Thursday, March 23, 2017
By David Kruse, president of CommStock Investments, Inc.
A Bloomberg story on JBS said that since 2005 the Brazilian meatpacking company “bought more than a dozen companies for $14 billion in cash, stock, and debt to become the biggest meat company in the world.” Long time subscribers know that I have never been a fan of JBS U.S. acquisitions because the Brazilian government was too imbedded in the company’s finances. U.S. commercial meat companies were essentially competing against the Brazilian Treasury. JBS was the beneficiary of large sums of development cash from the Brazilian government who maintained an equity state in the company.
Bloomberg noted that the Brazilian national development bank is the second largest shareholder in the company. JBS bought Swift and Co in 2007 for $1.5 billion and Pilgrim’s Pride in 2009 for $2.8 billion. BNDES, the Brazilian Development Bank, invested $4 billion in the company for a 30.4 percent stake in JBS calling the company a “national champion.” We have had some business experience in Brazil and the recent revelations of scandal and corruption exposing massive maleficence in Brazil between government and the private sector came as no surprise to us. They called the Petrobras scandal where billions were shared for political favor and government favoritism the “Car Wash.”
For years, the corruption was like the black elephant in the room in Brazil that was so large that everyone knew that it existed but no one did anything about … until the elephant grew so obscene it burst the seams of the country. The corruption was systemic and endemic between the bureaucracy and business sector. The assumption could be made that any Brazilian company that was doing exceptionally well could have some of that success attributed to favoritism from the government bureaucracy that was reimbursed in some manner or form of kickback.
Political elections in Brazil decide who controls the bureaucracy and therefore the flow of cash. It was never about ending the corruption until recently. The Judicial institution at the top in Brazil was honest and ethical … an island in a sea of culturally imbedded corruption. The corruption permeated the entire system from the top of the government as to who got BNDES development money … to the bottom of the system to which customs official got their “car washed” to approve the export papers on tainted meat.
My perception was always that if BNDES was investing billions in JBS, which heretofore had been just another company in Brazil, the rush of events that swept JBS to become the world’s largest meatpacker was propelled by who they knew and deals that were made. The odds that JBS was not somehow part of the “system” were the same as picking the perfect NCAA bracket. It is my opinion from an observation of JBS ascendancy and understanding of how things work in Brazil that you don’t get billions from the Brazilian government investment bank there unless a lot of cars are being washed.
They are selective. So I could never accept JBS because I believed that they were essentially a front for Brazilian government state intervention into our private sector forcing U.S. meatpackers to compete against a state enterprise … and they were therefore part of a culture of corruption that permeates their system. Nothing that has happened since 2007 has occurred to alter my perception as events have only served to reinforce it. JBS, founders and officials, have been sparring with the Brazilian Judicial branch over a number of issues as the company appeared to attempt to move its headquarters and concentrate its assets out of Brazil to escape the liabilities of all types that may exist there.
The latest liability uncovered in Brazil prompted Brazil’s new President Michel Temer to meet with a number of foreign ambassadors to attempt to explain an on-going investigation that Brazilian meat processors were selling tainted meat that they called “Operation Weak Flesh.” They have so many corruption scandals that they have to name them to keep them straight. The irony here is that Temer is president as the result of scandals that removed the previous elected president, Dilma Rousseff. Dozens of firms were involved in the latest investigations and not just JBS which was included. A Brazilian Federal Police official said, “The firms under investigation don’t care about the quality of meat they were selling consumers.” The tainted meat was allegedly sold both domestically and for export. Brazil exports 30 percent of its chicken production and 20 percent of its beef production. South Korea was partially banning chicken from Brazil on a selective case basis. China and the EU suspended beef imports from Brazil.
The global nature of JBS gives it the flexibility to deliver on contracts sourcing product from wherever they can access it. The length of the ban by China may depend on how much, if any, of the beef from the plants being investigated and charged reached China. I don’t see this benefiting the U.S. industry. Brazil exports low quality beef and the U.S. imports that kind of beef. Temer said this was an economic embarrassment. Importing countries are handling it differently from temporary bans to just increasing their own inspection upon arrival. South Korea is short of chicken so lifted its ban on Brazilian chicken. Australia will likely benefit most from any backfill demand from Brazilian beef business lost. China doesn’t buy U.S. beef which is something that Ambassador Branstad is supposed to fix.
David Kruse is president of CommStock Investments Inc., author and producer of The CommStock Report, an agriculture commentary and market analysis available daily by radio and by subscription on DTN/FarmDayta and the internet. CommStock Investments is a registered CTA, as well as an introducing brokerage.