recent drop in cattle prices. This uptrend will cause the supply of cattle for slaughtering to rise in the short and medium terms. The tendency of cattle prices slightly increasing reflects the seasonal nature of the period and should be limited by multiple factors, including weaker domestic consumption rates, the drop in exports, and the higher offer of animals ready for slaughter, due to the greater supply of calves Brazilian beef exports (in tons) jan fev mar abr mai jun jul ago set out nov dez Source: SECEX 8

9 Slaughter Cattle in thousand heads Source : MAPA Production : BRADESCO jan fev mar abr mai jun jul ago set out nov dez 160,0 140,0 120,0 100,0 80,0 60,0 61,8 93,3 74,5 109,6 106,9 90,8 108,4 125,2 97,0 150,7 157,7 148,1 126,9 138,6 Live cattle producer price São Paulo in R$ per arroba 40,0 20,0 jan/06 jan/07 jan/08 jan/09 jan/10 jan/11 jan/12 jan/13 jan/14 dez/17 Source: Cepea

10 Sugar and Ethanol Increases in international prices will likely be limited by the global surplus. Domestic ethanol prices may increase due to a lower production output, but this trend will be offset by the drop in oil and, subsequently, in gas prices, as well as ethanol imports SUGAR AND ETHANOL Fundamentals The USDA released its biannual report with the 1 st forecast for the 2017/18 sugar harvest in May. The report forecasts stable consumption and a 5.2% rise in production. The biggest output increases will come from the following producers: India (17.7%), European Union (12.7), Thailand (12.3%) and Brazil (1.3%). After four consecutive harvests of production deficits, the current harvest is expected to record a surplus of 8 million tons. The next USDA report will be published in November. Conab released its 1 st forecast for the 2017/18 harvest in April, indicating a 2.3% drop in planted acreage. In São Paulo, the largest producing state, the area should be 4.5% smaller. Sugar cane production is estimated at million tons, or 1.5% lower than the previous harvest. Yield is expected to rise 0.9% as the weather improves in the Northeast. Reflecting the high returns for sugar, the harvest will once again be used primarily for commodity production, and should total 38.7 million tons, the same volume as the previous harvest. Meanwhile, ethanol production is expected to drop 4.9%. Production of anhydrous ethanol (mixed with gasoline) is expected to rise 2.8%, while hydrated ethanol should drop 10%. The next report from Conab will be published at the end of August. Unica released its 1 st estimate for the 2017/18 harvest. Sugar cane production in the Center-South region is expected to reach 585 million tons, down 3.7% from the previous harvest, which came in at 607 million tons. Sugar production is forecast at 35.2 million tons (1.2% lower), while ethanol is at 24.7 million tons (a 3.7% drop). According to Unica, sugar cane processing until early June for the 2017/18 harvest fell 7.8%, while sugar grew 0.3% and ethanol dropped 6.1%, compared to the same period last year. Last harvest s grinding was extremely high at the beginning of the year, favored by the weather and by the unprocessed sugar cane from the previous harvest. Despite the lower volume of sugar processed in the beginning of this year, sugar prices continue low, reflecting the news of surplus with improved production in India and Thailand and investment funds sales. Gasoline sales grew 6.5% in the first five months of the year, after rising 4.6% in In the same comparison, hydrated ethanol sales have fallen 19.7% year-to-date, after an 18.3% drop in Ethanol prices fell 9% until June 2017, reflecting lower demand and higher exports. Ethanol imports totaled million until June, surpassing the total volume imported last year (818 million tons). International sugar prices dropped significantly from the beginning of the year until June, reflecting the news on a higher global production surplus this year. Forecasts regarding the surplus volume, however, are still diverse and prices started to react in July. This trend should remain over the next few months, although the global surplus suggests a much more moderate increase. Ethanol prices should go up due to the weaker production output, but the increase will be limited by a drop in petroleum and consequent gas prices, as well as ethanol import volumes Sugar cane production in 000 tons /91 91/92 92/93 93/94 94/95 95/96 96/97 97/98 98/99 99/00 00/01 01/02 02/03 03/04 04/05 05/06 06/07 07/08 08/09 09/10 10/11 11/12 12/13 13/14 14/15 15/16 16/17 17/18* Source and estimate: Conab 10

