Bigger and bolder
June 1, 2011
As the world’s largest meat and poultry company, JBS SA is used to being constantly scrutinized by financial analysts, politicians and the media. However, it significantly raised its profile this spring after it announced its 2010 financial results.
Much of this was due to Wesley Batista leaving JBS USA’s Greeley, Colo., headquarters to become JBS SA’s president and CEO in Sáo Paulo on Feb. 1. As comfortable as Batista is on a kill floor, he now appears equally comfortable explaining to investors and reporters where the meat giant is headed. Appearances at several investor conferences in March led to interviews and lengthy stories in major publications.
Meanwhile, JBS in mid-April refuted allegations that it bought cattle illegally in the Brazilian state of Acre. Brazilian public prosecutors on April 14 filed a 2 billion reais (US$1.3 billion) civil suit alleging that JBS and 13 other beef producers bought cattle from illegally deforested areas in the Amazon and from farms linked to slavery. JBS said the lawsuit refers to the possible purchase of 578 cattle in the past four years. Its procedures for buying cattle in Acre are correct and the lawsuit contains four significant inaccuracies, it said.
Batista’s PR offensive gave him several opportunities to repeat the message that JBS’s acquisition binge is over for now and that it is focusing on organic growth in its worldwide operations and on maximizing profits for shareholders. One way to do this is to shift some of its R$11.5-billion (US$6.9 billion) of debt, now predominantly on the books of the Brazilian company, to its US division to create a tax benefit there via amortization. Next phase
JBS has reached a critical mass and is entering a new phase, Batista told the Reuters Latin American Investment Summit in Sáo Paulo. It’s now time for JBS to start reaping what it has sown. JBS in 2010 spent R$400 million to R$500 million (US$253.8 million to US$317.3 million) to integrate new acquisitions. Although it will continue fine-tuning, such costs will be more in the range of R$10 million going forward, he says. However, Batista does not rule out the possibility of a new acquisition if the opportunity arises, especially of a packaged foods company, he told Dow Jones Newswires and the Wall Street Journal. This suggests JBS might still be interested in Sara Lee’s meat business.
None of the stories though mentioned any of the challenges that JBS faces in some of its beef operations. Its biggest immediate challenge is in Argentina. The country has quality cattle but not quantity. Most beef plants are running at only half their processing capacity. Beef packers face export and other restrictions. This led JBS to suspend operations at four plants and significantly reduce its workforce there. Beyond the US
JBS also faces the prospect of near-record-high cattle prices in Brazil. It also faces record-high priced cattle in Australia. None of these challenges is insurmountable, as beef prices in Brazil are much higher amid growing domestic demand. Beef exports from the US and Australia are increasing amid higher global beef prices. JBS will likely need to focus even more in both countries on improving carcass yields and being even more efficient. Another challenge is to keep its Pilgrim’s Pride business profitable in the face of high feed costs and somewhat depressed wholesale chicken prices.
JBS is operating two cattle processing plants in Argentina, with four idled. JBS is disappointed that it can’t get its Argentine operations running more efficiently, JBS’s Jerry O’Callaghan told Meat&Poultry. Argentina has good cattle and a good Hilton quota (for exports to the European Union). But JBS is exporting only a little beef because 70 percent of all beef produced has to be sold domestically. The Argentine government is also extremely volatile in its decision-making over export licenses, he says. The Argentine herd has declined from 55 million head to 47 million over the past five years and he does not expect to see any increase in cattle numbers this year.
Conversely, cattle numbers in Brazil are increasing and there has been a lot of heifer retention, O’Callaghan says. There’s also been a gradual increase in the number of cattle in feedlots, where they are fed for 60 to 90 days. About 3 million head will be finished this year, vs. 2.8 million in 2010. This year, Brazilian cattle prices won’t reach the record levels of last November, but they have reached a new plateau, he says. However, beef prices in Brazil are remarkably strong and reflect the booming Brazilian economy and a sustained improvement in beef demand.
JBS ran its Brazilian plants at 75 percent of capacity in 2010, well above the industry average. The utilization rate has been higher so far this year because more pasture cattle have come to market, says O’Callaghan. JBS Brazil exported 35 percent of its production in 2010, vs. 50 percent three years earlier, and this percentage should be similar in 2011. Exports from Australia have been very strong, with 80 percent of JBS’s production there going to export, he says. He doesn’t see anything denting beef demand globally.
In the US, JBS has improved its beef carcass yields by $50 per head by better deboning of various parts of the carcass, O’Callaghan says. The next phase for JBS USA is to improve its commercial skills. This means building even closer links with customers, he says. Steve Kay is editor and publisher of Petaluma, Calif.-based Cattle Buyers Weekly (www.cattlebuyersweekly.com).