Pig Woes and Cheap Feed Create Sweet Spot for Brazilian Chicken Giant

(Bloomberg) -- The stars seem to be aligning again for troubled BRF SA.

A deadly pig disease sweeping across China has boosted prospects for meat exports, leading to a surge in protein producer shares. At the same time, ample grain supplies in Brazil are lowering the cost for the Sao Paulo-based company to feed its chickens and hogs. While BRF’s first-quarter sales volume dipped, earnings beat estimates thanks to higher domestic prices.

The price for corn used as livestock feed in the South American nation is down 21% in the past year with farmers set to harvest a record crop in 2019. In contrast, domestic chicken prices have jumped about 60% amid rising export volume and tighter domestic supplies.

With most of the cost of producing chicken coming from feed, the ratio of chicken prices to feed costs -- a measure of industry profitability -- climbed to the highest since at least since 2015 for this time of the year, according to data compiled by Bloomberg.

Pig Woes and Cheap Feed Create Sweet Spot for Brazilian Chicken Giant

Domestic corn prices should remain under pressure over the next few months as Brazil’s total output of the grain is seen reaching a record 96.8 million metric tons this year, with fiercer competition in the export market from the U.S., Argentina and Ukraine adding to the bearish outlook, Ana Luiza Lodi, an analyst at INTL FCStone, said in an interview.

Soybean prices have also weakened globally as African swine fever is eroding demand for the oilseed used to make feed in China.

Turnaround Hopes

The Asian nation has been forced to cull hog herds as the diseases spreads. Pork production in China, the top consumer, probably will decline about 30% this year, a drop roughly the size of Europe’s entire annual supply, according to Rabobank International.

Meat prices and trade volumes -- whether it’s chicken, beef, seafood or even plant-based alternatives -- are likely to rise as a result, boosting revenues of major suppliers.

Improved market conditions have raised expectations for a turnaround at BRF, which last year posted a record loss after struggling with a European ban on its shipments following a major food-safety scandal, a revolt by shareholders, management changes and a jump in livestock-feed costs.

Shares of BRF have gained 37% this year, among the best performances in an index of global meat and dairy companies in that span. That follows four straight years of losses. The shares were down 2.5 percent at 10:58 a.m. in Sao Paulo Friday.

A drop in feed costs may take six months to be fully reflected in earnings as the food maker continues to use more expensive inventories, Leandro Fontanesi, an analyst at Banco Bradesco, said in a May 6 note to clients.

Read More: BRF First Quarter Adjusted Ebitda R$748 Mln

First-quarter feed inflation supported that view. Results were also hurt by restrictions imposed by Saudi Arabia earlier this year.

But investors may be less concerned with reported earnings and more focused on swine fever’s impact on meat and grain prices over the coming months.

On an earnings call Friday, the management team led by Chief Executive Officer Pedro Parente delivered a positive outlook for grain prices thanks to bumper crops in Brazil and Argentina and weaker demand from China because of swine flu.

The Asian nation’s pig woes may accelerate a return to historical margins, the company said.

©2019 Bloomberg L.P.