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Priciest Cows Ever Squeeze Meatpackers in Brazil Beef Boom

Bloomberg logoBloomberg 11/25/2020 Tatiana Freitas

(Bloomberg) -- Brazil’s beef boom has already peaked, at least in terms of profitability.

Exports are surging, led by China, as a weakening currency boosts the appeal of Brazilian shipments. But partly as a result, cattle supplies have shrunk, pushing up prices that meatpackers pay by 50% this year to record highs. The industry is struggling to pass on those higher costs to Brazilian consumers, eroding margins.

The supply of animals for slaughter is expected to stay low next year, keeping cattle prices high, according to Cesar de Castro Alves, agribusiness consultant at Itau BBA.

chart: Brazil cattle price soars on low supplies, strong Chinese demand © Bloomberg Brazil cattle price soars on low supplies, strong Chinese demand

While strong overseas demand for Brazilian beef has propped up earnings for JBS SA and Marfrig Global Foods SA this year, record-high cattle costs have meant margins are narrower than a year ago, Alves said.

“The situation is less comfortable despite the promising outlook for exports to China,” he said Tuesday in a webinar. Margins on domestic sales are already negative.

Those sky-high cattle prices, combined with lower consumption in Brazil, are hurting companies that sell domestically, while currency deprecation and higher overseas sales volume and prices are favoring exporters, Wagner Yanaguizawa, an analyst at Rabobank Brazil, said in a telephone interview.

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But high cattle costs are a concern even for the largest beef companies. Wesley Batista Filho, JBS South America’s head, said earlier this month that Brazilian beef operations are “challenging“ amid low cattle supplies. In the third quarter, margins at JBS Brazil, the unit that gathers Brazil beef operations, fell to 7.5% from 13.8% in the previous quarter and 8.5% a year earlier. The company was able to partially offset higher costs with price increases in Brazil and export markets.

In the coming months, beef companies may face difficulties increasing domestic prices due to a tough economic environment in Brazil. This year, a government cash stipend helped prop up food sales amid the coronavirus crisis, but the aid may be lowered or end next year.

Seasonally weaker demand in Brazil and China should bring some relief to cattle buyers early next year, with prices probably already peaking, according to Yanaguizawa. Still, costs will remain a concern for 2021.

“There’s a shortage of cattle supplies and it won’t change next year,“ he said.

(Adds Rabobank analyst comment in sixth and last paragraphs)

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