Articles in this document:

· Brazilian Beef Clan Goes Global As Troubles Hit Market

· JBS Posts Fourth Straight Loss, Citing Acquisitions (Update3)

· JBS Swift reports better earnings

· Brazil's JBS says weak dollar hurts Q2 results

Brazilian Beef Clan Goes Global As Troubles Hit Market

By LAUREN ETTER and JOHN LYONS

Wall Street Journal

August 1, 2008; Page A1

SÃO PAULO -- With grain prices high, the meat business in much of the world is reeling. Cattlemen are losing money fattening their herds on pricey feed. Meatpackers are struggling to turn a profit.

JBS SA, based here in Brazil's business hub, smells blood, and has set out to assemble a global beef empire. Its premise is simple: Meatpackers, at the moment, are cheap. Demand for beef is rising in developing nations. Beef prices, eventually, are likely to surge as well.

Thanks to an acquisition binge, JBS has become one of the world's largest processors of red meat, surpassing Minnesota-based Cargill Inc. It owns Colorado's Swift & Co., Tasman Group of Australia and a majority stake in Italian meatpacker Inalca SpA. If it completes several pending deals, including the purchase of National Beef Packing Co. of Missouri, it will own operations in 22 countries.

The strategy is risky, because it isn't clear when meatpackers will return to consistent profitability. JBS itself posted a large quarterly loss on Thursday. After hitting record highs in June, corn prices have dropped by about 20%, but they remain far higher than a year ago. Grain prices had jumped 76% world-wide over the year ending June 30, due in part to surging demand in Asia and the diversion of land to growing crops for biofuel, according to the United Nations' Food and Agriculture Organization. Beef prices rose by a more modest 11% over that period, the group says.

Members of the Batista family, which founded JBS and continues to control it, say their strategy of striking when the industry is down is well thought out. "Sometimes we make very aggressive movements," says Joesley Batista, the 36-year-old son of José Batista Sobrinho, the family patriarch. But "we have never done something before having all the pieces in place."

JBS's big bet is part of a broad tumult in the global food industry. While farmers and grain traders are reaping benefits, rising food prices are stressing economies all over the world. In poorer countries, sharply higher prices for flour, corn and rice have exacerbated hunger and sparked unrest. Some nations are using exports tariffs to try to keep grains and other food items from being sold outside of their borders. That's causing hardship in nations such as Haiti and Bangladesh, which rely on imports.

Several factors have kept beef prices in check. When grain shot up earlier this year, ranchers sent more cattle than usual to feedlots, in part so they could grow crops on some grazing land. Those animals have been going to slaughter, temporarily flooding the market with cattle and depressing prices for beef. Prices jumped briefly in recent weeks, but are now falling again.

This temporary spike in cattle boosted results for some meatpackers in the second quarter. But JBS posted a net loss of $233 million Thursday, which it attributed in part to higher cattle prices in Brazil and to the appreciation of the Brazilian currency. Its U.S. operations turned a profit, partly because of rising exports.

Meatpackers are bracing for another problem. After ranchers finish culling their herds, there will be fewer animals going to slaughter, and the fixed costs of running packing plants will become more onerous. The combination of a shrinking herd and rising cattle costs "is just going to murder the packer," predicts Stephen Koontz, a professor at Colorado State University.

U.S. beef companies haven't posted solid profits since 2003, before the detection of mad-cow disease in the U.S. caused some nations to ban U.S. beef imports. Those nations since have resumed buying U.S. beef, but a few key markets, including Japan and South Korea, imposed new restrictions. Exports to Asia are nowhere near what they once were.

"The opportunities for JBS to really be profitable in the next several years look rather more challenging than they did 12 months ago," says Steve Kay, editor and publisher of Cattle Buyers Weekly. Because consumers are stretched by higher prices for gasoline and other food items, he explains, there is a limit to how much more they're willing to pay for beef before trading down to cheaper meats like chicken or pork. That's especially true in the developing world.

Nevertheless, many food experts say that over the long term, higher beef prices are inevitable as the nation's cattle supply shrinks and grain prices remain high. The U.S. Department of Agriculture expects beef prices to rise by as much as 7% next year, faster than any other food item.

Kevin Good at Cattle-Fax, a cattle-marketing information service based in Englewood, Colo., says he sees a "price explosion" on the horizon. Retail beef prices would need to rise by as much as 20%, he says, just to offset the additional production costs incurred by the industry over the past two years.

JBS says a key part of its strategy is positioning the company to cash in on rising demand for meat in the developing world. The Paris-based Organization for Economic Cooperation and Development has forecast a 26% increase in meat consumption in developing countries over the next decade, as standards of living improve.

