A sage once told me that if you want to know what the government is thinking, don't listen to what it's saying; look at what it's doing. The same applies to business.
In this case, if you listen to what folks are saying, optimism in the future of the U.S. beef business is tougher to come by than an animal rights activist with common sense.
As of Jan. 1, the nation's beef cowherd was the smallest in at least four decades. Input costs are soaring. Between urban sprawl and acres converting to grain production, forage is getting tougher to come by.
The average age of beef cattle producers continues to climb, as does the equity requirement for entry into the business. Beef producers and beef operations continue to dwindle. The nation's economy is in a tailspin, and domestic beef demand is static at best.
Contraction — reducing excess cattle feeding and beef packing capacity to fit fewer cattle numbers — is the logical conclusion.
Brazil enters the picture
Yet, the Batista family of Brazil — their business, JBS — chose this time to invest $3 billion in the U.S. beef business. It came with the announced purchase last May of Swift & Company, followed by acquisitions of National Beef Packing Company, LLC and Smithfield Beef Group Inc., announced in March. The acquisitions also made JBS owner of Five Rivers Cattle Feeding, the world's largest cattle feeding organization.
Understand, the packing companies JBS acquired were carrying substantial debt. According to company reports, about $1.2 billion of the $1.4 billion Swift price tag was debt. JBS paid $560 million in cash and stock for National, also assuming the company's debt and liabilities; total value of the deal was pegged at $970 million. JBS gave $565 million for Smithfield Beef Group, which subsequently stated net proceeds would primarily go toward debt reduction.
Keep in mind that the Batistas, whose fortune began in the 1950s harvesting one head of beef/day, didn't have $3 billion lying around. They liquidated 49% of the equity in their family companies through an Initial Public Offering in Brazil. Since then the value of those stocks has increased.
Some cattle producers are concerned about the increased consolidation and concentration that goes with a single entity buying what had been the third-, fourth- and fifth-largest beef packers to quickly become the nation's largest. The U.S. Justice Department is reviewing the acquisition, just as JBS knew it would.
“Would you rather have five or six of the largest beef packers barely getting by, or three firms possessing the financial and intellectual wherewithal to take your product, harvest it and retrieve the most value for it from the global market place?” asks Chandler Keys, JBS-Swift vice president of government and industry relations. “The packers most innovative, efficient and adept at marketing are the ones who will win in the global marketplace.”
Moreover, Keys points out current excess feeding and packing capacity in the U.S., relative to cattle numbers, still means cow-calf producers are in the driver's seat, whoever owns the capacity.
The world's largest
If the acquisitions pass Justice Department scrutiny, JBS will be the world's largest beef processor, harvesting 80,000 head/day, or 10% of all cattle processed worldwide. Upon completion of the deal, they will have plants in Brazil, Argentina, the U.S., Australia and Italy, as well as production and distribution facilities in Europe, Russia and four African countries.
Operating with little debt obviously opens the doors to maximum efficiency. But Keys emphasizes JBS has also begun aggregating value to beef carcasses in this country with innovations they developed in Brazil. As an example, JBS sorts, grades, packs and markets beef intestines for sausage casings. Globally, the company is the leading provider of beef essence — basically a paste used to add beef flavoring to such things as bullion cubes.
“It's the right cut at the right time in the right place. That's their philosophy,” Keys explains. He says the Batistas invested in the U.S. beef business for two reasons:
To be a player in the global marketplace, they know they must have a U.S. presence, just like the purveyor of any other kind of product.
And JBS is enthusiastic about the future of global beef demand because of the growth potential in a growing global economy. As personal incomes rise, consumers want to improve their diets, and they do that with animal protein.
So, argue for the demise of the U.S. cattle business all you want. At least one family's sizable new financial commitment says otherwise.