Improving weather is allaying concern that a dry spell in Brazil and floods in Argentina may pare output of corn and soybeans used to feed Marfrig Alimentos SA’s (MRFG3) and BRF-Brasil Foods SA’ (BRFS3) poultry and hogs.
Showers in western Brazil are easing a drought that dimmed planting prospects, while less rain on the Argentine Pampas and southern Brazil is allowing soil to dry after downpours swamped fields and delayed sowing, said forecasters including AccuWeather Inc. and Somar Meteorologia.
A U.S. drought fueled soybean’s surge to a record on Sept. 4, increasing animal-feed costs for Brasil Foods, the world’s largest poultry exporter, and Marfrig, the biggest supplier of hamburger patties and chicken nuggets to McDonald’s Corp. (MCD) Better weather in South America, which grows half the world’s soybeans, reduces the risk that costs will rise further.
“The outlook is bright for Brasil Foods and Marfrig as Brazil will harvest a record crop,” Saulo Sabba, who helps manage 500 million reais ($241 million) as a director at Banco Maxima SA, said in a telephone interview from Rio de Janeiro. “I see blue skies ahead.”
Marfrig and Brasil Foods, Brazil’s largest food companies, are outperforming the broader market this year as an expanding middle-income class increases demand for TV dinners and frozen pizzas, allowing the companies to pass rising costs through to consumers.
Brasil Foods rose 1.9 percent in Sao Paulo this year before today, compared with a 2.4 percent drop in the benchmark Bovespa index. It fell 0.1 percent to 37.05 reais at 10:23 a.m. Marfrig, which has been boosted by a plan to cut debt through a share sale backed by Brazil’s development bank, was up 0.2 percent from yesterday after rising 30 percent this year.
Marfrig trades at 32 times analysts’ earnings estimates for the next four quarters, compared with a ratio of 22 for Brasil Foods and 16 for the Bovespa index.
Both Sao Paulo-based companies increased prices for their food products about 7 percent on average in the third quarter, according to earnings reports.
“We have our eyes set on the situation,” Brasil Foods Chief Executive Officer Jose Antonio Fay told reporters in Sao Paulo Nov. 13. “If Brazil doesn’t reap the bumper crop that’s expected, it will be a problem for food inflation.”
Brasil Foods’ press office declined to comment further. A Marfrig official, who isn’t an authorized spokesperson, also declined to comment.
The western Brazilian state of Mato Grosso, the country’s largest soybean-growing area, is getting 170 millimeters (6.7 inches) of rain in the second half of this month, following a dry spell in previous weeks, Somar analyst Celso Oliveira said from Sao Paulo. The Argentine Pampas will receive 20 to 45 millimeters of mild showers that will alternate with sunshine, following downpours that swamped farms earlier this month, he said.
Marfrig processes poultry, hogs, fish and beef in 87 plants in Brazil and another 21 in Argentina, Uruguay and Chile. Its Keystone Foods unit in the U.S. is the biggest meat products supplier to McDonald’s. Marfrig also produces the Jamie Oliver chicken products through its U.K. Moy Park unit.
Brasil Foods owns 52 plants in Brazil and five in Argentina that process meat into hotdogs, nuggets, hamburgers and other food products. It gets about 41 percent of its revenue from processed meat food, another 41 percent from raw meat and the rest from dairy products. About 59 percent of sales come from the domestic market and the rest is exported.
Farmers in Brazil and Argentina started planting soybeans and corn crops for the 2012-2013 season in September and usually begin harvesting in January.
Soybean futures have slumped 22 percent from September’s record after the outlook for bumper crops in South America helped offset shortage concerns.
“Both Brazil and Argentina hold the key to the supply-side equation over the next few months,” Barclays Capital analyst Sudakshina Unnikrishnan said in an interview from London. “You can’t overestimate the importance of a good South American crop after the concerns and issues we’ve seen with the US crop.”
Brazil, set to surpass the U.S. as the largest soybean grower, sees output jumping 26 percent to a record 83 million metric tons as rainfall is expected to improve yields, the government said on Nov. 8.
Farmers in Argentina, the largest exporter of soybean oil made by Bunge Ltd. (BG) and Cargill Inc., may reap a record 58 million tons as crops expand and benefit from showers, industry group Acsoja’s president, Miguel Calvo, said in a Nov. 12 interview.
Recent rainfall may not be enough to help fields in western Brazil recover from dryness and planting delays, Hamburg-based researcher Oil World said Nov. 13. Flooding in Argentina may reduce the country’s summer-crop planting by as much as 2 million hectares (4.9 million acres), Oil World said.
“It’s a cause of concern because the world is depending on a record harvest from South America,” Giovana Araujo, an analyst with Itau Unibanco Holding SA (ITUB4), said in a Nov. 14 telephone interview from Sao Paulo. “We are depending on perfect weather conditions during development.”
Brasil Foods posted third-quarter net income excluding some items of 90.9 million reais, missing the 107.8 million-real average of nine analysts’ estimates compiled by Bloomberg. Marfrig’s net income of 10.4 million reais beat estimates for a loss of 54 million reais.
“We had a lot of disturbances in the beginning of the planting, but with good rain from now on we could surpass the estimates,” Glauber Silveira, head of Brazilian soybean producers association Aprosoja, said on Nov. 9 from Caceres, Brazil. “While it’s still early, there’s no doubt that we’ll have a record crop.”