COP26 deforestation plan is neutral to Brazilian meatpacker ratings
The agreement by more than 100 countries, including the US, the UK and Brazil, to end deforestation by 2030 at the United Nations 26th Climate Change Conference (COP26) in Glasgow, Scotland could temporarily raise raw material costs and lead to supply-chain investments by Brazilian meatpackers, says Fitch Ratings.
Quantifying the effects of ending deforestation on cattle supply, prices and margins is difficult but near-term credit effects are likely neutral due to the long time before implementation. Lower leverage and greater financial flexibility will also mitigate credit effects. Fitch projects median sector net leverage of about 2.0x at YE 2021 and 1.7x at YE 2022, down from 5.1x at YE 2017.
Cattle prices in Brazil are already high and could increase further if supply declines due to the end of deforestation. Most Brazilian meat companies, including JBS (BBB-/Stable), Marfrig Global Foods (BB/Positive) and Minerva (BB/Stable), have some downside protection from difficult cattle sourcing in Brazil, due to the diversification provided by non-Brazilian operations. Innovation in plant-based meat also reduces exposure to cattle supply risk.
About 85% of the world’s forests are located in the countries participating in the agreement to end deforestation as having fewer trees to absorb CO2 contributes to climate change. A pledge of $19.2 billion of private and public funds will help developing countries restore damaged land and prevent wildfires.
Deforestation across countries will no longer be used to make space for animals and crops involved in global trade to graze or grow, which could reduce the supply of these items and lead to export risk. Agricultural exports could decline due to reduced supply. Brazil is the world’s second-largest producer of beef, behind the US, exporting about 25% of production in 2020, per the US Department of Agriculture’s Foreign Agricultural Service.
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Livestock farming is a driver of deforestation in the Amazon, with about one-third of cattle pasture land in the rainforest. Brazilian meatpackers face climate-related reputational risk due to this deforestation, which could cause countries to announce restrictions on beef imports from Brazil. There are ongoing examples of such restrictions.
Brazil recently suspended beef exports to China due to the confirmation of two cases of Atypical Bovine Spongiform Encephalopathy, which Fitch expects to be temporary as Brazil is a large supplier of beef to China and meatpackers are using plants outside Brazil to supply the Chinese market. Additionally, some European countries designated fires in the Amazon as an international crisis and proposed banning Brazilian beef imports.
Beef exports to Europe represented roughly 10% of Minerva’s Brazilian division and 8% of Athena Foods’ export revenue, 6% of JBS’s export revenue and 1% of Marfrig’s revenue in 2020. Asia is the main destination for Brazilian beef with nearly 65% of export volume going to China and Hong Kong last year.
We believe high environmental standards enhance credit profiles of these companies. Deforestation is garnering greater attention due to climate change, given the release of carbon dioxide when trees burn. Most protein companies have public targets to reduce greenhouse gas (GHG) emissions.
JBS committed to achieve net-zero GHG emission by 2040, to eliminate procuring cattle from indirect suppliers engaging in illegal deforestation in the Amazon biomes by 2025, and signed a partnership with Dutch Royal DSM to bring a food supplement that reduces the methane emitted by cattle to its supply chain.
Marfrig committed to reduce GHG emissions by 2035 and to ensure 100% of its supply chain is sustainable and free from deforestation by 2030 by eliminating deforestation from the Amazon biome by 2025. Minerva aims to reduce scope 1 and 2 GHG emission intensity by 30% by 2030, and have zero illegal deforestation throughout the supply chain for all of its South American operations by 2030.
