June 11, 2009

Brazil's beef processors are fighting their worst crisis in years, but recent merger initiatives and a possible rise of exports to the EU have given hope that a recovery may be at hand, a leading industry analyst said.

Low cash flow and high cattle prices in the local market are among the main challenges faced by export-oriented companies such as JBS, Marfrig Group and Minerva, said Jose Vicente Ferraz, director of AgraFNP.

The global financial crisis had also cut credit lines and sharply reduced imports by Brazil's major key markets. Some companies have filed for bankruptcy protection, while others may merge to fight low operating margins and sluggish demand as world economies contract.

Some processors have also defaulted on cattle payments, leading many ranchers to demand immediate payment instead. Traditionally, producers have been paid after a 30-day period.

But the EU's decision to raise the amount of prime cuts Brazil can ship there from 5,000 tonnes to 10,000 tonnes, using reduced tariffs inside the Hilton quota, is a positive sign for the sector, Ferraz said.

JBS' agreement with J&F Oklahoma regarding its American fed cattle operation, JBS Five Rivers Cattle Feeding LLC, also shows that companies are looking for alternatives to overcome the financial difficulties, he said.

The deal will likely free up JBS' cash as it removes cattle hedging costs.

Marfrig Group, which recently got a credit line of BRL250 million (US$128 million), said Wednesday (Jun 3) it was in talks with rival Bertin S.A. about a possible partnership.

In May, poultry and hog processor Sadia has also agreed to a takeover by rival Perdigao, creating the world's largest poultry exporter.

There are indications of companies working to improve their cash flow, and Brazilian beef processors will be profitable, according to Ferraz.