JBS Scandal Grows in Brazil

Chairman of Protein Powerhouse at Center of Bribery Allegations

Chris Clayton
By  Chris Clayton , DTN Ag Policy Editor
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JBS may have its roots in Brazil, but half of its revenue comes from U.S. operations. The company's executives, including its chairman, are caught up in multiple scandals in Brazil over bribes to top elected officials and potentially improper loans. (Courtesy graphic)

OMAHA (DTN) -- The world's largest meatpacker -- and second-largest global food company -- is directly involved with a bribery scandal at the highest levels in its home country of Brazil, but there is no indication JBS S.A. is facing investigations in the U.S.

Joesley Batista, chairman of JBS S.A., is caught up in a political scandal with global market impacts. While JBS is based in Brazil, the company last year had $33.9 billion in sales of U.S. and Canadian beef, pork and poultry, accounting for more than half of the company's revenue, according to JBS' financial reports.

A spokesman for JBS USA Holdings told DTN on Friday the company is not commenting further on the investigation in Brazil. The company is not under investigation in the U.S. related to the controversy.

Still, revelations continued coming out of Brazil on Friday as the country's Supreme Court released testimony from Batista showing he and other JBS S.A. executives gave at least $2.2 million in bribes to current Brazilian President Michel Temer. Batista also claimed in testimony for a plea deal that he gave millions more in bribes to Brazil's last two presidents as well through off-shore accounts, Dow Jones reported.

Associated Press later reported that Brazil's attorney general accused Temer of corruption and obstruction of justice.

Batista turned over recordings to the Brazilian Supreme Court about bribes involving JBS executives that included a recording of Temer encouraging Batista to keep paying bribes to another Brazilian politician who is already in prison.

Batista's role in the presidential scandal comes just a week after Brazilian law enforcement issued dozens of search warrants against JBS in a criminal investigation called "Operation Bullish." The investigation involves billions of dollars of loans made by a subsidiary of the National Economic and Social Development Bank to JBS as far back as a decade ago. The company issued a "notice to the market" declaring that all of the loans made by the bank to JBS "were fully compliant with the Brazilian capital markets legislation and devoid of preferential treatment or benefits to JBS."

Still, federal authorities in Brazil stated that unnamed executives at the company were prohibited from foreign travel or making any major corporate changes.

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JBS S.A. released another notice to the market on its website Thursday stating that seven executives had reached a plea deal with prosecutors in return for a fine and cooperation. However, Brazilian prosecutors indicated Batista remains under investigation, according to AP.

When the scandal broke wide Thursday, U.S. and Brazilian soybean farmers and traders were caught up in the immediate currency reaction. Brazil's currency, the real, dropped 7%. Local soybean prices in Brazil responded by trading 4% higher in an effort to preserve some purchasing power, noted Todd Hultman, DTN market analyst.

The overall impact on the soybean market may be minimal. In terms of U.S. dollars, Brazil's soybean price lost 3% Thursday, roughly the same as U.S. soybean prices lost. The net result is that soybean prices in Brazil and the U.S. were close to each other before the news broke, and they are still close to each other now. Because of that, U.S. soybean exports should continue to do well moving forward, in spite of Thursday's drop in the real. The real bounced back on Friday, despite the continuing scandal, moving up 2.5%.

The JBS statement to shareholders on Thursday declared that seven of its executives and its controlling entity, J&F Investimentos, entered into a plea agreement with Brazilian federal prosecutors with fines totaling $225 million reals ($67.93 million). The statement did not list the executives involved, but did state they were cooperating with prosecutors.

"The company will maintain the market duly informed of any developments related to this matter," the report stated. Yet further reports stated Brazilian authorities were seeking significantly higher fines from J&F Investimentos and had reached an impasse with the company.

J&F Investimentos is a private holding company owned by the Batista family. Besides being the largest shareholder in JBS S.A., the investment company owns Vigor, Brazil's largest dairy company; Eldorado Brazil, a giant pulp mill firm; and owns a share of Alpargatas, the largest footwear company in South America.

In the midst of the scandal, JBS S.A. also released a shareholder presentation on its food businesses on Thursday, showing 50% of the company's total revenue comes from U.S. operations, while 15% comes from Brazil and 14% in Asia. According to the report, JBS beef, pork and poultry operations in the U.S. and Canada generated $33.9 billion in sales in 2016. (http://jbss.infoinvest.com.br/…)

JBS slaughters 29,000 cattle every day in the U.S. and 4,200 in Canada. The company owns 11 feedlots in the U.S. with a capacity of 900,000 head, as well as one Canadian feedlot with 75,000-head capacity.

Through Pilgrim's Pride, JBS also processes 6.6 million birds a day in the U.S. through 25 processing facilities. On the pork side, JBS processes 90,000 hogs a day in the U.S. and also operates five feed mills.

As a subsidiary of JBS USA Holdings, Pilgrim's Pride is the main U.S. stock traded by the company in the U.S. According to Securities and Exchange Commission filings, Wesley and Joesley Batista own 195,445,936 shares of common stock in Pilgrim's Pride, or 78.57% of all outstanding shares.

Dow Jones reported S&P cut the credit rating for Pilgrim's Pride, due to reputational risks, indicating it could affect Pilgrim's Pride's access to finances. Yet, according to another SEC filing earlier this month, Pilgrim's Pride just reached an agreement with Rabobank to increase its revolving loan limits from $700 million to $750 million and also increased a loan commitment with Rabobank from $500 million to $800 million.

In March, JBS was hit with a tainted meat scandal as Brazilian authorities issued hundreds of court orders to JBS and other Brazilian beef companies over tainted and rotten meat and bribes to agricultural inspectors, Bloomberg reported. JBS was forced to temporarily cut operations in Brazil because of the scandal. Still, foreign markets such as China -- the largest foreign buyer of Brazilian beef -- reopened their markets to some Brazilian packing plants after assurances from Brazilian authorities over the extent of the scandal.

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Editor's note: This article includes reports from Associated Press, Bloomberg, Dow Jones and Reuters.

Chris Clayton can be reached at Chris.Clayton@dtn.com

Follow him on Twitter @ChrisClaytonDTN

(AG)

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Chris Clayton