Sizzling Demand for Meat Drives China-Brazil Deals

When Dilma Rousseff, Brazil’s new president, visited China recently, the business delegation travelling with her hammered out several deals. One of the success stories of the trip was the Brazilian meat production industry.

Here’s a quick roundup of the Latin American industries and three stocks that might also benefit from this.

China’s burgeoning population and rising wealth have increased demand for food which can only be met through imports at this stage of the country’s development.

Take a closer look at beef imports into China. China’s beef imports are expected to jump 38 percent to 55,000 metric tons (MT) in 2011 from 40,000 MT in 2010.

Where’s the beef?

It will come from Latin American nations, like Brazil and Uruguay which should benefit most from the higher beef imports needed by China. Until 2008, Argentina was among the world’s top beef exporters. However, now 80 percent of Argentina’s production stays domestically, due to Argentine government sanctions on beef exports. As a result, smaller regional peers such as Paraguay and Uruguay have been able to surge past that nation in beef exports.

China also needs pork. It accounts for 50 percent of global pork consumption. This year it will import 1 million MT of pork, an increase of 20 percent over 2010 levels.

Within the next four years, Brazil’s annual pork supply to China is expected to touch 200,000 MT (slightly under 40 percent of its total exports in 2010). With these new orders, China will be competing with Russia and Hong Kong which accounted for over 61 percent of Brazil’s pork exports in 2010.

And demand for pork and beef is growing in other areas too.

The European Union’s proposed free trade agreement with the Latin American trade block (MERCOSUR), will allow imports of various types of meat such as beef and pork, creating high-end opportunities for producers into Europe over the next few years.

But it may not take years for the effects to be felt. All this demand is likely to be putting upward pressure on global beef and pork prices and production soon.
Among the ADRs that might benefit are the following:

BRF Brasil Foods SA (NYSE:BRFS) emerges as a clear winner in this recent deal, given that the company accounts for 40 percent of Brazil’s pork exports. The company’s stock has been a trail blazer on the bourses, notching up a string of new 52-week highs in recent weeks.

Cresud Inc. (NASDAQ:CRESY) in the medium term. In addition to its Argentine operations it also owns 36 percent of Brasil Agro which uses the same agricultural land development model to create value in Brazil.

Chile’s Sociedad Quimica y Minera (NYSE: SQM), a major producer of plant-nutrients whose Latin American operation includes facilities in Brazil, Mexico, Peru and Ecuador, as well as Chile. Its products are also distributed throughout North America, Europe, the Middle East, Africa, Asia and Australia. Given that land prices are rising, productivity is becoming a more crucial element, so expect fertilizer prices to rise as well.

To put it in a nutshell, I believe that demand from China will dictate the fortunes of the beef and pork industry in Latin America in the near future. It also will create some profit-making opportunities for Latin stock investors.