“In some cases, slaughterhouses couldn’t support the speed of their expansion, on top of which there may have weighed management problems.”
– Marcio Vieira, Pricewaterhouse Coopers
The foreign acquisitions, record exports and expansion of slaughtering and processing capacity for beef in the past years is over for Brazilian meat packers.
As in many other industries in Brazil’s farm sector that became heavily leveraged in recent years to expand, some in the beef industry were caught off-guard by the evaporation of credit and demand for beef.
Currently, some local meat packers such as Arantes Alimentos and Margen are restructuring under bankruptcy protection, while others have shelved expansion plans and are focusing on cutting costs, according to specialists in the sector.
“The situation is very complicated,” said Rafael Cintra, an analyst for Link Investimentos traders. “In the case of the slaughterhouses, a sector that historically is very leveraged, the scenario is very difficult, especially for small firms.”
Before the international financial crisis deepened in late 2008, the industry was getting its margins squeezed by record prices for the cost of cattle, not only due to strong demand but also due to limited supply of cattle ready for slaughter.
Prices have fallen slightly, but so has the demand for beef, which continues to put pressure on the industry’s margins.
The industry’s concerns continue into 2009 as Russia, Brazil’s main buyer of beef abroad, is expected to struggle with the lack of credit and falling oil prices.
The impact of the crisis is not only touching the smaller companies in the sector. Arantes, a meat processor with a capacity to slaughter 4,000 head of cattle a day, recently entered court protection from creditors. It had taken on heavy debts in a move to expand into poultry before the crisis hit.
“In some cases, slaughterhouses couldn’t support the speed of their expansion, on top of which there may have weighed management problems,” said Marcio Vieira, an associate at PricewaterhouseCoopers. “Along comes the crisis and the problems only magnify.”
Not all of Brazil’s meat-packing industry is in trouble. Alcides Torres, a specialist in the beef market at Scot brokerage, is confident in the strength of the sector.
Giant players such as JBS, Marfrig, and Bertin e Minerva are all in less troubling waters. They all are big enough to have access to premium lines of credit, such as from Brazil’s BNDES national development bank.
Analysts say these companies may benefit from the difficulties that are besetting the sector at present. They will have access to credit and cash flow to buy up distressed medium and small rivals should the opportunity arise.
But for now, the industry is simply trying to tread water until some bottom to the market appears.
“The majority of meat packers are working with a lot of excess capacity and high financing costs… So, I think the sector will go through consolidation, which doesn’t necessarily mean through acquisitions. Some weak players may just bow out of the market,” said Cintra of Link.
Brazil’s meat-packing industry is more concentrated than the ranching sector, but even so, the five biggest in the industry slaughter less than a third of the country’s cattle.