Big changes in Brazilian poultry meat industry

21-01-2014 | | |
Big changes in Brazilian poultry meat industry

The world’s largest meat ?packer, the JBS group, has bought the assets of Brazilian Seara, a poultry processing and retailing company, from Marfrig which is also one of the world’s top packers. And more leading companies have changed hands in Brazil’s poultry meat industry.

By Patrick Knight

The purchase of Seara, which cost JBS about $3 billion, is the latest in a series of mergers and acquisitions which are transforming the poultry industry in Brazil, the world’s leading chicken exporting country. Seara, Brazil’s third largest chicken exporter after Sadia and Perdigao merged into one, had already changed hands twice in the past few years. It was bought by Cargill, before being taken over by Marfrig. JBS, which took over Pilgrims Pride in the United States five years ago, has long wanted to become a major player in poultry meat and pork in Brazil. The company aimed to complement its domination of beef packing in the country.

Last year, JBS took control of the assets of the troubled French owned Doux company, Brazil’s fourth largest chicken exporter, as well as buying two smaller companies. In addition to the assets bought by Marfrig from Cargill, the companies bought by JBS include some 20 processing plants, distribution facilities as well as several brand names, which were sold to Marfrig by Brasil Foods, BRF, last year. Brasil Foods, the company resulting from the merger of the two previously leading producers and exporters, Sadia and Perdigao four years ago, had been obliged to dispose of these facilities by Brazil’s regulatory body, Cade.


Forced sale for more competition

Cade had determined that Brasil Foods, whose brands still have a 65% share of processed foods and ready to serve meals, should dispose of these assets to allow more competition. Cade decided the assets should be sold as a bloc to Marfrig, which in 2009 paid Cargill some $900 million for Seara. At the time, Seara was responsible for about 12% of the chicken exported from Brazil. But Marfrig, which has taken over about 40 companies in the past five years, including Keystone Foods, strong in the fast growing food services segment in Asia and the United States and the Moy Park Food company in Ireland, has had difficulty digesting its numerous purchases. Many of them have been operating well below capacity and the hoped-for synergies and economies of scale did not materialise.

With its debts ballooning, its share price falling and under pressure from Brazil’s National Development Bank, which has provided much of the finance for the expansion abroad by Brazil’s meat packers, Marfrig decided the best solution was to sell Seara. Marfrig will now concentrate on its assets in beef in Brazil as well as food services companies Keystone, which supplies McDonalds with all its meat in several countries and Moy Park, strong in Europe.

An alternative to the disposal of Seara had been the sale by Marfrig of Keystone Food to the BRF group. BRF can no longer take over more companies in Brazil, but the company is anxious to speed up expansion overseas. As well as JBS, the Tyson group had also been interested in the Seara group, which may have obliged JBS to pay a high price for Seara.


Big risks in mergers

Although more than half of all meals are now eaten out of home in many developed countries, less than 30% of them are in developing countries such as Brazil. Problems lie ahead for all the companies involved. Marfrig’s agreement with Cade stated that the company would not be able to sell the assets acquired from BRF for five years. BRF is now considering taking action aimed at having this requirement enforced.

Brasil Foods itself is the result of the enforced merger of leading exporter Sadia, and the second largest group, Perdigao, after Sadia was obliged to make massive payments following hedging operations which went wrong. The group itself has had some difficulty in digesting the dozens of processing plants and distribution units which Brasil Foods inherited.

Apart from the difficulties involved in the merger of the two very different companies, Brasil Foods, like Brazil’s poultry industry as a whole, was prejudiced by the steady rise in the value of the Brazilian currency, the Real. The real gained almost 20% against the US dollar between 2003 and 18 months ago, the stronger currency making exporting more difficult. The rise in the value of the Real has been reversed in the past 18 months.


Losing advantage

During 2012, much of the meat industry was also hit hard by the sharp rise in the price of the two leading feed ingredients, maize and soya meal. Prices had to be raised, which caused demand to weaken both in Brazil and abroad. Fortunately, Brazil had a record maize crop of 70 million tonnes in 2012. This year’s maize crop is even larger, so feed prices have fallen. The maize and soya grown in Brazil are amongst the world’s lowest in cost. But this advantage has been neutralised by the sharp rise in the cost of labour and of logistics in the past few years. As a result, Brazil has ceased to be the world’s lowest cost chicken producer. The high price of feed resulted in many consumers in Brazil switching from chicken to lower priced cuts of beef, as well as pork last year.


Shareholders rule

Despite the considerable challenges faced by the BRF board over the past few years, a group of shareholders argued that the company had not been sufficiently aggressive in foreign markets. Notably as regards to China, now a leading market for Brazilian chicken. The rebel shareholders have forced major changes at the top of the company. Nildemar Secches, previously chairman of the BRF board, and earlier chief executive of Perdigao, is to step down at the end of this year. With no obvious successor in the company, the rebels proposed that the chairman’s job should go to 76 year old Abilio Diniz.

Diniz is a controversial figure, and as well as his new job at JBS, is chairman of the board of BRF’s largest customer, the Pao de Acucar supermarket chain, Brazil’s largest. This fact has raised concerns about a conflict of interest. The shareholders argued that the combative Diniz has the qualities needed to allow BRF to grower faster, both abroad and in Brazil. Despite the disposal of numerous brands, BRF still has a 65% share of most markets for high value processed goods, which are responsible for a disproportionately large share of profits.

BRF now plans to distribute free freezer cabinets to tens of thousands of new outlets, hoping to increase its share of the market for processed items to 80% by this means. Meanwhile, Marfrig is seeking a new brand name which will allow it to compete in Brazil, where conditions are likely to get much tougher, following the arrival of the very aggressive JBS company. JBS itself is coming under fire for not honouring agreements whereby shareholders of the Doux company would be compensated out of profits.