JBS Loses $100 Million on Livestock Hedges


By Marshall Eckblad, Dow Jones Newswires

  • Decline in livestock futures prices fuel second-quarter trading loss at JBS
  • Weaker dollar makes U.S. beef attractive in foreign markets
  • JBS says U.S. pork exports to grow faster during remainder of 2011

Trading operations at Brazilian meat producer JBS S.A. (JBSAY, JBSS3.BR) reported a $100 million loss in the second quarter after a decline in cattle prices this past spring soured some of the company’s futures positions, JBS said Tuesday.

The world’s largest beef producer routinely uses livestock futures to minimize the risks of signing forward sales agreements, or contracts to deliver products in the weeks or months ahead. At JBS, the practice, which is used to reduce risk and not to speculate on the direction of prices, led to the trading loss in the second quarter, due in large part to a drought in the southern U.S., the company said during a conference call with investors Tuesday.

Last spring, as cattle prices hovered near record levels, JBS signed agreements to sell beef. It then purchased cattle futures to protect itself against the chance that cattle prices would climb. A severe drought in Texas and Oklahoma, however, forced producers there to sell animals urgently as parched grazing lands led to a scarcity of food and water. The jump in supplies caused prices to fall and led to losses in JBS’s trading portfolio. Because the company had already locked in prices, JBS wasn’t able to take advantage of the fall in prices for cattle.

“The drought that is hitting the south of the U.S. caused cattle to be removed from pasture and increased the offer of animals for slaughter,” said Jeremiah O’Callaghan, director of investor relations, during the call.

The company on Monday reported an overall loss of $113.7 million in the quarter, driven in part by the trading loss, which many analysts refer to as a “paper loss,” since it reflects a drop in the value of investments, rather than a loss that bleeds cash.

Unlike big financial firms, meat companies don’t usually post big gains or losses from trading. That’s because their aim is to reduce operational risks, rather than boost profits.

“Most meat companies don’t speculate in the futures market,” said Stephen Share, analyst at Morgan Joseph TriArtisan. Many investors, he said, frown on meat companies risking capital to speculate on market movements.

In the case of JBS, the company was essentially trapped by a sudden shift in the cattle industry’s historical production patterns. Traditionally, cattle supplies tighten and prices climb during the spring and early summer as U.S. consumers increasingly grill meats outdoors.

The trading loss also points to the recent volatility in livestock markets as the drought has disrupted seasonal supply patterns, even as foreign demand for U.S. meat has soared. The fast-rising exports are in part tied to growing middle-class populations in emerging markets that can afford higher-priced foods.

U.S. beef exports in the first half of year climbed 25{e7e4ba4d9a3c939171d79cae1e3a0df1d41e5a91c3c4158fbb92284b490bc9d3} over the same period in 2010–in part because a weaker dollar made beef attractive in foreign markets. Demand for dollar-denominated commodities often rises when the greenback falls as foreign buyers gain buying power.

“The weakness of the U.S. dollar is [making] U.S. beef prices very, very competitive,” said Vice President Wesley Mendonca Batista.

Batista said demand for U.S. beef will continue to grow this year in part because of interest from newer markets such as the Middle East.

JBS said pork exports will accelerate during the remainder of 2011. U.S. pork exports during the first half of 2011 were 15{e7e4ba4d9a3c939171d79cae1e3a0df1d41e5a91c3c4158fbb92284b490bc9d3} higher than for the same period in 2010.

As for chicken, exports also are growing, though not quickly enough to solve an historically high glut of U.S. supplies. JBS said its U.S. chicken processor Pilgrim’s Pride Corp. (PPC), in which it owns a 67{e7e4ba4d9a3c939171d79cae1e3a0df1d41e5a91c3c4158fbb92284b490bc9d3} stake, is trimming production to offset ongoing high feed prices and a long-running weakness in demand for chicken in the U.S.

Source:  Dow Jones Newswires

Posted by Haylie Shipp



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