Grains like wheat and corn have long been viewed as global commodities. For many years, the beef industry has been different. Producers generally have confined their production operations to their own countries, and branded their products accordingly: USDA prime beef, grass-fed Argentine beef, and Japanese Kobe beef, for example. Not since the Vestey Group -- a 19th-century British beef company that expanded globally alongside the British Empire -- has a beef company tried to establish a significant global presence.

JBS wants to do just that. By acquiring footholds in many different countries, it aims to work around trade barriers and other obstacles to selling beef globally. It is also hoping that it can operate more efficiently than its competitors and offset losses in one market with gains in another.

'No Limits'

"There are no limits" to expansion opportunities, says José Batista Jr., the founder's 48-year-old eldest son, who is member of the JBS board.

The senior José Batista got his start a half century ago buying cows and selling them to meatpackers in Anápolis, in the Brazilian state of Goiás. Feeling that meatpackers were underpaying him, in 1953 he opened a butcher shop and began slaughtering one cow a day. In 1957, as Brazil government was moving the capital from Rio de Janeiro to Brasília, Mr. Batista followed, opening one of the first slaughterhouses in the region.

As Brazil's economy expanded, meat consumption grew, and so did Mr. Batista's business, which he named Friboi. Between 1993 and 2005, the company acquired 12 meat-processing companies, becoming one of Brazil's biggest beef producers.

His three sons -- José Batista Jr., known as "Junior;" Wesley, 38; and Joesley -- skipped college to work at the company, starting out by supervising workers who skinned and deboned cows. Three Batista daughters helped with administrative and managerial tasks.

Today the brothers call the shots at JBS, although their father, now 74, continues to advise them and to help buy and sell cattle. Every Sunday, the family gathers at his home outside São Paulo, or on a telephone conference call, to discuss the week's activities. The brothers talk almost every day by phone.

In 2004, the company moved its headquarters to an old meatpacking plant in São Paulo, where the senior Mr. Batista had sold cattle decades earlier. The company was thriving, and the Batista family routinely traveled over the city by helicopter and to their ranch on the Paraná River -- where they entertained customers and prospective investors -- by private jet.

Friboi rankled some Brazilian ranchers. In 2005, the Brazil-based National Agriculture and Cattle Federation filed a price-fixing claim against a group of meatpackers, including Friboi, alleging that they kept cattle prices artificially low. Before the investigation was done, Friboi reached a $13.8 million settlement with the government. Later, four other meatpackers were declared to have formed a cartel and were fined 5% of their 2004 revenue. The Batistas say the matter is behind them.

Foreign Acquisition

In 2005, the company made its first foreign acquisition, buying Argentine meatpacker Swift Armour. In 2006, the company changed its name to JBS -- the senior Mr. Batista's initials. The following March, JBS went public on the Brazilian stock exchange, becoming the first Brazilian meat company to do so. The offering raised nearly $800 million to expand further in South America.

By then, Brazil's currency, the real, had appreciated against the dollar. That made Brazilian exports more expensive, slowing export growth. Since more than one-third of JBS's beef is exported, that presented a challenge.

It also offered an opportunity. "Foreign assets became very attractive," says Marcus Vinicius Pratini de Moraes, a JBS board member and former agriculture minister in Brazil. "Instead of complaining that was hurting exports, [the Batistas] looked at alternatives."

Establishing a presence outside South America, the family felt, would help JBS hedge risks of trade barriers and sanitary restrictions, which threaten beef processors whenever there's a disease outbreak like mad cow. Exporting fresh Brazilian beef to many European countries, for example, requires time-consuming inspections due to concerns about foot-and-mouth disease. JBS now can export beef there from its Australian facilities.

The Batista brothers had been touring meatpacking facilities for years, trying to figure out how to get better access to global markets. During a trip to Egypt around 2000, Wesley Batista saw a market for halal beef, which is produced according to Islamic law; the family then adapted some of its packing plants to produce beef that way.

JBS moved to provide more options suited to cultural preferences -- livers in Egypt, tripe in Spain, heart in Russia. "You can't just sell rib-eyes around the world," says Andre Nogueira, chief financial officer of JBS's U.S. operations.

The world's biggest beef-consuming market, the U.S., was a logical target. The American market has long been fragmented. U.S. meatpackers have little control over the supply of cattle. Unlike chicken and pork producers, they rarely own the animals before they go to slaughter. For years, meatpackers have had excess slaughtering capacity, making their plants inefficient.

Swift & Co., which traces roots to the 19th century, had been struggling with its beef business for years. In December 2006, Immigration and Customs Enforcement officials raided Swift plants in six states, arresting more than 1,000 workers. Swift estimated that the incident cost it about $50 million. In January 2007, Swift announced it was considering a sale.

