German farmers benefit from meat scandal in Brazil

In Brazil a nation-wide raid by the federal police revealed a scandal in the meat industry at the end of last week. Among those affected are Brazil’s two biggest meat exporters JBS (beef) and BRF (poultry). In addition, food inspectors were bribed so it cannot be ruled out that contaminated meat was sold through export channels.

Given the scandal we expect that declining Brazilian meat exports will tear a hole in the global meat supply later in the year. Increasing European and US exports could fill this hole to some extent, at least regarding beef and poultry. European as well as US meat exporters would benefit from this tendency – and not least German farmers: given a reduced Brazilian offering in the world market, Europe will presumably be able to increase its market shares for poultry (12%) and beef (3%) slightly in the course of the year. With respect to beef, Germany accounts for around 22% of overall EU exports, which is far higher than in the case of poultry (3%). As a result, Germany is likely to export more beef to the third market.

Taking the aggregates pork, beef and poultry together, Brazil is the world’s second-largest meat exporter. If one excludes pork, the country is even the biggest global meat supplier. Asian countries are particularly important trading partners on the import side. Around one third of Brazilian beef exports were shipped to China and Hong Kong. Around 17% of the exported poultry went to China.

After the recent corruption scandal at the national oil giant Petrobras (bribes were also paid here), the current case is particularly explosive as the meat industry is Brazil’s third most important export industry ahead of the power sector and capital goods and in the past it has been one of the economy’s main sources of hope. The scandal is creating a major stir and the damage to the country’s reputation will not be mended any time soon. On the contrary: the loss of confidence especially among Asian customers could increase.

In the third markets the EU buys most of its beef (42%) and poultry (57%) from Brazil. Admittedly, since the Europeans only import whole cuts of meat and no meat mixtures it is unlikely that contaminated meat reaches Europe. But because of the substantial damage to reputation we believe it is likely that European imports from Brazil will shrink. This could also support European – and thus German – meat prices.

 

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