Source: MEATINGPLACE, 3/23/17

The Brazilian meat industry already is suffering a drop in exports as a result of the Federal Police's investigation on irregularities involving 21 processing plants and 33 public agricultural inspections, according to information released by the government on Wednesday.

Brazilian meat exports fell sharply on Tuesday to $74,000, compared with a daily average of $63 million registered prior to the announcement of the investigations Friday, said Minister of Agriculture Blairo Maggi during a hearing in the Senate.

The 21 plants investigated represent a small fraction of the Brazilian meat industry, which has more than 4,000 facilities in operation, but many countries importing meat from Brazil have been banning products since Friday as a precautionary measure.

China, Chile, Japan, Mexico, Hong Kong, South Africa and the European Union are among the countries that have suspended purchases, partially or completely.

Moody's Investors Service said in a report released Tuesday that the main negative impact of reduced meat sales should be felt by BRF S.A and, to a lesser extent, by JBS.

“It is far too early to quantify the impact or how long it will last, since the credit implications will depend on the outcomes of the investigations and possible reaction of Brazil trade partners,” analyst Erick Rodrigues wrote in the report.

If the bans continue to spread and are extended indefinitely, Brazilian meat exports could seriously be disrupted, hurting the meat processors' EBITDA and therefore their credit metrics, he added.

China and Hong Kong accounted for 13 percent of Brazil's revenue from poultry meat exports ($773 million) and 34 percent of beef exports ($1.8 billion) in 2016, according to data compiled by Moody's. Chile bought $300 million in Brazilian beef (5 percent of total exports) last year.

“A drop in Brazil’s poultry exports would hit BRF the hardest among the rated Brazilian producers, since most of its production is concentrated in Brazil,” according to Moody's.

BRF closed 2016 with leverage measured by adjusted gross debt/EBITDA at 4.6 times, and any frustration in EBITDA generation would put additional pressure on the company's credit metrics. Despite this, Moody's considers that BRF has a strong competitive profile and good liquidity, with BRL6.3 billion in cash, which partially mitigate this increased risk.
JBS is expected to be less affected because only 5.2 percent of its revenues from poultry exports and 4.8 percent from beef sales are related to operations in Brazil, according to Moody's.

Even Minerva and Marfrig, which have not been mentioned in the investigation, may suffer knock-on effects of the disruption in Brazil's beef exports.

Minerva has beef operations mainly in Brazil, but also in Uruguay, Paraguay and Colombia. Marfrig is less exposed to the export bans because it generates half of its revenues from U.S.-based unit Keystone.

Marfrig said in a statement on Monday, when Chile and China were the only countries that had already confirmed total suspension of Brazilian imports, that these markets account for 3 percent of the company's total revenue, and that it is able to supply their demand via plants in Uruguay and Argentina.

For more stories, go to www.meatingplace.com.