Higher grain costs are likely to weigh on meat processors like BRF SA and JBS SA when they report third quarter results this week, even as export markets stayed strong in the three-month period.
While China remained a key export destination buying ever-larger meat volumes from Brazil and other origins, it is now paying lower premiums, according to a November 2 report from HSBC analyst Alessia Apostolatos.
"The weaker Brazilian real is a double-edged sword that has made Brazilian protein exports more competitive globally, but also increased input costs," Apostolatos said. "China has been able to negotiate lower prices and absorb higher quantities as it continues to face African swine fever (ASF) pressures."
Chicago soy futures hit a four-year high last week as dry weather spurred supply concerns in top producer Brazil. Corn, another key livestock feed ingredient, soared 46% in local currency over the third quarter.
But the impact of higher input costs is different for JBS and BRF, given their distinct product portfolios and production base, Banco do Brasil analyst Luciana Carvalho said in an interview on Friday.
In the United States, where JBS gets 70% of its sales, the impact on third-quarter margins from higher grain costs was probably less significant because of still ample cattle availability, Carvalho said.
For BRF, which is focused on chicken and pork, higher feed prices could be more of an issue though the company's corn inventories, typically lasting three or four months, provide a cushion, she added.
Higher costs in Brazil compelled meatpackers to shift toward higher-margin exports and processed foods that sell for more. As such, both JBS and BRF benefited from the Brazilian government's cash aid program during the pandemic, which allowed families to spend the extra income on food.
On a less positive note, BRF still faces import restrictions imposed by Saudi Arabia, weighing on Halal food sales in the Middle East. For JBS, tight cattle availability in Australia and Chinese export restrictions are key issues, Carvalho said.
At the same time, strong demand for pork on domestic and international markets, especially from China, should offset higher feed costs and protect margins in Brazil's hog processing industry going forward, Carvalho said.
In October, all Brazilian meat companies underperformed the benchmark Bovespa index as record cattle, corn and soy prices boost overhead.