STRUCTURAL CHANGES IN JUICE CHAIN. World Juice - Madrid THE BRAZILIAN ORANGE

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 2

MARKET ALIANCES SP / MS / BA Scientific Think Tank Services (outsource) Projects Blue Ocean Training Coopercitrus Moema Sugar Mill 3

ANALYZING FOOD CHAINS FOR 10 YEARS WHEAT 2004 Sponsors: J.Macedo Bunge MILK 2006 Sponsors: Sebrae Senar Faesp LARANJA 2010 Sponsors: CitrusBR Wageningen Academic Publishers 2011 2005 ORANGE 2009 SUGAR CANE Sponsors: Abecitrus Fundecitrus Sponsors: UNICA Coming Soon! 2011: Cotton 2011: Livestock 2012: Swine 4

CITRUS PRODUCTION CHAIN IN BRAZIL GDP: US$ 6.5 billion 8

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 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) GDP estimate for the Brazilian citrus production chain based on final goods Product Internal Market (IM) External Market (IM) Total (IM + EM) US$ (million) US$ (million) US$ (million) Orange 2,323.9 19.1 2,252.0 Lemon 673.1 48.2 721.2 Tangerine 945.9 5.8 951.7 FCOJ - 1,545.9 1,545.9 NFC - 299.5 299.5 Citrus pulp 85.2 93.5 178.8 Essential oils - 72.9 72.9 Terpene - 55.2 55.2 Frozen cells - 9.1 9.1 D-Limonene - 0.9 0.9 Orange Juice/Nectar 459.1-459.1 TOTAL 4,396.21 21,150.10 6,546.31 Source: Neves, Trombin and Milan from data elaborated by Markestrat (2010) 9

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 19

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 2001 2006 2009 x 1000 Trees Trees Growers Number of Trees Growers Number of Trees Growers Number of (%) (%) Growers (%) (%) Growers (%) (%) Growers > 400 16.15 0.15 23 33.65 0.35 46 39.25 0.4 51 200 to 399 7.65 0.25 38 8.05 0.55 73 7.35 0.55 69 100 to 199 10.6 0.7 105 8.1 1.05 139 8.95 1.3 164 50 to 99 12.4 1.75 263 11.45 2.7 356 10.75 2.95 372 30 to 49 12.3 3.15 473 7.7 3.35 442 7 3.5 442 20 to 29 8.95 3.9 585 5.5 3.8 502 5.3 4.1 518 10 to 19 16.45 14.5 2,175 9.45 11.35 1,498 8 11.15 1,408 <10 15.45 75.55 11,333 16.15 76.9 10,151 13.4 76.05 9,603 TOTAL 100% 100% 15,000 100% 100% 13,200 100% 100% 12,627 Source - Prepared by Markestrat based on information from CitrudBR, considering data obtained from member-organizations Range of Productivity (boxes/ha) > 1,400 1,100-1,399 800-1,099 500-799 200-499 < 200 TOTAL TOTAL > 500 TOTAL < 499 STRATIFICATION BY PRODUCTIVITY RANGE (BOXES PER HECTARE) OF ORANGE PRODUCTION IN 2009/10 SEASON % of hectares % of boxes 2% 7% 19% 28% 36% 8% 100% 56% 44% 5% 13% 29% 30% 21% 2% 100% 77% 23% Volume of boxes produced per productivity range (x million) 16 41 92 95 67 6 317.4 244.4 73 Source - Prepared by Markestrat based on information from CitrudBR, considering data obtained from member-organizations Yield (boxes/ha) 20 1,655 1,209 933 639 345 138 607 909 280 In 2009, around 650 growers (5.2% of the total) owned nearly 66% of the trees 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 Less efficient growers, both small and big ones, are leaving the citrus sector and dedicating themselves to other cultures or activities. 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. 21

R$ / Orange box US$ / Orange Box The operational costs of the orange orchards owned by CitrusBR associates show a significant increase. R$ 7.50 R$ 7.28 R$ 7.26 US$ 4.50 FREIGHT OF THE FRUIT US$ 3.96 R$ 6.00 R$ 4.50 Total in R$ R$ 3.00 Total in US$ R$ 3.30 R$ 4.01 R$ 4.25 US$ 1.74 US$ 1.66 US$ 1.31 R$ 5.65 R$ 4.98 US$ 1.90 US$ 1.75 R$ 5.81 R$ 5.67 R$ 5.59 US$ 3.15 US$ 2.41 US$ 2.58 US$ 3.67 US$ 3.00 US$ 1.50 HARVEST MAINTENANCE, UPKEEP AND OTHER EXPENSES EXPENSES WITH OWN VEHICLES AND SERVICES OF THIRD PARTIES ELECTRIC ENERGY FERTILIZERS R$ 1.50 PESTICIDES AND HERBICIDES R$ - 2000/01 2001/02 2002/03 2003/04 2004/05 2005/06 2006/07 2007/08 2008/09 2009/10 US$ 0.00 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 22