JBS had been interested in the company for years. At least two other big meat companies, Cargill and Smithfield Beef, also expressed interest in buying it. In May 2007, JBS agreed to buy it for about $225 million, plus the assumption of $1.23 billion in debt. In order to complete the deal during the U.S. credit crunch, JBS turned to Brazil's government bank for $600 million of equity financing, which left the bank with a 13% stake.

In December, JBS bought a 50% stake in Italian meatpacker Inalca, a unit of Cremonini SpA, largely because of its operations in Russia, Eastern Europe and North Africa, all growing beef markets.

In March, JBS said it was buying National Beef Packing, the fourth-largest beef processor in the U.S., Tasman, the Australian beef processor, and Smithfield Beef, the fifth-largest U.S. beef processor.

In the U.S., the Smithfield and National Beef deals still must be cleared by the Justice Department on antitrust grounds. If they go through, JBS will be the largest U.S. meatpacker, controlling about 30% of U.S. beef processing, according to Cattle Buyers Weekly. Some American cattlemen, worried that decreased competition will cause cattle prices to fall, have urged the Justice Department to block the two deals.

Late last year, JBS restarted a second shift at one of its Greeley, Colo., packing plants, returning about 1,350 workers to the payroll. Its goal is to run the plant more efficiently, which means processing more cattle -- even if that requires bidding a bit more for cattle over the short term.

Some analysts think JBS will try to use its deep pockets to take market share away from its competitors. "These guys have a lot of money," says Rich Nelson, director of research at commodity-research company Allendale Inc. in Chicago. "The game," he says, is to see which company can tolerate losses "for the longest period of time."

online.wsj.com

JBS Posts Fourth Straight Loss, Citing Acquisitions (Update3)

By Carlos Caminada and Laura Price

Bloomberg

July 31, 2008

(Bloomberg) -- JBS SA, the world's biggest beef producer, posted its fourth straight quarterly net loss on expenses related to U.S. acquisitions and currency declines.

The second-quarter net loss of 364.4 million reais ($233.4 million) compares with net income of 38.7 million reais a year earlier, Sao Paulo-based JBS said today in a statement. Net sales increased more than sixfold to 7.13 billion reais.

Surging cattle prices in Brazil offset gains from rising profit margins in the U.S., the source of more than half the company's revenue. In Brazil, margins may fall further this quarter as a shortage of cattle for slaughter pushes up costs for animals, Chief Executive Officer Joesley Mendonca Batista said.

``I fear I'll see a worse third quarter than the second quarter,'' Batista said today at a news conference in Sao Paulo. ``In the medium term, we'll suffer even worse moments.''

JBS fell 15 cents, or 1.8 percent, to 8.40 reais in Sao Paulo trading. The shares have gained 43 percent this year, compared with a 6.9 percent decline for Brazil's benchmark Bovespa index.

Financial expenses, including debt costs, jumped sevenfold after the Brazilian currency's appreciation eroded the value of foreign assets and hedges JBS holds to protect future investments in U.S. units Smithfield Food Inc. and National Beef Packing Co. against a surge in the dollar.

Currency Rally

Brazil's real gained 20 percent against the U.S. dollar in the year through June 30, including a more than 9 percent jump in the second quarter from March 31.

Earnings before interest, taxes, depreciation and amortization, or Ebitda, climbed 76 percent to 290.8 million reais from a year earlier. JBS said its U.S. and Australia beef businesses became profitable in the second quarter, with an Ebitda margin of 5.1 percent.

``The improvement in U.S. margins is evident,'' Jander Medeiros, an analyst at UBS Pactual, said in a telephone interview from Rio de Janeiro before the results were announced.

In Brazil, the Ebitda margin fell by two-thirds to 4.9 percent because of an increase in cattle prices. Average cattle prices in Brazil rose in the quarter to 83.14 reais per arroba from 56.23 reais a year earlier, according to the University of Sao Paulo. An arroba -- equal to 15 kilograms (33 pounds) -- is a unit of measure used in the Brazilian beef industry.

Acquisitions

JBS bought Swift & Co. for $225 million in July 2007 to become the world's top beef producer. It agreed to pay $1.27 billion this year to buy Smithfield Food Inc.'s beef unit, Tasman Group in Australia and control of closely held National Beef Packing Co. in the U.S.

Batista said he still plans to focus on the integration of JBS's units for the rest of this year and to seek acquisitions in Brazil next year. He expects some Brazilian meatpackers may go out of business as early as this year because supply will likely fall short of capacity by 37 million head of cattle. The industry has the capacity to slaughter 75 million head a year.

The U.S. operation accounted for 57 percent of JBS's sales in the quarter. Brazilian sales accounted for 20 percent. The remainder came from the Australian, Argentine and Italian units.

JBS said its second-quarter earnings were also affected by the amortization of goodwill from the purchase of U.S. and Australia units. Excluding the goodwill and the currency losses, JBS would have posted net income of 136.6 million reais.

