Brazilian JBS gets $78M slice of bailout

Two men in cowboy hats stood behind President Donald Trump in May as he announced a $16 billion agricultural bailout. Trump said the financial relief from his trade war with China would help American farmers, reinforcing an earlier tweet when the president said the funds would help "great Patriot Farmers."

But not all beneficiaries of the taxpayer-funded program are American farmers or patriots. JBS, a Brazilian company that is the largest meat producer in the world, has received $78 million in government pork contracts funded with the bailout money -- more than any other U.S. pork producer.

JBS' winning hand in securing a quarter of all of the pork bailout contracts is one example of the power a small number of multinational meat companies now hold in the United States. JBS has become a major player in the United States even as it faces price-fixing and other investigations from the federal government.

The company's explosive growth through acquisitions over the past decade has been a dominant factor in the consolidation of the meat industry.

A dozen years ago, JBS did not own a single U.S. meat plant. Today, JBS and three other food companies control about 85% of beef production. JBS and Tyson Foods control about 40% of the poultry market. And JBS and three other companies control nearly 70% of the pork market.

JBS and the large multinational meat companies, including Tyson Foods, Smithfield Foods and Cargill, use their size and global presence to create efficiencies that enable them to produce a variety of quality foods at a lower price. But many agricultural economists and food marketing analysts say when so few companies control the market, they can drive smaller operators out of business, reducing competition and sometimes raising prices for consumers.

JBS says it's a vital part of the agricultural economy; the company employs more than 60,000 people in the United States and buys from more than 11,000 U.S. farmers and ranchers. The company and Agriculture Secretary Sonny Perdue say the bailout funds JBS received are helping American farmers because the company buys its hogs from them.

JBS chief executive Gilberto Tomazoni told analysts in August that JBS is "at the best moment in its history." He said an upcoming stock offering in the United States will allow the company to continue to expand; JBS says expansion efforts "will better position the company to sustainably meet evolving customer and consumer expectations."

However, U.S. Sens. Marco Rubio, R-Fla., and Robert Menendez, D-N.J., recently challenged whether JBS' entry into the U.S. market should have been allowed.

Corruption scandals have engulfed JBS in Brazil, the senators wrote to Treasury Secretary Steven Mnuchin, and company officials have "admitted criminal conduct to secure loans that were used for investment in the United States." They have asked for a review of the purchases.

JBS said it received all "necessary regulatory approvals from the ... antitrust authorities, including the Department of Justice" before purchasing each of the companies.

Small farmers and cattlemen are glad some politicians are listening. They say the federal government's bailout -- and JBS' share of it -- are reminiscent of the bank bailouts during the 2008 financial crisis. Even though many of the banks were under investigation by the federal government, they still received federal money.

"I think it's one of those situations where it's too big to fail," said Greg Gunthorp, who runs his family hog farm in Indiana. "We are talking about a company that has shown it doesn't play by the rules."

JBS purchased its first U.S. meat plants in 2007, using Brazilian bank loans the owners secured illegally, court records show. In a plea deal, brothers Joesley and Wesley Batista told prosecutors how they bribed bank and government officials to receive low-interest loans.

The bank loans and other funding allowed JBS to consolidate five U.S. companies -- which produced pork, poultry and beef -- into a single company, JBS USA.

In 2007, JBS bought pork and beef producer Swift and Co. In 2008, it purchased the beef operations of Smithfield Foods. In 2009, it acquired poultry producer Pilgrim's Pride. In 2015, JBS bought Cargill's pork division. And in 2017, the company purchased poultry producer GNP Co.

The bailout payments underscore JBS' advantage over smaller, domestic competitors. Some of its pork plants kill more than 1,000 pigs an hour, enabling JBS to operate off a slimmer profit margin and underbid other companies for the bailout contracts.

JBS is also able to shift production to avoid high tariffs. While U.S. pork exported to China faces a 72% tariff, pork from JBS plants in Brazil faces only a 10% to 12% tariff.

JBS increased production where tariffs were lower, benefiting twice from the Chinese trade war -- first by collecting the bailout money and then by increasing pork production at its plants outside the United States, which JBS announced this year.

Consolidation can lead to benefits for consumers. Trey Malone, an agricultural economist at Michigan State University, said consolidation has led to lower prices and an explosion of new food products.

But the small number of major players increases the possibility that companies could collude to increase prices, Malone and other economists say. A lawsuit filed in 2016 by a food-service company in New York alleges that JBS-owned Pilgrim's Pride and other poultry companies intentionally destroyed flocks of breeder hens to reduce the poultry supply.

The coordinated effort resulted in a 50% increase in the wholesale price of broiler chickens, the lawsuit claims. The civil suit is on hold as the Justice Department investigates.

JBS declined to comment on the price-fixing investigation. Lawyers for Pilgrim's Pride and other poultry companies filed a motion to dismiss the case in January.

Information for this article was contributed by Andrew Ba Tran and Alice Crites of The Washington Post.

Business on 11/06/2019