Average price of the orange box (US$) Amount of orange boxes acquired from providers (in million boxes of 40.8 kg) About 65% of the orange processed by the industry is acquired through different contractual arrangements. US$ 6.50 US$ 6.00 US$ 5.50 US$ 5.00 US$ 4.50 136 123 197 148 215 200 237 226 205 US$ 5.43 US$ 5.28 US$ 4.63 171 250 200 150 US$ 4.00 US$ 3.50 US$ 3.00 US$ 2.50 US$ 2.96 US$ 3.03 US$ 3.16 US$ 3.37 US$ 2.81 US$ 2.12 100 US$ 3.85 50 US$ 2.00 00/01 01/02 02/03 03/04 04/05 05/06 06/07 07/08 08/09 09/10 0 Spot Market Long Term Agreements Leasing Cropsharing Relationship Typology between Brazilian Citrus Growers and Processors 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. 23

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 AVERAGE EXCHANGE RATE OF DISBURSEMENT IN PERIOD OF THE SEASON 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 UNIT 2002/03 2009/10 VARIATION R$ per US$ 1,00 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. 25

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 2000/01 2001/02 2002/03 2003/04 2004/05 2005/06 2006/07 2007/08 2008/09 2009/10 (I) Average costs of maritime logistics, port operations, administrative, sales and financing of w orking capital abroad (II) Average costs of overland flow, operations and port charges in Brazil (III) Average costs of orange processing and production of FCOJ and by-products, administrative and financing of w orking capital in Brazil 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 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 Dollars per ton of FCOJ 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) Dollars per ton of FCOJ U$ 469 U$ 428 U$ 310 U$ 394 U$ 388 U$ 482 U$ 539 U$ 679 U$ 696 U$ 731 (V) Subtraction of by-products revenue FOB factory plant (VI) Average total costs subtracting the revenue w ith by-products = (IV) - (V) Dollars per ton of FCOJ -U$ 121 -U$ 132 -U$ 145 -U$ 173 -U$ 117 -U$ 148 -U$ 162 -U$ 219 -U$ 247 -U$ 197 Dollars per ton of FCOJ U$ 348 U$ 296 U$ 165 U$ 221 U$ 271 U$ 334 U$ 377 U$ 460 U$ 449 U$ 534 Average industrial yield including the recuperation of secondary and tertiary solids Orange boxes needed to obtain 1 ton of FCOJ 66 Brix 246 236 224 226 242 227 232 230 255 263 Average disbursement exchange rate in the period of the season Reals per 1 Dollar R$ 1.93 R$ 2.44 R$ 3.22 R$ 2.99 R$ 2.79 R$ 2.30 R$ 2.13 R$ 1.82 R$ 1.97 R$ 1.85 Dollars per 1 Euro U$ 0.90 U$ 0.89 U$ 0.99 U$ 1.08 U$ 1.14 U$ 1.13 U$ 1.15 U$ 1.22 U$ 1.26 U$ 1.23 Source: Elaborated by Markestrat based on CitrusBR data. 26

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? 28

HOW TO SOLVE THESE PROBLEMS? 30

620.770 581.487 586.937 609.475 600.060 587.935 574.510 571.532 584.096 566.652 370,3 592.568 406,3 Hectares 432,7 429,3 416,0 486,7 Boxes/hectare 719.735 736.770 545,1 570,3 766.640 776.690 616,4 613,6 612,9 616,1 625,4 601,3 590,1 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. Area x Productivity - Oranges in the state of São Paulo (Brazil) 800000 650,0 750000 600,0 550,0 700000 500,0 650000 450,0 400,0 600000 350,0 550000 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 300,0 Area Productivity Source: Elaborated by Markestrat - University of São Paulo with data from IBGE (Brazilian Institute of Geography and Statistics), 2010 31

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. 33

HOW TO SOLVE THESE PROBLEMS? 3) A KEY FACTOR: SUSTAINABILITY 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. 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. 35

MARKESTRAT Center of Research and Projects in Marketing and Strategy www.markestrat.org FUNDACE Foundation for Research and Development of Business, Accounting, and Economics www.fundace.org.br 37