11 Domestic sugar and ethanol production SUGAR ETHANOL Sugar in 000 tons Ethanol in 000 liters Source and estimate: Conab /95 95/96 96/97 97/98 98/ /00 00/01 01/02 02/03 03/04 04/05 05/06 06/07 07/08 08/09 09/10 10/11 11/12 12/13 13/14 14/15 15/16 16/17 17/18* Hydrous Ethanol Prices in R$ per cubic meters jan/13 fev/13 mar/13 abr/13 mai/13 jun/13 jul/13 ago/13 set/13 out/13 nov/13 dez/13 jan/14 fev/14 mar/14 abr/14 mai/14 jun/14 jul/14 ago/14 set/14 out/14 nov/14 dez/14 fev/15 mar/15 abr/15 mai/15 jun/15 jul/15 ago/15 set/15 out/15 nov/15 dez/15 fev/16 mar/16 abr/16 mai/16 jun/16 jul/16 ago/16 set/16 out/16 nov/16 dez/16 fev/17 mar/17 abr/17 mai/17 jun/17 jul/17 ago/17 Source: BMF BOVESPA International sugar prices 20 in US$ Cents/ Lb 33,0 27,0 28,4 32,1 29,5 24,9 22,9 21,0 17,9 21,9 17,7 20,4 15,0 13,1 14,6 15,4 14,9 14,8 15,7 14,1 9,0 10,7 9,0 8,8 9,0 8,4 8,9 11,3 10,7 5,6 6,3 Source: Bloomberg 3,0 jan/00 jan/01 jan/02 jan/03 jan/04 jan/05 jan/06 jan/07 jan/08 jan/09 jan/10 jan/11 jan/12 jan/13 jan/14 jan/18 dez/18 11

12 Harvest follow-up Non-commercial positions and international coffee prices Coffee prices Non-commercial positions Source: Bloomberg Jun-14 Jul-14 Aug-14 Sep-14 Oct-14 Nov-14 Dec-14 Jan-15 Feb-15 Mar-15 Apr-15 May-15 Jun-15 Jul-15 Aug-15 Sep-15 Oct-15 Nov-15 Dec-15 Jan-16 Feb-16 Mar-16 Apr-16 May-16 Jun-16 Jul-16 Aug-16 Sep-16 Oct-16 Nov-16 Dec-16 Jan-17 Feb-17 Mar-17 Apr-17 May-17 Jun , Soybean prices Non-commercial positions Non-commercial positions and international soybean prices jun/14 jul/14 ago/14 set/14 out/14 nov/14 dez/14 fev/15 mar/15 abr/15 mai/15 jun/15 jul/15 ago/15 set/15 out/15 nov/15 dez/15 fev/16 mar/16 abr/16 mai/16 jun/16 jul/16 ago/16 set/16 out/16 nov/16 dez/16 fev/17 mar/17 abr/17 mai/17 jun/ jun- Source: Bloomberg Non-commercial positions and international corn prices Corn prices Non-commercial positions Source: Bloomberg 300 Jun-14 Jul-14 Aug-14 Sep-14 Oct-14 Nov-14 Dec-14 Jan-15 Feb-15 Mar-15 Apr-15 May-15 Jun-15 Jul-15 Aug-15 Sep-15 Oct-15 Nov-15 Dec-15 Jan-16 Feb-16 Mar-16 Apr-16 May-16 Jun-16 Jul-16 Aug-16 Sep-16 Oct-16 Nov-16 Dec-16 Jan-17 Feb-17 Mar-17 Apr-17 May-17 Jun

