Marfrig- BRF Merger How Big of A Deal is It?

Brazil’s Growth Continues to Influence Agricultural Trade

In the background of tariff discussions and global trade negotiations reshaping the flow of commodities across the world, Brazil solidified a significant merger between Marfrig and BRF in September. With so much change going on you might have noticed this merger in your periphery and wondered, how big of a deal is it that two South American food manufacturing giants just joined forces? Could it boot the U.S. out of its ranking in beef production or add another variable to already complex trade talks?

Brazil is Agriculturally Strong

On the one hand, this merger is not surprising. Brazil is well suited to agricultural expansion due to its climate and the availability of natural resources. The country has steadily gained ground in commodity markets for years. Some worry their growth will disrupt other powerhouse countries and reshape trade deals, while others see Brazil as a big player as we consider how to address the food needs of a growing global population. Either way, Brazil has agricultural goals.

Those goals include keeping food costs down for their own citizens and breaking into global markets with safe and affordable options. The best way to meet both of these goals is to streamline food production and manufacturing. A Marfrig, BRF partnership does just that. If Brazil is able to keep costs low in a season where commodity prices are volatile it would certainly give them an edge over the competition in multiple sectors.

Brazil is Embracing Innovation and Infrastructure

Brazil has come under scrutiny for food safety issues and management of natural resources. The EU developed its own deforestation policy that limited imports from countries like Brazil if the products contributed to clearing away rainforests. The U.S. pushed back on JBS and Brazil’s beef industry for safety standards and clear country of origin labeling. Additional regulatory framework discussions have prompted American and European consumers to scrutinize South America’s meat production methods and question where their goods are sourced.

But, Brazil is determined to rebound from any negative spotlight and use new compliance standards as a catalyst for innovation. Individually Marfrig and BSF have worked to meet regulatory standards for the sake of scooping up more international market demand. The merger allows them to pool their innovative tools and compliance infrastructure so they can negotiate trade deals on an increasing number of products in a larger number of countries. The merger could work quickly to dismantle export barriers. Like JBS, the new company formed under the merger could become a publicly traded company in the U.S. in the near future.

Brazil has Built Strategic Partnerships

Not so long ago our attention was focused on the relationship blossoming between several South American countries and China. These partnerships have resulted in robust transportation infrastructure intended to support Brazil’s move into more global markets; what you might know as the New Silk Road. They can move goods more efficiently than ever. If we are talking specifically about competition between the U.S. and Brazil for Asian and Middle Eastern markets, Brazil may have the upper hand here. The merger could be a very strategic move not just for Brazil’s domestic economy, but for future influences on food supply chains.

Brazil has also built their supply chains with Chinese holidays in mind as well as specific demands from Middle Eastern countries. These are choices worth taking note of in a time where U.S. trade agreements with both China and Middle Eastern countries are strained. Brazil could be strategically scooping up markets the U.S. is leaving behind.

Brazil May Have Maximized on Timing

Beef is a great example of how this merger seems to be perfectly timed. Thanks to high feed costs, droughts and now screwworm cases popping up closer and closer to the United States, the U.S. cattle inventory, which typically ranks highest, is at an all time low. Meanwhile, Brazil’s herd remains robust and, thanks to Mercosur, is backed by a regionally strong cattle supply. The United States has imported more beef from Brazil in the last year than ever before, despite consumer questions about country of origin.

Negotiations between China and the U.S. are tense with beef in the crossfire. Currently, China has halted all beef imports from the United States favoring Brazil for future trade deals. In general, we know American agriculture tends to be targeted in retaliatory tariff moves. However, we can’t exactly blame Brazil for cashing in a supply and demand imbalance that works in their favor. You can find a similar dynamic in other commodity trade deals meaning Brazil could continue to gain commodity export ground in virtually all regions of the world.

Brazil Isn’t Completely Commercialized

BRF and Marfrig may be large companies looking to consolidate agriculture in the country but for the most part, Brazil’s food industry is made up of small companies. In fact, of the roughly 41,000 food production or manufacturing companies in Brazil, 94% are defined as micro businesses. A merger appears like a grand consolidation, but the two companies haven’t scooped up all of the country, yet.

If U.S. agriculture picks up momentum again bringing soy, corn, beef and other commodities down then competition will circle back to who is the most efficient in their production methods and who has the most streamlined supply chains rather than simply who can afford to export their goods when supplies are tight. And the stakes are already higher than that. Today food producers have to be efficient and compliant. The trade deals go to those who are both. The U.S. and Brazil could both be formidable contenders in both arenas in the coming years.

The BRF- Marfrig merger could shed light on what it looks like to successfully support the average farmer or rancher in micro business endeavors that keep domestic competition strong, while also highlight the streamlining benefits of consolidation dynamics.