May 30, 2007

 

US meat analysts see little immediate effect from Swift sale

 

 

Most fed cattle and pork market analysts say the purchase of Swift & Co by JBS which controls Latin America's leading beef exporter Friboi Group, should have little effect on US cattle and beef markets unless the firm closes one or more of Swift's current facilities.

 

However, analysts said closing some of Swift's cattle slaughter and beef processing facilities was a real possibility, and if JBS did so, it would cut the industry's capacity and could trim cattle prices.

 

Closing beef plants also could raise beef prices at retail and food service for consumers, the analysts said.

 

"Closing plants is not good for cattlemen," said Michael Swanson, senior economist at Wells Fargo Economics Group in Minneapolis.

 

But the US cattle industry is not building its cattle supply, Swanson said. Beef supply is being grown through larger cattle with more beef per animal.

 

Greg Wagner, grain and livestock market analyst at Iowa Grain Co in Chicago, said a greater question to him was whether the US wanted to keep meat packing company ownership within US borders. It's a question of security, he said.

 

In addition, Wagner said JBS would be financing the US$1.4 billion purchase price with bonds, which would be creating debt to purchase a debt-ridden company. He wondered where JBS would get the economies to pay off the debt.

 

Market analysts also wondered if the sale to JBS would spur Smithfield Foods to redouble its efforts to build a new plant in Oklahoma. Smithfield has said it has plans to build a plant, but the process has dragged on as Smithfield negotiated for its own buyout of Swift.

 

Most hog analysts considered the sale of the struggling company to JBS as generally neutral and not expected to have much if any notable effect on the live hog market or wholesale pork prices.

 

Rich Nelson, analyst with Allendale Inc in McHenry, Illinois, said he does not expect the new owners to make many changes in Swift's pork operations so the plants should continue to process as normal. However, he also said in making the acquisition, JBS is absorbing a lot of debt, so it is possible that the Swift operations could be sold again within two to three years.

 

Don Roose, analyst with US Commodities in West Des Moines, Iowa, views the deal as slightly supportive for the US hog and pork complex. He said the acquisition results in another player in the market, not fewer as there would have been had the ownership of Swift's meat plants been split between the two US-based companies, Smithfield Foods and Cargill.

 

"I would expect the Brazilian company to compete and to grow upon what they are acquiring," Roose said.

 

Adding to the uncertainty, JBS said it will give Swift's pork division six months to one year to see if it wants to keep or sell the division.

 

"Pork is not our business, but we kept Swift's pork division in the deal because it is the one division that had the best profit margins. We will give it a six-month to a one-year trial period to see if this is a business we want to keep," said JBS Chief Executive Joesley Mendonca Batista in a conference call Tuesday.