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Could spiking corn prices end up helping Brazil's meat giants?

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The soaring price of Brazilian corn could have a counter-intuitive benefit for the country's large protein producers - as narrow margins squeeze out smaller chicken producers, and reduce competition for beef companies, BTG Pactual said.

The bank has a "buy" rating on Brazil's big four protein producers, with the beef producers Minerva, Marfrig and JBS favoured in the short term.

For chicken giant BRF, the bank saw a good future but said that continued squeezed margins from the corn price spike could offer "a better entry point over the next months".

Soaring corn

Brazil's domestic corn prices are soaring, thanks to the weaker currency, which has boosted exports.

"The shortage of corn domestically has triggered price disruption, with local real prices up 66% to R$40 a sack since September," BTG said.

This leaves prices at a 37% premium to international prices, compared to a 20% discount eight months ago, BTG said.

Prices to normalise

True, BTG expects corn prices to "normalise" later in the year, as arbitrage opens up with Argentina and the US, and the second corn crop is harvested.

But with prices set to remain high "for another few months," BTG saw squeezed margins in the poultry sector, which relies on corn for feeding.

The Brazilian poultry industry has been booming, thanks to strong exports, as BTG reports broiler chick production up 4.4% in 2015.

And this rise in poultry supplies has weighed on prices.

Stronger momentum

Now, with corn prices high and chicken prices low, BTG believes margins in the industry "may have collapsed".

And until corn prices come down, the outlook is set to get "even gloomier," BTG said.

But these squeezed margin could be good news for larger chicken producers in the medium term.

BTG said smaller players, "will likely need to cut back production to cope with much lower profitability".

"Ultimately, we believe the high-cost/low-price scenario could eventually revert completely as we move into second-half of 2016, and drive much stronger momentum for large poultry players in the mid-term," BTG said.

And the beef industry is set to benefit as well, as higher chicken prices reduce competition in the protein space.


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