The entry of Brazil’s JBS into the US beef industry may have raised eyebrows but with the sector in the doldrums, consolidation was on the cards. Dean Best looks at the impact an enlarged JBS will have on US beef.
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With widespread over-capacity in the US beef sector, it’s no surprise that the industry is seeing some consolidation.
A tight supply of cattle has made it harder for beef processors to make much cash from the sector and margins have been squeezed in recent months.
However, to some industry watchers, it was a shock that it was one company – and a foreign firm at that – which sparked a shake-up of the US beef market.
This week, JBS, the world’s largest beef processor, struck three acquisitions for a combined US$1.3bn in a bid to ramp up its presence in the US and Australia.
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By GlobalDataThe Brazil-based firm first signalled its presence in the US last summer, with the acquisition of US meat group Swift & Co. for US$225m. That deal was the first move from JBS to become a major player in one of the world’s key meat-producing markets.
On Wednesday (5 March), JBS grabbed the headlines again when it pounced for to buy the beef operations of US meat processing giant Smithfield Foods in a deal worth $565m. Not satisfied there, JBS also snapped up National Beef Packing Co., the fourth-largest beef processor in the US, in a deal worth $560m.
Wesley Mendonca Batista, CEO of JBS’ US business, said the company’s deal with Smithfield would expand its presence into new categories. “We see this acquisition as an opportunity to participate in a segment of the business and a region where we are not present today,” he said.
Batista said the National Beef deal would see JBS look to boost its sales in the US and in Asia-Pacific. “National Beef is an industry leader in value added fresh beef in the United States and is also a leading US exporter of fresh chilled and frozen beef to Japan,” he said.
One industry watcher, analyst Farha Aslam, says the deals would benefit the entire US beef industry. Aslam, an analyst at US investment bank Stephens, said the news is a “big positive” for the sector. “The increased industry consolidation will likely foster increased production discipline among beef packers, which would improve beef packing margins,” she says.
With consolidation comes the likelihood that there will be further rationalisation of processing capacity in the sector. A flat cattle supply has meant margins have been tight, a situation exacerbated by the soaring cost of grain as more corn is used for biofuel production. In January, Tyson Foods said it would stop slaughtering beef at a site in Kansas, a move that could cost 1,500 jobs.
According to Aslam, the closure of Tyson’s Emporia site in Kansas accounted for 4,000 cattle per day – or some 12% of the company’s capacity. However, she believes Tyson, currently the largest US beef processor with a 26% share of the market, will be a beneficiary of the consolidation and any further rationalisation in the sector.
“The increased industry consolidation is a big positive for Tyson Foods,” Aslam says. “Given the increased exposure that JBS has to the US beef market, the company has an incentive to improve profitability of the sector and be more rational in its US slaughter levels.”
When the Smithfield and National Beef acquisitions go through, JBS will usurp Tyson as the largest beef processor in the US. The company will account for 28% of the sector and the creation of a firm accounting for almost a third of beef sales could raise concerns in a time of rising anxiety about food safety. Aslam believes US anti-trust authorities could ask JBS to offload some assets.
“The general rule in the protein industry is that the Federal Trade Commission will allow one company to have up to one-third of the market as long as there are strong viable competitors,” Aslam explains. “JBS may be forced to divest operations in certain geographies if the US government feels the combined businesses’ control of the local market is too great.”
For Smithfield, its decision to sell its beef processing operations will leave it free to focus on the more lucrative pork sector. The company saw profits from its pork business double during the three months to 27 January thanks to healthy margins from fresh pork. President and CEO Larry Pope said Smithfield would spend the proceeds of its beef sale on businesses with a “higher return”.
“It makes sense to exit the beef business at this time,” Pope said. “While outperforming the industry, our beef group has nevertheless been a relatively minor player, as we have been unable to grow through acquisition or justify building a new plant in this adverse environment.”
In all, JBS’ foray into the US beef sector comes at a critical time in the industry. With margins tight and export markets only just beginning to open after recent US mad cow scares, beef processors have been finding the going tough. Over-capacity and low margins meant consolidation was likely and the entry of JBS into US beef is likely to benefit many in the sector.
However, with the US cattle supply expected to remain flat in the years ahead, further consolidation could still be on the cards.
