20 January 2012

2 minute read

Ranchers will benefit from scarce cattle supplies while feedlots and packers face challenges.

Tight cattle supplies—as result of either weak rancher margins over the past years or weather-related problems—will push power up the value chain. Ranchers are set to enjoy some of their best margins in years. Conversely, feedlots and packers should be concerned about both higher prices and limited availability of inputs exacerbating low capacity utilisation problems and causing margin compression.

Beef processors’ ability to pass through pricing to consumers will be tested in 2012. Global economic growth has been inconsistent, with growth slowing in many markets. In the world’s largest consumer markets, Europe and the US, growth has been particularly slow. Although not identified yet, there is a limit to what consumers will pay for retail beef.

Additionally, the ongoing debt crisis in Europe presents a unique tail risk for some beef processors. If the banking system becomes stressed to the point at which it has to withhold credit, cash- strapped beef companies will struggle. In conjunction with margin compression, possible credit strains could set the stage for accelerated merger and acquisition activity in the beef industry. Signs of this were seen in Q4 2011, with several transactions announced in Europe and in the US.

Although the big picture remains challenging for certain segments of the industry, the outlook for beef companies does look positive for 2012 in some countries. Among them, Brazil stands out. Of the top producer countries, Brazil is the only one that is expected to show a combination of increased supply of animals for slaughter, robust domestic demand and a growth in exports (see Figure below).

This more favourable scenario for companies operating in Brazil should be viewed as an opportunity for the sector to generate better results and deleverage balance sheets, thus mitigating possible credit-related risk.

TheCattleSite News Desk