13 Snapshot of the market SOYBEANS Soybean Complex Of soybean grain produced in Brazil, 43% is exported and 57% is destined to milling. The milling process results in 72% bran and 18% oil. The remaining 10% are seeds and losses. Of bran produced, 50% is exported and 20% of oil is exported. Soybean is an exports culture, since the level of production exceeds consumption by around 40%. This means that any growth of domestic production results in exportable surplus. In the domestic market, soybean is used in the manufacturing of food, such as salami and sausages and nearly 80% is employed to produce animal s food. Soybean accounts for 25% to 30% of poultry and hog food. Countries of destination Grain: 75% China, 25% Europe, 10% other Asian countries. Bran: 70% Europe, 20% Asian countries. Oil: 50% China, 20% India. Seasonality Summer crop: planting occurs between October and December and harvest is concentrated between February and May. Regionalization Mid-west: 49%, south 33%, 8% northeast, 6% southeast Ranking Brazil is the world s second largest player of production with 30.8%, behind the USA with 31.5%, but it is the largest exporter with 40.7%, followed by USA with 39.3%. 13

14 Snapshot of the market CORN Corn is the basis of animal s food for main types of breeding. In the animal s food composition, corn accounts for: 64% in poultry raising 65% in hog raising 23% in dairy cattle Countries of destination Corn exports account for 28% of volume produced. Main markets of destination are 14% Japan, 13% South Korea, 8.5% Taiwan. Seasonal factors Corn has two crops: Summer crop: planting occurs between October and December and harvest is concentrated between February and May. It represents 40% of total harvest. It has the following regional distribution: 45% south, 26% southeast, 10% mid-west, 15% northeast. Winter crop: planting occurs between February and June and harvest is concentrated between July and November. It accounts for 60% of total crop. It has the following regional distribution: 64.3% mid-west, 23% south (only in Paraná), 6% northeast (only in Bahia), 5% southeast. Ranking Brazil is the world s third largest corn producer, with 7% market share and the second largest exporter, with 18% market share. 14

15 Snapshot of the market COFFEE Brazil exports 67% of coffee produced, 90% green coffee and 10% instant coffee. Coffee cultivation has high workforce costs, which account for nearly 52% of total costs, since most part of harvest is manual. Countries of destination Green coffee: 19.3% USA, 18.8% Germany, 10% Japan. Instant coffee: 16.3% USA, 13.5% Russia, 6.4% Ukraine. Regionalization Regional distribution of coffea arabica: 71.5% state of Minas Gerais 10.5% state of São Paulo 9.1% state of Espírito Santo 4.3% state of Paraná 2.8% state of Bahia Regional distribution of Robusta coffee production: 75.6% state of Espírito Santo 12.5% state of Rondônia 6.7% state of Bahia 2.6% state of Minas Gerais Seasonality Coffee flowerage occurs between September and November in Brazil. Harvest starts in May and extends until September. Ranking Brazil is the world s largest coffee player with 37% market share in production and 27% in exports. Other players, such as Vietnam and Colombia have low domestic consumption, opposite to Brazil, which accounts for 15% of global consumption. 15

16 Snapshot of the market BEEF Brazilian cattle is estimated in approximately 200 million heads. The commercial livestock for slaughtering is estimated at 40 million heads, i.e., this is the volume of cattle at age and weight ideal for slaughter. The remaining cattle is divided among dairy cows, male calf and unfinished cattle. Exports accounts for 20% of beef national production. Countries of destination Russia is the main market of destination of Brazilian beef exports, accounting for 22%. Hong Kong accounts for 18%. Regionalization Cattle slaughter has the following regional distribution: 36.4% mid-west, 20.4% southeast, 20.1% north, 12.3% south and 10.8% northeast. Ranking Brazil is the world s second largest beef producer with 16.9% market share, preceded by the USA, which holds 19.1%. Brazil is the world s largest exporter with 21% market share. Seasonality Cattle raising cycle is long 2.5 years since when male calf is born until slaughter with approximately 15 arrobas. Cattle breeding system in Brazil is the extensive cattle raising, i.e., bull is raised released in the pasture and eats grass. The confinement system, where bull is raised with animal s food in small areas, accounts for only 5% of total slaughter. Cattle crop occurs in the first half of the year, during rainfall period, when pasture is plentiful. With a greater cattle supply for slaughter, finished cattle prices during such period are lower. The cattle intercrop occurs in the second half of the year, during drought period, when cold and white frost dry pasture. Bull lose weight, with lower cattle supply for slaughter. However, cattle prices increase during such period, as supply is higher for confined cattle, whose production cost is higher. During intercrop peak (October) there is greater number of confined male cattle slaughter. Confinements have two shifts: 1st shift: unfinished cattle is stored between May-June and delivered in August-September. 2nd shift: unfinished cattle is stored between August-September and delivered in November-December. 16

