MercoPress. South Atlantic News Agency

US chicken business hit by grains’ costs will need to raise consumer prices

The fourth quarter will see higher costs passed along to prices

Brazil's JBS SA, the world's biggest meatpacker, sees rising costs for feed grains hitting its US chicken business mainly in the fourth quarter and will need to raise prices accordingly.

The company's Pilgrim's Pride Corp. PPC-2.50% unit in the US experienced a good start to this year after a difficult 2011, and hopes were high for a “very solid second half,” JBS Chief Executive Wesley Batista said in a conference call with investors.

“We had a change of scenario in the last 60 days from the point of grains prices” Mr. Batista said, noting that corn in the U.S. has risen to around 8 dollars a bushel from 5 previously. A severe drought in the Midwest has decimated the U.S. corn crop, which just a couple of months ago was expected to be a record-breaker.

JBS still expects Pilgrim's to post a margin of earnings before interest, taxes, depreciation and amortization, or Ebitda, of around 5% of revenue in the third quarter, down from 6.4% in the previous three months.

“The main challenge will be the fourth quarter, which is when we're going to be incurring these grains prices and we'll have to pass along prices to compensate,” Mr. Batista said.

Pilgrim's Pride's positive Ebitda margin could nearly evaporate if it can't raise prices, but the executive said he doesn't think that will be the case.

“We believe the industry has conditions to minimize the increase in grains prices,” he said. ”We're going to have a profitable year in the US poultry segment.

JBS owns more than 75% of Pilgrim's Pride, and the unit contributed 21% of the Brazilian company's second-quarter revenue.

The company continues to expect good results from its beef business in Brazil. Although domestic demand was somewhat anaemic in the first half of the year, Mr. Batista said he sees the Brazilian economy picking up in coming months amid lower interest rates and various stimulus measures from the government.

JBS also sees working-capital needs declining in coming months as it converts tax credits into cash, while a more favourable exchange rate should drive exports from Brazil, Mr. Batista said. (Meat Trade news daily).