The Batista family obviously thinks there’s a future in beef worldwide. They also thought now was the time to finish putting their production capabilities in place.

Sao Paulo, Brazil-based JBS brought international enthusiasm for the beef business to Greeley last year, buying Swift & Company. Now, they have purchased, pending government approvals, National (14,000 head per day) and Smithfield (7,600 head per day). Taking advantage of a weak U.S. dollar and a Brazilian real that has appreciated 25 percent, they have quickly assembled U.S. market share.

Wesley Batista, one of the brothers and CEO of the family’s JBS USA, spoke to the Joint International Markets Committee at the Cattle Industry Convention in Reno recently. The family’s father started the business with a tiny plant in Brazil in the 1950s, harvesting a single animal per day. The family company – now involving three brothers and three sisters – harvests 22,600 head per day in their 23 Brazilian plants and another 5,000-6,000 in six plants in Argentina – that’s nine million annually in South America. Their South American plants, however, are much smaller capacity than the U.S. plants they have.

Fewer names, more exports?
Combining the number three, four and five beef packers in America will make JBS Swift the largest U.S. packer and assemble the top global capacity of 79,000 head per day. It will operate some 120 packing plants worldwide. While varying estimates are circulating, Steve Kay at Cattle Buyer’s Weekly tracks the industry closely and figures the top three packers would have capacity for 71 percent of total daily U.S. slaughter capacity. JBS Swift would have about 30 percent market share, with Tyson and Cargill a little over 20 percent each. JBS’s global share would be 10 percent, and several industry observers note that everyone – including regulators – needs to take into account that beef is increasingly a global product and its market and competitive situation need to be viewed in that light.

Batista told the Joint International Markets Committee that the key to the packing business is operating on an international basis.

“The best way to get value from the carcass is selling the right cuts in the right country,” Batista said. “Every country has cuts that it values more, cuts that it recognizes. We must sell all the cuts the right way to get the most value for the money.”

JBS is optimistic about exports. China and Russia are increasing consumption, Batista said. Last year Brazil shipped 400,000 tons of beef to Russia alone.

JBS Swift’s Chandler Keys emphasized the company wanted to be in position to pay more for cattle – the U.S. just needs to get more export markets open so they can.

JBS’s aim is to strategically diversify its production and distribution in the main meat producing countries around the world, allowing it to reach customers more easily. Certainly, the company expects Asian markets to be big customers again before too long. National, too, had focused heavily on Asia.

“As Australia is sending more beef to Europe because of European prices, we’re confident Japan and South Korea will need to buy more beef from the United States,” JBS S.A. president and CEO Joesley Batista told an investor conference call (“JBS-Swift Confident in Ability to Export to Asia,” Meatingplace.com , 03/07/08). Rather than South Korea following Japan’s lead, as has been common in the past, JBS thinks South Korea will open up first, and Japan will be inclined to follow shortly after.

The company’s recent expansion has included the purchase of Tasman in Australia and, in late 2007, 50 percent of Inalca/Monatna, headquartered in Italy with production and distribution in Europe, Russia and Africa. Tasman has six plants and exports to 50 countries. JBS only started its international expansion in 2005 with the acquisition of Swift Armour S.A. Argentina.

JBS strives to position itself so that if a country’s market closes to one country, it has plants in another to quickly shift supplier plants and not lose markets. For example, their new Australian plants ship to Europe while Brazil’s supplies are currently restricted. Argentine and Brazilian plants in different states can often serve the same purpose if one country or state faces restrictions. The U.S. plants JBS Swift owns or is acquiring range from cow slaughter plants to fed Holstein plants to smaller fed plants to large fed cattle plants. Geographically, they range from California to the East Coast and the southern border to Michigan.

At the Markets Committee meeting, Wesley Batista was asked about the flap between Brazil and the EU. It is a complicated issue, he said. Brazil had made some changes in its processing system and the EU had only, at that time, re-approved 300 of 2,500 Brazilian farms for export. Batista was confident things would be remedied soon.