The European Union this year banned most fresh-beef imports from Brazil, forcing JBS to sell the meat in less-profitable international and domestic markets. The EU bought a quarter of Brazil's red meat last year.

bloomberg.com

JBS Swift reports better earnings

Sharon Dunn

The Greeley Tribune - Colorado

August 1, 2008

JBS S.A. officials today reported that the company's US Beef operations posted enough gains in second quarter profits to help the global company overall realize a 65 percent increase in earnings.

In a conference call Thursday, JBS officials noted that their global strategy, as well as cutting costs, helped keep the company on the path of growth after its USA division posted a $21.8 million loss in the first quarter of the year, and about $100 million loss in the last three months of 2007.

Overall, JBS USA, formerly Swift & Co., posted $132.9 million in earnings before interest, taxes and other expenses, after a 33 percent increase in net revenue to $2.6 billion. Such earnings, called EBIDTA, are considered a better reflection of a company's cash flow. JBS Brazil, however, dipped 59 percent and JBS Argentina plunged 198 percent in EBIDTA earnings. Officials blamed outside forces and higher cattle prices in Brazil for those losses.

JBS S.A. CEO and president Joesley Mendonca Batista said the company's globalization was a large factor in the USA division's growth.

"This is one of the advantages of being a global company," Batista said. "We have offices all around the world, which may be the reason we're increasing the export sales more than the average of our competition."

Earlier this year, JBS officials began reporting combined United States and Australia numbers. They refused Thursday to split the two saying only that they feel it's better for the company's interests to report them together.

"JBS USA is exporting almost twice as much as the industry average in the United States," reported Jeremiah O'Callaghan, the company's investor relations director. "The company believes that if present conditions prevail, relevant margins will be sustained in the second half of the year."

Markets in South Korea opened three weeks ago, as well.

"I expect to be here in the next quarter talking about better numbers," Joesley Batista said.

The company also has dramatically decreased its costs, as well, while it sits on $1.5 billion to pay for the acquisitions of Smithfield Beef and National Beef Co., approvals of which are expected in September. The U.S. Department of Justice is still reviewing that, but company officials reported Thursday they expected no delays in that decision.

"We have improved in exports ... we're running the plants more efficiently with much better costs," said Wesley Batista, JBS USA chief. "We believe we're very competitive."

In terms of the cost "per head of cattle," the company dropped its cost by $48 per head from the same time last year In its USA division.

"Less than $10 comes from the volumes," Joesley Batista said. "We reduced costs in variables, packaging, supply, improving the carcass yield, and most of the profits comes from efficiencies, not the market, not from cattle prices."

Wesley Batista said the company just last month started its transportation division in Greeley, operating 80 trucks. Officials plan to have 200 trucks operating by the end of the year.

"JBS will continue growing," O'Callaghan said. "We continue to pursue our growth strategy in this market, regardless of the lack of available cattle due to the reduction of the herd, regardless of the restriction on exports in the European Union, and regardless of the high costs of raw materials, which all combine to compress margins."

By the numbers

« JBS USA, which includes the beef divisions in U.S. and Australia, posted $132.9 million in EBIDTA earnings for the second quarter compared to a loss of $900,000 in the first quarter.

« JBS USA Pork posted EBIDTA earnings of $19.9 million in the second quarter, a 27 percent increase form the first quarter.

* EBITDA stands for earnings before interest, taxes, depreciation and amortization.

greeleytribune.com

Brazil's JBS says weak dollar hurts Q2 results

Reuters UK

Fri Aug 1, 2008 1:06pm BST

SAO PAULO (Reuters) - Brazil's JBS (JBSS3.SA: Quote, Profile, Research) posted a net loss of 364.4 million reais ($233 million) in the second quarter of 2008, compared with a profit of 38.7 million reais in the same three months of 2007.

The world's largest beef producer and owner of JBS-Swift said on Thursday that earnings were significantly hurt by the devaluation of assets it holds abroad, including the financial position it is maintaining for the acquisition of U.S. processors Smithfield Beef and National Beef.

The Brazilian real BRBY continues to appreciate against the dollar, having gained around 13 percent so far this year after appreciating 20 percent in 2007 against the greenback.

JBS said net revenue from April through June grew to 7.13 billion reais, up sharply from the 1.17 billion reais a year ago.

Earnings before interest, taxes, depreciation and amortization, a widely watched indication of a company's cash flow known as EBITDA, grew to 290.8 million reais from 165.2 million reais a year ago.

JBS shares on the Sao Paulo Stock Exchange closed down 2.8 percent at 8.31 reais on Thursday.

($1=1.56 reais)

(Reporting by Renato Andrade; writing by Reese Ewing)

uk.reuters.com