Today, Beef Central strengthens its international beef market coverage with the launch of a monthly column written by respected US industry analyst and commentator, Steve Kay.
Mr Kay, pictured, editor and publisher of the authoritative Cattle Buyers Weekly newsletter (www.cattlebuyersweekly.com) will provide Beef Central readers with sharp and timely insight into developments in the critically important North American market. He is a regular speaker at industry conferences across North and South America and has visited Australia on numerous occasions to address processor, lotfeeder and producer audiences.
His Beef Central column will appear during the last week of each month…
Brazil’s Batista brothers are the beef world’s most opportunistic buyers. It’s not just that they’re always on the alert for potential assets to acquire. Sometimes, assets fall into their laps. But they’re still bold enough to snap them up before other buyers can make a move.
That’s how the Batista family built JBS SA from being a regional packer barely known outside South America into the world’s largest beef processor.
JBS entered North America and Australia in 2007 by acquiring Swift and Company when it was apparent that Swift’s owner wanted to sell, but would not be able to find a US buyer. Neither Cargill (also active in Australia) nor Tyson Foods would have been allowed to buy Swift by the US Department of Justice (DOJ), which oversees competition issues.
In turn, the next largest US processor, National Beef Packing, was too small to buy Swift. So JBS swooped in.
Once JBS had turned around Swift’s US beef business and improved it in Australia, it made clear its desire to expand. It made a bold bid in 2008 to acquire both National Beef and the fifth-largest beef processor, the Smithfield Beef Group. Ironically, the latter had combined with Cargill in 2007 to try and acquire Swift and then split its beef and pork assets.
The US industry was sharply divided over JBS buying both National and Smithfield. DOJ finally settled the issue in early 2009 by allowing JBS to buy the latter but not the former. Meanwhile, JBS expanded its beef and lamb business in Australia through acquisitions.
DOJ’s decision left JBS unable to expand its production base in the US. So Canada, from where JBS draws a small number of grainfed cattle, was the only place to go.
But the odds of expanding there looked slim. Canada’s largest beef processor is Cargill. The second largest, XL Foods, is Canadian-owned by the Nilsson Brothers Group, which is prominent in livestock markets throughout western Canada. The Nilssons appeared unlikely to sell unless JBS made them an offer they couldn’t refuse.
Fate steps in
Fate however intervened in the form of the pathogen E. coli O157:H7 that the North American beef industry has been working for 20 years to eliminate from the beef supply.
The industry, notably at the processing level, has spent several billion dollars in pursuit of this goal. The reduction of the pathogen’s prevalence has been impressive. The incidence of food-borne illnesses related to the pathogen fell 51pc from 2000 through 2009, while the prevalence of the pathogen in ground beef fell 72pc.
This year had been quiet in terms of beef recalls. But that changed with a September 17 recall of ground beef products produced at an Edmonton, Alberta, plant operated by XL Foods. The recall expanded 13 times over the next three weeks to include whole muscle cuts, short ribs and other intact cuts.
By mid-October, the total amount of beef under recall involved many millions of pounds and more than 1800 products. That’s a small volume compared to US recalls in the 1990s that involved 25-35 million pounds. But it was record large by Canadian standards.
In addition, some of XL’s largest Canadian customers returned all the beef they bought from XL, even if it wasn’t subject to recall.
Even worse, Canadian authorities shut down XL’s Brooks, Alberta, beef processing plant, the second largest in Canada, while they investigated the cause of the E. coli contamination.
After 16 days with no production, XL’s owners threw in the towel. In the first few days after the recall, they had asked Cargill and JBS for technical assistance. But on October 17, JBS and XL announced that JBS USA was immediately taking over the management of the Brooks plant.
More important, JBS USA was given an exclusive option to purchase the Canadian and US operations of XL Foods for US $50 million in cash and US $50M in JBS stock. JBS won’t assume any of XL Foods’ debt or liabilities. JBS is expected to exercise its option within the next few months.
Its opportunistic move means JBS will add 5200 head of daily slaughter capacity to its current US total of 29,000 head per day. This will leave it slightly smaller than Cargill in North America.
JBS USA Beef has a strong food safety team and should be able to restore XL Foods’ business fairly quickly. Canadian authorities on October 23 gave the plant permission to restart slaughter and processing operations.
JBS will also be able to exploit the synergies between Canadian beef coming south and US beef going north. Canada was the leading value market for U.S. beef exports in 2011, reaching US $1.03 billion. Volume was up 25pc to 191,000 tonnes.
Conversely, Canada was and is an important source of beef for the US. Imports in 2011 totalled 235,00t.
With US cattle numbers continuing to shrink, JBS’s fortuitous move into Canada might become increasingly important to its success in North America.
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