Asked about processing costs, he said U.S. costs are double Brazil’s. Other questions involved JBS’s market share in Brazil (15-20 percent), finished cattle prices in Brazil ($75-80 per cwt.) and the most profitable country to sell to ( Russia). JBS sold 100,000 tons to Russia last year.

Why?
Brazilian beef is different from U.S. beef; 85 percent of it is grass fed. Grain feeding has increased over the last five years, mainly a 90-day period as a way to use residues from crops like sugar cane. At harvest, cattle are on average three years of age.

In a release, Batista said JBS had a particular interest in National because of its emphasis on value-added beef and exporting to Japan. Because National is a much smaller – number four – packer, with about 14 percent of the Big Four’s total slaughter capacity, neither its acquisition nor Smithfield’s is expected to raise federal anti-trust concerns, many observers believe. That’s not to say the Justice Department might not make some specific conditions, and some observers think it may be more difficult than others. JBS has expressed both confidence and a willingness to work with Justice to get the deals done.

But the acquisition of National and Smithfield yields quite a list of varied plants, cattle inputs and geography. National has the two large fed-cattle plants in Kansas, at Liberal and Dodge City. The third is a smaller plant in Brawley, Calif., purchased from cattle feeders in California and Arizona, primarily set up to process fed Holsteins. There are two case-ready processing plants, one in Pennsylvania and one in Georgia.

Smithfield , on the other hand, had plants handling fed cattle, fed Holsteins and cows. Plants are located in Wisconsin, Michigan, Pennsylvania and Arizona.

As to why Smithfield was willing to get out of the beef processing business, besides the obvious struggles most packers have had making money in recent years, CEO C. Larry Pope had a strategic answer in a Meatingplace.com interview (“Smithfield to focus on reducing debt, growing pork: CEO,” 03/06/08). He said Smithfield’s strategy all along was to buy Swift. Having both Swift and Smithfield plants would give them a ring of plants around both their feedyards and the main national cattle-feeding areas plus the economies of scale they needed. When they were outbid for Swift and market conditions made building a new plant untenable, the plan unraveled. So, they were open to the idea when JBS came calling.

The numbers
Economies of scale are crucial to narrow margin businesses like meat packing. Steve Koontz, a Colorado State University ag economist who has extensively researched packing economics, charted the total harvest and processing cost difference between the big U.S. packing plants and smaller plants at 15 percent. That’s $20 per head, which he notes, is one thing when it’s $20 less profit but another when it’s $20 all loss. The average cost is $140 per head for the chart’s small plants (3,000 head per day) and $120 per head for the large (6,000 head per day), but he’s seen smaller plants whose costs at times hit $250. That is a key reason for Grain Inspection, Packers & Stockyards Administration (GIPSA)-RTI International study findings that larger plants tend to pay more for cattle (“GIPSA Livestock and Meat Marketing Study,” RTI International, GIPSA-USDA, Jan. 2007.)

The National Cattlemen’s Beef Association (NCBA) published an editorial by President Andy Groseta that called for “a thorough review by the Department of Justice and other federal agencies” that review agriculture mergers and acquisitions. “And we feel this review must consider ‘buyer-side’ impacts to agricultural producers as well as ‘seller-side’ impacts to consumers, so that a competitive environment is maintained at every level of commerce in the cattle and beef industries,” Groseta said.  “But it is important to note that the statutory procedures and requirements for this review are already in place.”

No new regulations or so-called market reforms are appropriate at this time, he said. Further calls for banning packer ownership of cattle more than 14 days before slaughter limits marketing options for cattlemen and does nothing to enhance competition. Packer ownership of cattle didn’t cause packer concentration, and banning packer ownership won’t prevent further concentration, he said.

According to Kay, in the deal for National, U.S. Premium Beef (USPB) members will receive $261 million in cash for their shares and $65 million in JBS stock. The 450 unit-holders will get $286 per share for shares that cost $55 in 1997 – a 520 percent return .

USPB said 2,100 producers from 36 states have marketed cattle on USPB’s grids. Those cattlemen marketed millions of Ù cattle through USPB, collecting a total $120 million in cash grid premiums since late 1997.

