June 28, 2013

 

 

Due to the recent strengthening of the US dollar against the Brazilian real, Brazilian meat processors and exporters are put in a difficult position.

 

Revenue is set to soar for meat exports if the exchange rate continues to rise, but companies holding debt in dollars may suffer uncontrollable losses, industry leaders and analysts said.  

 

The dollar began 2013 at US$1=BRL2.05, after starting 2012 near BRL1.80 (US$1.28). The exchange rate had been held steady through early May of this year with various manoeuvres by Brazil's central bank at a rate between BRL2 (US$0.91) and BRL2.10 (US$0.96), which most in the meat industry considered ideal for stable profit and competitive pricing.

 

But over the past six weeks, Brazil's currency has devalued to BRL2.24 (US$1.02) as of June 20, driven down by various factors including monetary policy in the US, and negative reviews for Brazil as a whole by credit ratings agencies. The recent escalation of social protests throughout the country may add to further devaluation.

With a weaker currency, meat exporters like JBS, BRF and others are reporting on-year gains in export revenue. Brazilian beef exports for January through May set a new revenue record, with US$2.5 billion improving annual sales by 15%.

 

"The weakened exchange rate helps promote exports, and there is space for growth in (global demand) of meat exports still," said Fernando Sampaio, executive-director of Brazil's beef industry trade association, Abiec. "We in Brazil are used to exchange rates of BRL3 (US$1.37) or more in past years. … If the real gets weaker, it will only help exporters here more."

 

The ability to earn more reais per dollar is also allowing Brazilian processors to offer discounts in dollars to their export clients while maintaining the same revenue in reais, said Cesar de Castro Alves, sector analyst with MBAgro consultancy in Sao Paulo.

 

But Brazilian producers and exporters face various costs based in dollars that are now rising, from soy and corn inputs to export operational costs, said Ricardo Santin, markets director for Brazil's poultry processors and exporters association, Ubabef.

 

"Even domestic grains can become more expensive when our international sales increase, on account of the added competitiveness for these grains to be sold for export as well," he said.

 

"All of this directly impacts our costs, and certainly in our competitiveness," noted Clever Pirola Avila, president of industry trade union Sindicarne. "In addition, this impacts the internal market with the inflation rate, provoking an impact on the purchasing power of domestic consumers, and unfortunately reducing their consumption."

 

Potentially the most negative impact of a runaway exchange rate this year for Brazilian processors will be on those holding large amounts of debt in dollars, said analyst Castro Alves.

 

"This could be bigger than the positive impact on export sales," he said. "Those that have revenue in reais and high debt in dollars could face big problems. I think the worst is the great volatility with this rate, and that neither side (buyer or seller) really knows how to position themselves."