March 24, 2017

Tainted Meat Scandal in Brazil could have widespread Ripple Effects

Author: Michael Cordonnier/Soybean & Corn Advisor, Inc.

Everyone involved in the meat sector in Brazil are doing their best to contain the fallout of the Carne Fraca (Weak Meat) investigation announced by the Brazilian Federal Police last Friday, March 17th.

In Brazil there are 4,837 animal processing facilities that are inspected by the government, but only 21 of those facilities are under investigation for selling tainted meat. Only two of those facilities process beef with the others mainly involve poultry processing. One of the two facilities that process beef sells only to the domestic market and the other facility sells their products in eight countries. Brazilian meat products are exported to more than 160 countries.

Even though there were only a few facilities implicated, many countries have issued a blanket suspension of all Brazilian meat from all of Brazil's processing facilities. Countries such as China, Hong Kong, and Egypt, which combined account for 44% of Brazil's beef exports, have temporarily suspended all meat imports from Brazil.

Most immediately imperiled are meat shipments already in foreign ports or on their way to the ports. If the bans are not lifted quickly, the exporters must try to reroute the containers to other destinations or return the containers to Brazil. If the bans remain in place, all the available options for the exporters are bad and the losses will be in the millions.

The economic fallout of the investigation will be felt the most in southern Brazil where poultry and hog production is concentrated. The state of Parana is the largest poultry exporter and Santa Catarina is the largest pork exporter and second largest poultry exporter. Santa Catarina for example, exported one million tons of poultry and 274,000 tons of pork in 2016. The beef industry in Brazil is much more spread out throughout the country.

Officials from Sindicarne, which represents the livestock industry in Santa Catarina, has indicated that the meat processing industry in the state has enough cold storage capacity for 6 to 8 days of processing. If the bans are not lifted by the time the storage facilities are filled, there would be a quick ripple affect all across the sector.

Processing facilities would have to close at least temporarily and livestock production would then be reduced. This in turn could impact feed manufactures and the price of corn and soybean meal. All the other industries associated with livestock production could also be impacted. A BRF poultry processing facility in Toledo, Parana has already announced they will close for an indefinite period of time, which impacts 1,500 employees. Beef processing facilities in Mato Grosso have announced a multiday suspension in the purchase of any cattle. In a worst case scenario, it could result in more corn exports from Brazil due to the reduced domestic demand.

The situation is so serious that the Brazilian government has sent a letter to the members of the Phytosanitary Committee of the World Trade Organization stressing that this was not a systemic breakdown of the food inspection system in Brazil, but rather isolated instances at very few facilities.

In their letter, they reemphasized their commitment to the highest standards and they asked the World Trade Organization not to impose arbitrary restrictions on Brazilian meat exports. They stated that the Ministry of Agriculture has 2,300 food inspectors, but only 33 have been implicated in the scandal and that the Ministry has already suspended the export licenses for the 21 implicated facilities.

Various Brazilian companies could be impacted differently by the scandal. JBS is the largest Brazilian beef exporter, yet their only unit being investigated is a Seara facility that processes poultry and pork. Only 5.2% of the company's receipts come from Seara exports. BRF is expected to be impacted more because they are Brazil's largest poultry exporter and their operations are concentrated in Brazil.

Other companies are expected to suffer economic losses from the investigation as well. For example, Marfrig and Minerva, which are the second and third largest Brazilian beef exporters, are expected to suffer losses even though none of their facilities are involved in the investigation.