Future Ag profits and Chinese meat consumption

Posted By Dick Sterling
April 8, 2013

As an investor in agriculture and someone who's very bullish on the sector, it's particularly encouraging to read the latest Chinese meat consumption statistics. Very simply, they've skyrocketed.

A portion of China's 1.3 billion people are experiencing a modest degree of wealth for the first time in their lives. And the first thing they want to do isn't buy a bigger house or go shopping. Rather they want better food, starting with meat. Especially pork.

Recently it was reported that total Chinese meat consumption is now double that of the US. They consume one-quarter of the world's meat production, and they're only getting started. While this is big news, what's more telling is that per capita meat consumption in China is only half that of here. In other words, they've still got a long way to go before they catch up to us. And that's great news for meat producers.

But it's also a boon for crop farmers, particularly corn and soy --- both of which are heavily utilized as inputs in pork production, China's preferred meat.

And it's not just happening in China. It's happening in Brazil and India (yes, even "vegetarian" India). Anywhere incomes are growing, so is meat consumption.

Meat production requires substantial land, either as a direct input or indirectly through feed inputs. It also requires a great deal of water. And it requires fuel, to get it processed and to transport the finished product. The FAO is predicting world meat consumption will double between now and 2050. I think they're probably right. More reason to be long farmland, water-related investments, and petroleum --- but that's a different post.

Back to meat. Brazil is a significant supplier of raw food products to China. Two companies worth watching, both Brazil-based, are JBS and Marfrig. Both of them export vast quantities of meat into the Chinese market.

JBS (JBSS3: Brazil) is known as the largest beef producer in the world. But they also produce poultry and pork products. Their operations are international in scope, and they have extensive processing and marketing infrastructure in several countries. While their US interests include Swift and Pilgrim's Pride, what's most interesting is their Asian market. As major meat exporters to China, their potential for sales growth is significant. A five year chart as follows:

Marfrig (MRFG3: Brazil) is a meat packer/producer. While they also produce beef, poultry, and lamb, they were the first Brazilian company authorized to export pork to the Chinese market. The company's operations are international in scope, and again it's their meat exports to China which interest me the most. A five year chart:

I like the fact that both companies are either run by the founder or run by the founder's children --- not that it guarantees anything, but it's slightly reassuring. The main point really is their meat exports to Asia, their potential to expand capacity, and their prospects for international sales growth.

Both Marfrig and JBS have disappointed investors in recent years. They were extremely bold in their acquisition strategy and are dealing with integration and debt issues which probably won't get resolved anytime soon. Hence the weak share prices. Still, I see upside in both companies, and while I generally focus on North American stocks, these are two exceptions.

Posted by: Dick Sterling, Editor   contact here