China’s swine fever brings relief to Brazilian companies. For how long?

. Apr 20, 2019
china swine fever

Amid a rocky April for Brazilian markets, one kind of stock has been soaring at B3: Brazilian meatpackers. Propelled by the African swine fever outbreak in China, the stocks are among Ibovespa’s best performers for the month, but is it enough to wipe out their recent history of trouble and sustain a longer recovery?

As we noted on our newsletter on April 15, Brazilian exporters have been rising amid a political turmoil that delayed the pension reform bill in Congress. In the case of meatpackers, more than just being connected to foreign markets, the swine fever has significantly damaged China’s production and may be spreading across Asia. March data released by China’s National Bureau of Statistics show that the country is 40 million animals down from the previous year. Now Chinese authorities expect the shortfall to increase pork prices by 70 percent during this year’s second half.

</span></p> <p><span style="font-weight: 400;">Humans are not affected by the swine fever, but</span><a href=""><span style="font-weight: 400;"> it is lethal for pigs and there is as of yet no cure.</span></a><span style="font-weight: 400;"> The disease is spread by contact with infected animals, objects, the ingestion of meat and meat products, or bites by infectious ticks. There are outbreaks in Russia and it is an endemic disease in Africa, “making the Americas the best choice for Chinese buyers,” wrote agribusiness specialist Marcos Sawaya Junk in newspaper </span><a href=""><i><span style="font-weight: 400;">Folha de S.Paulo</span></i></a><span style="font-weight: 400;">.</span></p> <hr /> <p><img loading="lazy" class="alignnone size-large wp-image-15978" src="" alt="China’s swine fever brings relief to Brazilian companies. For how long? " width="1024" height="683" srcset=" 1024w, 300w, 768w, 610w, 1200w" sizes="(max-width: 1024px) 100vw, 1024px" /></p> <hr /> <p><span style="font-weight: 400;">On top of that, Brazilian authorities, including Agriculture Minister Tereza Cristina, are set to visit Beijing in May in what could open up even more opportunities for trade deals. China&#8217;s ambassador in Brazil Yang Wanming told Reuters News that the country may allow more Brazilian meat imports following the negotiations; </span><a href=""><span style="font-weight: 400;">sources told Reuters</span></a><span style="font-weight: 400;"> that another 78 Brazilian meat processing plants could get permission to export to China. </span></p> <p><span style="font-weight: 400;">BRF expects an additional demand of 5.5 million tons of pork if Chinese production falls only 10 percent. For the company’s CEO, Pedro Parente, the flu outbreak could open a “transformational” opportunity for the company, which faced its worst year ever in 2018 amid sanitary scandals and restructuring. But for BRF to be able to fully surf on this wave, it would be necessary to open up more plants to export, which is not an easy business. “Obtaining permissions for a plant is like a pilgrimage. We reached the conclusion that it is a strategic topic for BRF, that requires major attention”, </span><a href=",1043512/brf-queda-de-10-na-producao-chinesa-de-suinos-implica-importacao-de.shtml"><span style="font-weight: 400;">said Mr. Parente</span></a><span style="font-weight: 400;">.</span></p> <h2>Much-needed boost</h2> <p><span style="font-weight: 400;">The additional demand boost is a relief for the sector that, since last year, has attracted investors&#8217; mistrust due to sanitation scandals triggered by Operation Weak Flesh, losses caused by the trucker’s strike, and high leverage. BRF, for example, saw its shares drop by 40 percent in 2018; Minerva shares fell 53 percent, while Marfrig lost 25 percent in the same period.</span></p> <p><span style="font-weight: 400;">JBS started to lose value in 2017, after the corruption scandal involving its then-CEO, Joesley Batista, and former President Michel Temer. Since then the company proceeded with an overhaul that helped it rise 18 percent last year before jumping another 60 percent, near historical highs.</span></p> <p><span style="font-weight: 400;">For Fernando Bresciani, investment analyst at Mirae Asset, the higher demand, coupled with a stronger dollar, probably boosted these companies&#8217; export revenues in the first quarter, which helps reduce debts. However, he believes a steep spike in prices may also boost competition very soon, leveling the field.</span></p> <p><span style="font-weight: 400;">“For sure, it has been good for the companies, but I don’t know for how long the trend is to continue. Beef and pork take more time to produce, but chicken is way faster, so competitors may start to increase their chicken production. (&#8230;) I don’t see stocks rising so fast as they did, unless the dollar spikes,” he says.</span></p> <p><span style="font-weight: 400;">For the second quarter, if Brazil </span><a href=""><span style="font-weight: 400;">doesn’t face another truckers&#8217; strike</span></a><span style="font-weight: 400;"> and the dollar stays at its current BRL 3.90 level, meatpackers may get better exporting prices. Investors also need to keep an eye on the prices of grains used for animal feeding. Conab, the agency controlling food supply in Brazil, </span><a href=""><span style="font-weight: 400;">expects a near-record grains harvest for this season</span></a><span style="font-weight: 400;">, but it is important to remember that the country also exports plenty of its grains, so a steep increase in the demand for feedstock may pressure prices nevertheless.

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Natália Scalzaretto

Natália Scalzaretto has worked for companies such as Santander Brasil and Reuters, where she covered news ranging from commodities to technology. Before joining The Brazilian Report, she worked as an editor for Trading News, the information division from the TradersClub investor community.

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