NOBULL: Brazil Regulator Queries JBS on Use of Derivatives


Updated June 19, 2013, 4:54 p.m. ET

Brazil Regulator Queries JBS on Use of Derivatives


SÃO PAULO—Brazil’s securities regulator has expressed concerns about how JBS SA, the world’s largest meatpacker by revenue, uses derivatives and has asked for an explanation.

Washington Post/Getty Images

The Brazilian regulator is looking into JBS’s use of derivatives. Pictured, a worker at a JBS meatpacking plant in Lins, Brazil, in 2011.

JBS is by far the largest user of derivatives among nonfinancial companies in Brazil, the regulator, known as CVM, said in a letter sent to JBS last week and made public by the company late Tuesday. JBS makes "constant changes" in its derivatives operations, switching position in one direction or another, the CVM said.

JBS uses derivatives, or financial contracts, to hedge fluctuations in interest rates, commodities prices and currencies. During the financial crisis in late 2008, a number of Brazilian companies lost heavily on bets in the derivatives market, and many were forced into mergers to stay alive.

Analysts said the move reflects a more proactive stance taken by Brazilian regulators in the wake of those problems.

"I believe that CVM used this as a preventive measure in order to alert the company’s executives and shareholders, to avoid mistakes we’ve seen in the past at others companies," said Pedro Galdi, a stock analyst at brokerage SLW. The CVM didn’t respond to a request for comment.

In a statement, JBS’s comptroller, Rafael Harada, said the company uses derivatives to protect its operations against market movements, and JBS will ask independent auditors to examine its use of derivatives.

JBS uses foreign-exchange, interest-rate, beef and corn derivatives, "which basically reflect those that most influence our business," a company spokesman said.

According to one JBS executive, the rapid growth of the firm’s operations in the derivatives markets reflects JBS’s own growth. Net revenue reached 75.7 billion Brazilian reais ($34.7 billion) in 2012, up from 14 billion reais in 2007. Revenue could top 100 billion reais this year, according to JBS’s forecasts.

JBS has invested billions of dollars to buy up beef, poultry and pork slaughterhouses and processing plants across South America, North America and Australia, including companies in the U.S. such as Swift & Co. and Pilgrim’s Pride Corp. The company went public in 2007.

JBS has a team of 10 people in Brazil working on risk control, which includes derivatives operations, and others working around the world, the person said.

On Wednesday, JBS’s shares closed down 5%, to 5.94 reais, in São Paulo.

Write toRogerio Jelmayer at rogerio.jelmayer

A version of this article appeared June 20, 2013, on page C4 in the U.S. edition of The Wall Street Journal, with the headline: JBS Faces Regulator Query.