August 4, 2008

 

Brazilian meatpacker JBS SA is set to establish a massive global beef empire, as it eyes on potential acquisitions on a weak beef market that the company believes would recover in time to come.

 

JBS believes that meatpackers are currently cheap and with growing beef demand in developing nations, beef prices are likely to soar as well. A key component in JBS' strategy is to position the company to cash in on growing meat demand in the developing countries.

 

JBS has become one of the world's largest beef processors through an acquisition spree that includes Swift & Co. of the US, Tasman Group of Australia and a majority stake in Italian meatpacker Inalca SpA. If JBS completes several pending deals, it will own operations in 22 countries. More significantly, the purchase of National Beef Packing Co. and Smithfield, which are part of the pending deals, would enable JBS to control 30 percent of US beef processing if cleared.

 

By gaining footholds in several countries, JBS could hedge risks of trade barriers and sanitary restrictions. For example, exporting Brazilian beef to the EU is a cumbersome process due to concerns of foot-and-mouth disease but JBS can now export beef to the EU from its Australian facilities. JBS also hopes to operate more efficiently than its competitors and offset losses in one market with profits in another.

 

There are no limits to expansion opportunities, said Jose Batista Jr., a member of the JBS board.

 

The strategy, however, is risky because it isn't clear when meatpackers will return to consistent profitability. Exorbitant feed grain prices are eating into profits and JBS has posted a second quarter loss of US$233 million compared to a first quarter loss of US$4 million. Global grain prices had jumped 76 percent over the year that ended June 30, compared to beef prices that rose by only 11 percent, JBS said. Moreover, US beef companies have had difficulties regaining its foothold in key Asian markets since the detection of mad cow disease in the US back in 2003.

 

Meatpackers have another problem, according to Stephen Koontz, a professor at Colorado State University. Ranchers will have fewer animals going to slaughter after they finish culling their herds, and the fixed costs of running packing plants will become grueling. Koontz expects the packer to be hurt real badly by a combination of a shrinking herd and rising cattle cost.

 

JBS also face the challenge of rising fuel and energy costs, which stretches the consumers' pockets and lures them to buy cheaper meats such as chicken and pork instead of beef. Still, many food experts say that over the long term, higher beef prices are inevitable as the US cattle supply shrinks and grain prices remain high. The USDA expects beef prices to increase by as much as 7 percent next year, faster than any other food item.

 

Kevin Good at Cattle-Fax, a cattle-marketing information service based in Colorado, US, expects retail beef prices to shoot up as high as 20 percent to offset the additional input costs incurred by the industry over the past two years.

 

In 2005, the company made its first foreign acquisition by purchasing Argentine meatpacker Swift Armour. The company changed its name to JBS in 2006 and became the first Brazilian meat company to go public on the Brazilian stock exchange in the follow March. The offering raised nearly US$800 million for further expansion in South America.

 

By then, the Brazilian real had appreciated against the US dollar, which slowed export growth as Brazilian exports become more expensive. It poses a challenge as more than one-third of JBS' beef is exported.

 

Some analysts think JBS has the financial muscles to take market share away from its competitors. Rich Nelson, director of research at commodity-research company Allendale Inc. in Chicago, said it all depends which company can tolerate losses for the longest period of time.