The deal also provides ties to some cattle supplies. Although USPB cattle had supplied National in the past, Smithfield’s Five Rivers feedyards had been selling cattle to several different packers, depending on cattle type and proximity. At that, to fill a 40,000-plus per day harvest schedule, JBS Swift will probably need to fill half to two-thirds or more of its supply requirements from feedyards other than the Five Rivers yards it will own. The USPB ranchers and feeders will own stock in JBS Swift and thus continue their ownership relationship, and access to, a packer but now with more geographic options and increased international exposure.

JBS plans to float a private stock placement of around $1.5 billion to help finance the acquisitions. Such an infusion of capital will help three former packers struggling to survive after years of mostly heavy losses. Excess industry capacity still looms, however.

Not just investors
Of course, the U.S. beef industry is curious to know what JBS Swift is going to be like and how they intend to make their operations pay. One long-time Swift official we talked to emphasized that JBS is not an investor group. These are meat guys through and through, he said.

And making full use of its capacity is part of JBS’ philosophy. In that same investor conference call, Joesley Batista explained that they used their capacity at JBS Swift last summer to keep the pressure on other packers in an industry with too much capacity, so they didn’t recover before JBS had bought the other packers they wanted. Using a maximum utilization strategy, they increased Swift’s total daily harvest from 14,000 head per day to 19,000 head.

“That’s the main reason the market was so tough [for packers],” he said. Tight cattle supplies and excess slaughter capacity made the U.S. beef processing industry a buyer’s market. And JBS was ready to step in and buy National and Smithfield. JBS did make money last year, something not every packer can claim.

“If you look at our track record, what we have been doing for the last 20 years is buying companies without profitability to make them profitable,” Batista said. Their focus for the next couple years will be raising margins and cutting costs, with the goal of getting profitability into JBS Swift and the entire U.S. market. He noted that Tyson’s closure of its Emporia, Kan., plant is a step forward in reducing the industry’s overcapacity.

JBS certainly comes from a different viewpoint. Rather than a U.S. packer striving to expand exports, JBS is a multi-country processor routinely used to global marketing, learning about operating here. Sources within JBS Swift expect JBS’s global experience and international contacts to pay off in new sales channels and increased total carcass values. Plus, experience counts when trade difficulties arise – being able to get on a plane and having the clout to get in and see the right people can pay fast dividends.

In 2006, before its U.S. acquisitions, JBS got over 61 percent of its sales from exports to 500 customers in 110 countries. And this was accomplished with 50 percent of the world’s fresh beef imports markets closed to Brazil and Argentina, which included the U.S., Canada, Mexico, Japan and South Korea. JBS already had subsidiaries in Chile, Egypt, the U.S., the U.K. and Russia.

The company must think putting together market share in the U.S. is a picnic compared to South America. In 2006, JBS boasted a “leading market share” in the highly fragmented Brazilian and Argentine fresh and processed meats business – with 7.6 percent of the total slaughter in Brazil and 2.6 percent in Argentina. And they’ve done it with 1,000-head packing plants, harvesting three-year-old, grass-fed cattle. According to the company, they generally purchase their cattle in South America on the spot market.

JBS does produce further processed and pre-cooked beef products, ready-to-eat meals and, of course, canned beef. But one must learn international terminology. “Industrialized beef” to the international market is what we refer to as canned beef, i.e. canned beef stew or canned corned beef. That is the only form in which some countries, like the U.S., will import Brazilian beef. The MERCOSUL countries – Argentina, Brazil, Paraguay and Uruguay – export 95 percent of the world’s “industrialized beef,” and JBS holds 42 percent of the export share from Brazil and 82 percent from Argentina.

In January this year, JBS was projecting export sales just from its South American and Australian divisions of $680 million in 2008.

Since Brazil has been exporting to the EU, everyone would like to see JBS find a way to reopen that market to U.S. beef, after two decades of drought. It will be interesting to see what the industry can learn from JBS and what JBS learns about operating here. It is a different way of boosting U.S. export expertise than many expected. Maybe JBS has learned about the U.S. industry faster than we realized.