17 Snapshot of the Market SUGAR AND ETHANOL Sugarcane Complex Of sugarcane produced in Brazil, 46% is destined to produce sugar and 54% to produce ethanol. Sugar has the following destination: 70% exports and 30% domestic market. Ethanol has the following destination: 10% exports and 90% domestic market. Out of total ethanol produced, 55% is hydrated (used as fuel in flex fuel vehicles) and 45% is used as anhydrous (mixed to gasoline between 20% and 26%). Sugar is an exports culture, since level of production exceeds consumption by approximately 70%. This means any growth of national production generates exportable surplus. Countries of destination Raw sugar (73% of production) : 15% China, 8% Bangladesh; Refined sugar (27% of production): Arabian and African countries; Ethanol: 60% USA, South Korea 13%. Seasonality Cane is a continual culture, since period between cane planting and harvest is 18 months, and from same plant, it is possible to make until six cuts, on average. Cane harvest period occurs between April and November. During such period, mills operate 24 hours. Between January and March, plants are disassembled for maintenance. Brazil is the single large global player with crop in the first half of the year. Other countries are: USA, Europe, India, Thailand and Australia start their crop from the second half of the year. Regionalization 65% southeast, 16.8% mid-west, 10.3% northeast, 7.3% south. Ranking Brazil is the world s largest sugar producer, with 22.2% market share. Other players are: India 15%, European Union 9.2%, China 8.5%, Thailand 6.2%. Brazil is the largest exporter, with 46% market share in the global market. Other exporters are: Thailand 15%, Australia 5.4%. World s largest ethanol producers are: 57% USA and 27% Brazil. 17

18 DEPEC - BRADESCO does not accept responsibility for any actions/decisions that may be taken based on the information provided in its publications and projections. All the data and opinions contained in these information bulletins is carefully checked and drawn up by fully qualified professionals, but it should not be used, under any hypothesis, as the basis, support, guidance or norm for any document, valuations, judgments or decision taking, whether of a formal or informal nature. Therefore, we emphasize that all the consequences and responsibility for using any data or analysis contained in this publication is assumed exclusively by the user, exempting BRADESCO from all responsibility for any actions resulting from the usage of this material. We all point out that access to this information implies acceptance in full of this term of responsibility and usage. The reproduction of the content in this report (partially or in full) is strictly forbidden except if authorized by BRADESCO or if the sources (the name of the authors, publication and BRADESCO) are strictly mentioned. Team Fernando Honorato Barbosa Economists: Ana Maria Bonomi Barufi / Andréa Bastos Damico / Constantin Jancso / Daniela Cunha de Lima / Ellen Regina Steter / Estevão Augusto Oller Scripilliti / Fabiana D Atri / Igor Velecico / Leandro Câmara Negrão / Marcio Aldred Gregory / Myriã Tatiany Neves Bast / Priscila Pacheco Trigo / Regina Helena Couto Silva / Thomas Henrique Schreurs Pires Internships: Alexandre Stiubiener Himmestein/ Christian Frederico M. Moraes / Felipe Alves Fêo Emery de Carvalho / Felipe Yamamoto Ricardo da Silva / Gabriela Soares de Faria / Mariana Silva de Freitas / Rafael Martins Murrer