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Factory closures help lift Brazil beef industry margins
[SAO PAULO] A recovery in Brazil's beef prices following the closure of dozens of meat processing plants in the past year has lifted industry margins to positive territory for the first time in months, providing relief to a sector hard-hit by the worst recession in decades.
Brazil, the world's largest beef exporter, is the home of meat heavyweights like JBS, Marfrig Global Foods and Minerva Foods as well as a raft of small and medium-sized slaughterhouses.
Industry profits have suffered and many plants have closed as ranchers, facing rising land values and feed prices, have reduced herd sizes and as Brazilians have cut back on beef consumption.
According to analyst Agrifatto, 58 of Brazil's 281 beef plants have suspended production since 2015 as the companies focused on more profitable units.
After hitting a two-year low in early August, prices for beef hindquarter have jumped 24 per cent this week to 12.6 reais (S$5.30) per kilo, as the flow of processed meat to the market fell.
Benchmark cattle prices retreated 0.9 per cent over the same period due to reduced demand from the shrinking number of plants in operation, according to the latest data by Cepea research centre.
The bulk of the national output is sold in a domestic market plagued by inflation, high unemployment and indebted customers as Brazil struggles with its worst recession since the 1930s.
While exports remain profitable for some big companies, they account for only 20-25 per cent of Brazil's total beef production. Increased domestic demand would benefit the whole sector, analysts said.
Beef per capita consumption in Brazil has fallen steadily over the past three years, with a 13 per cent drop since 2013, to 32.9 kg/person in 2016, according to government data.
Analysts have said it is the lowest rate in more than a decade. "We expect to see a slight increase in consumer income and thus, higher beef consumption over the next three months," said Alex Lopes, at Scot Consultoria, pointing to positive perspectives for industry margins. "There is space for more hikes in beef prices."
Sales margins for boned beef, leather and other by-products, which were 0.3 per cent as of the end of July, jumped to 21.3 per cent on Tuesday, according to local analyst Scot Consultoria website.
Specialists said hard-pressed consumers would not easily accept a hike in beef prices, which would be mostly absorbed by the retail sector.
Many plants have been sending workers home for a month or two at a time, for so-called collective vacations, and slowed the pace of butchering.
"The reduced slaughtering in recent months has cut beef supply to the domestic market," said Lygia Pimentel, head of Agrifatto.
Cattle prices, which reached a record high of US$3.27 (S$4.40) per kg, in April due to the country's shorter herd, have stopped soaring because of reduced demand.
Rising sales margins are good news but not the salvation for many local companies, analysts said. "Keeping the factories closed does not erase all the fixed costs," said Ms Pimentel. Small- and medium-sized companies, which do not have idle capacity, should benefit the most, she noted.