(Bloomberg) -- On the flat green pastures of Brazil’s Mato Grosso state, ranchers are witnessing firsthand what happens when the biggest cattle buyer stumbles.
JBS SA, the nation’s meat-producing powerhouse, used to buy almost half of the Mato Grosso cattle headed for slaughterhouses. But since the company’s owners admitted taking part in a sweeping corruption scheme, its finances have been squeezed and purchases have plunged. Even worse, JBS no longer offers cash upon delivery of animals and instead asks to pay ranchers as much as 30 days later.
Producers say they fear not getting paid for the cattle delivered to JBS, especially with banks asking ranchers for additional guarantees on loans made against expected sales to the company. Still, no payment delays by JBS have been reported so far, ranchers say. JBS also is seeking to refinance part of its debt with lenders in Brazil amid tighter credit conditions.
“If the banks aren’t providing credit to JBS, why should we?” said Alexandre Caiado, 30, a second-generation rancher in Juina, Mato Grosso. “A lot of producers are only making punctual sales, just enough to pay the bills.”
The slowdown in demand has sent cattle prices plunging since mid-May, when news broke that JBS’s controlling shareholders, brothers Joesley and Wesley Batista, said they paid bribes to help fund a $20 billion acquisition spree over the past decade. The company’s shares and bonds plunged and now it plans to divest about 6 billion reais ($1.8 billion) of assets, including stakes in a Brazilian dairy supplier and a U.K. chicken producer, to ease the concern of investors.
Cattle futures in Sao Paulo have fallen 17 percent this year.
While there’s no available data on JBS production, the company has enough cattle inventory for three days of slaughtering, on average, while rivals operate with enough for nine, Lygia Pimentel, a director at consulting firm Agrifatto, said in a telephone interview from Sao Paulo. Before the Batista brother’s plea bargain became public, rivals were operating with similar inventories level, she said.
JBS is using about 80 percent of its slaughtering capacity, and volumes are improving, the Sao Paulo-based company said in an emailed response to questions. JBS said it set its payment policy to 30 days in accordance with national standards, citing BM&FBovespa futures contracts as an example. It said all the payments based on this new standard have been made, with no damages to Brazilian ranchers.
"The current value of cattle is directly related to market cycles, in which a greater supply of cattle for slaughter added to a drop in domestic consumption,” JBS said. “That downward trend has been predicted by several analysts since last year.”
Adding to the pressures on the industry is a U.S. ban imposed last week on Brazil beef, which revived food safety concerns that led to a similar halt to shipments in March and had already sent cattle prices down earlier this year in the country.
Business is getting so slow that some ranchers say they are leaving cattle in the pasture rather than selling to meatpackers or placing them on feedlots, where the animals normally spend three months eating grain rather than grass to get bigger before they are sent for slaughter.
“At these prices, producers simply can’t profit from a feedlot operation,” said Alberto Pessina, a rancher and board president of Assocon, a Brazilian feedlot association.
With winter arriving this month in the Southern Hemisphere, keeping the animals on pastures may not last. Cold and dry weather may force ranchers to sell animals at low prices because there isn’t enough grass for them to eat.
A few, including Caiado, have been able to shift sales to regional beef processors or JBS rivals including Marfrig Global Foods SA and Minerva SA, but none are big enough to absorb all that excess cattle.
“A lot of ranchers keep selling to JBS simply because they don’t have any other option,” Caiado said.
JBS now controls 25 percent of the slaughtering capacity in Brazil, including 48 percent in Mato Grosso. Some ranchers say the processing industry has become too concentrated over the past decade, after a series of acquisitions.
Mato Grosso’s ranchers association, known as Acrimat, has long complained that JBS’s tight control over the industry posed serious risks for local producers. In 2012, after JBS had made several acquisitions in the region, Acrimat sent a formal complaint to Brazil’s antitrust regulator but it was dismissed.
A prolonged period of reduced purchases by JBS could hurt Brazil’s beef exports, said Jose Vicente Ferraz, director at Informa Economics Group-FNP. Brazil, the world’s biggest exporter of the meat, was expected to boost shipments this year by 6 percent, according to an April estimate by the U.S. Department of Agriculture.
“With falling profit for cattle ranchers, it’s likely that investments in Brazilian cattle-raising will be delayed or reduced,” Ferraz said. “That will lead to lower productivity, and the country could lose competitiveness in the global market in the long term."
JBS, which became the world’s biggest chicken and beef producer by gobbling up producers in the U.S. and Australia, has seen its borrowing costs skyrocket in recent weeks. The yield on its $1 billion bond due in 2020 almost doubled from 6.38 percent before the scandal erupted on May 17 to as high as 12.64 percent on June 12. The yield closed at 9.96 on Monday.
Troubles for the top producer has opened the door for Sao Paulo-based Minerva and Marfrig to regain market share, said Hyberville Neto, an analyst at Scot consultancy in Bebedouro municipality, Sao Paulo state. JBS’s rivals have reduced overall idle time in recent weeks, he said. Minerva confirmed it will reopen a plant in Mato Grosso in mid-July while Marfrig said it’s mulling opportunities in Brazil.
In the meantime, ranchers may continue to hold off on selling their cattle until prices rebound or JBS starts paying in cash again, Caiado said.
“Nobody wants to sell to them,” he said. “JBS has lost credibility.”