WITH the US beef industry now descending into challenging times due to constricted livestock supply and rapidly climbing cattle prices, Australia is providing a safe set of hands for global protein giant, JBS.
Analysts involved in JBS’s half-year investor briefing on Friday were told that Australia was a great example of positive benefit in JBS’s global diversification strategy, by geographic region and protein type.
“The second quarter (ended 30 June) figures from JBS Australia show we are already capturing the benefit of a greater supply of cattle in Australia, which is reflected in the increase of our margin the region,” global chief executive Gilberto Tomazoni told analysts.
Chief financial officer Guilherme Cavalcanti said despite the drop in consolidated net revenue in the annual comparison, pre-tax profit margin in JBS’s Australian operations grew significantly to 8.6 percent, when measured in US GAAP reporting terms.
In the United States, the challenge of beef business would persist for the coming months, considering a scenario of tightened margins with a dramatically lower cattle supply.
“In Brazil, the current cattle cycle is also favourable, as it is in Australia,” he said.
Investments in value added product and strong brands in the countries in which it operates had also been complemented by JBS’s diversification strategy.
Progress in US public listing
“All of these factors reinforce our review that JBS has a unique position in the global protein industry, and we believe that the competitive advantage of our diversified global platform has not yet been fully recognised and priced by the market,” Mr Tomazoni said.
“That’s why we see our dual-listing (NY Stock Exchange) proposal, announced in July, as a transformational step to build a new growth avenue. This strategy will give us more flexibility to finance our growth and de-leverage, in addition to reduced capital costs. We will have access to a broader investor base with greater financial capacity, favouring the unlocking value of our shares and expanding our investment capacity,” he said.
Processing margins in Australia and Brazil
During question time, analysts focussed on progress in Brazil’s processing margins, and Australia’s ‘very, very strong margins’, asking where the cattle rebuilding cycle was up to in those markets, and how this would affect processing margins for the rest of this year and into next year.
Mr Tomazoni said both Australia and Brazil were at the beginning of the cycle (growth).
“It has only just started. We mentioned at the end of the first quarter (March 31) that the results from Australia were really below our expectations. That’s because while there has been a herd buildup, the cattle were still on the farm – they had not come yet to the processing plant, because of the favourable weather conditions encouraging Australian farmers to keep the cattle on the land,” he said.
“But now, the cattle have started to go to the factories. But we are at the beginning – Australia is still ramping up its operation.”
“Earlier (during Australia’s own cattle shortage) some Australian plants were working for three days each week. Now we have five-day weeks, and are looking for labour to add a second shift (at JBS Dinmore) at the beginning of next year.
“Then we see good conditions in Australia for the next two years,” Mr Tomazoni said.
“It will be no different in Brazil. We see favourable (processing) conditions in Brazil for the next two years, because it is also at the beginning of the cycle, like Australia.
“They are opposite to the US. I think when Australia and Brazil are at the end of their cycle, the US will start its own new good cycle. This is the beauty of JBS’s diversification, because in the same business, we have different geography, and we have different moments in the supply cycle.
Another analyst asked for more detail about the upside seen going forward in Australia.
Mr Tomazoni said it was not JBS’s policy to give forecasts about its business.
“But I can tell you we are in the beginning of the cycle in Australia, and if you look at the past results, it’s a good perspective all we can deliver.”
“We see that the margin will be similar or could be higher, could be lower, because of course, Australia exports 70 percent of its production.
“If the market conditions help Australia – for example, in the US we have now reduced in terms of availability of cattle – it could help Australia to be more active in international markets because the US and Australia are competing in the same export markets.”
Another analyst asked about rapidly rising cattle costs in the US and how this would affect the company’s US beef business.
JBS US beef head Wesley Batista said the level of activity and profitability in the US operations was going to depend a lot on cattle costs.
“The US cattle cost is going to depend a lot on supply in any given month. But we know that from a supply perspective, we (US beef division) are in a tight period right now. We’re going into 2024 when we’re going to see some start to US herd rebuilding, hopefully,” Mr Batista said.
“So, we’re going to start seeing heifers going into US breeding herds, rather than into the feedlot in 2024. This will restrict cattle supply further, which is all that the public data points to.”
“We already are in a tight supply situation in US beef, and going into next year, we’re probably going to see an even tighter supply of cattle.”
Several analysts asked about future beef sales prospects in China, where there had been a ‘very important economic slowdown’ this year.
“Is this impacting protein prices, and could prices of all proteins (beef, pork, chicken) into China increase in the second half of 2023?” one analyst asked
Mr Tomazoni said in the short-term, JBS had seen a decline in terms of price and volume into China.
“But it was because of the end of the COVID lockdowns there, and because we had a case of BSE in Brazil, meaning some volumes of Brazilian meat that was on the water did not enter China, but was later quickly approved.”
“That created a short-term oversupply, and now the price decreased. But longer term, we see China’s poultry price recovering, and then I see that market continuing to grow, because it is structural. We need to focus on the demand for protein.”
“By 2050, we will need to produce 70pc more protein to feed global markets. That is a fact – coming from regions like Asia and sub-Saharan Africa.”
“We see consumption of beef in China continuing to grow. The market will not be affected by this (economic slowdown) situation in China right now, because beef is consumed by people at the top of the (economic) pyramid, and not for those at the lower end of the pyramid.”
“This, for me, is structural. It will not be changed because of the economic situation or because the consumption is too low compared to the other parts of the world.”
Mr Cavalcanti said when he joined JBS five years ago, the per capita annual consumption per year of beef in China was 4kg. Today that had risen to 7.8kg.