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Looking for deals on the frontier of argiculture? How about these three from Brazil

posted on June 21, 2010 at 6:40 pm
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International credit markets may still be tight for companies in the developing world, but Brazil’s domestic bond market looks ready to pick up the slack. As of June 15 five Brazilian companies have bond sales worth $2.2 billion on tap. That’s a huge shift from the first half of June when no Brazilian company sold bonds because fears that the euro debt crisis would spread to Brazil had closed down the local debt market. No Brazilian company has raised money overseas since April 30, according to Bloomberg.

And where is this cash going? Into a continued expansion and restructuring of the Brazilian agricultural sector with an emphasis on exports of food and ethanol from sugar cane.

In other words Brazilian domestic investors are putting their money where the country’s strengths are. And that’s unleashed a spate of deals, financed by local debt or by companies that suddenly feel confident that they can tap the local debt market.

Some deals?

For example, Marfrig Alimentos, the second largest beef producer in Latin America, will raise $1.4 billion by selling five-year convertible bonds to buy Keystone Foods, a chicken and beef producer in West Conshohocken, PA. (The Brazilian company has also announced plans to issue an American depositary receipt (ADR).) With purchase of Keystone, Marfrig buys into the North American and European fast food and prepared foods sectors. Marfrig will become a supplier of chicken nuggets, hamburgers, and other protein products to McDonald’s (MCD), Subway, and Campbell Soup (CPB) in thirteen countries including the United States, France, and Australia. Marfrig has made 38 acquisitions in the last three years including the purchase of Cargill’s chicken and pork business in Brazil for $705 million.

Or how about this deal?

Brazil’s state-controlled oil company Petrobras (PBR) is investing $239 million in the Sao Martinho sugar milling group that will give Petrobras 49% of the ethanol produced by two of Sao Maratinho’s ethanol plants. This comes on top of an April 30 investment that secured a 46% stake in Acucar Guarani, one of the Brazil’s biggest sugar and ethanol companies. Petrobras distributes ethanol made from sugar cane through its service stations in Brazil. The company has set a production target of 1 billion gallons by 2013.

The big prize isn’t Brazil’s domestic market, however, but the global market for biofuels, where Brazil is already the world’s largest exporter of ethanol. To go along with its acquisitions in Brazil’s center-west, Petrobras is building an ethanol pipeline and river barge system to carry ethanol to its main refineries in ports in Sao Paulo and Rio de Janeiro states.

Petrobras isn’t the only big ethanol and sugar group to have export plans and to be making export investments.

Cosan Industrial & Comercio (which trades on the New York Stock Exchange as an ADR with the symbol CZZ), the world’s biggest sugar-cane processor and 84 other Brazilian ethanol makers are seeking authorization to build a $1.7 billion pipeline to ship fuel to the coast. The joint venture Uniduto Logistica, has requested an environmental permit for a 375-mile-long pipeline that will take ethanol from the north of Sao Paulo state to a port on the southeast coast. Plans call for construction of the pipeline to start in the first quarter of 2011 and for the pipeline to begin operation by 2013. The joint venture has said it may sell shares in the pipeline once it is in operation.

Cosan will own a 30% share of the joint venture with another 30% stake owned by Copersucsar, itself a joint venture between mills that process about 20% of Brazil’s sugar cane.

Analysts project earnings growth of 40% for Cosan in fiscal 2011. The ADR has traded at a 52-week high of $10.96 and a 52-week low of $4.67.

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  • jamba on 21 June 2010

    Jim or Ed

    Do you have an opinion on AGU? It is the most diversified Ag play out there.

  • java12jack on 21 June 2010


    Off subject I am interested what you think of FLS as a stock right now. It is down because of Europe and BP oil spill. Would start to accumulating if it drops into the 80′s?
    Also found this interesting tidbit:

    Even more promisingly, the report identified four companies that currently have junk ratings from Fitch but also have positive ratings outlooks for the future. They are Del Monte Foods (NYSE: DLM – News), Flowserve (NYSE: FLS – News), Interpublic Group (NYSE: IPG – News), and Jabil Circuit (NYSE: JBL – News).

    Just a single tick in a bond rating makes a huge difference to financing costs. Currently, spreads on BB+ rated bonds are typically more than a percentage point higher than BBB- rated bonds. Here’s a closer look at just how big a difference that could make to these companies:

    CompanyAnnual Savings From 1 Percentage-Point Reduction in Interest Costs
    Del Monte Foods $12.9 million
    Flowserve $5.7 million
    Interpublic Group $19.4 million
    Jabil Circuit $12.0 million

    Would like your thoughts

  • Run26.2 on 21 June 2010

    Related to all the Brazilian sugar cane biofuels is CPFL Energia S.A. (CPL) using sugar cane bagasse as a fuel for power generation. Have not been able to determine if this is competing or complementary to biofuel. Would assume it is complementary in that they are using the remanants for biomass power generation. Please correct me if this is wrong.

  • DJBarber on 22 June 2010

    Strange to see it here (Before Bloomberg) first:

    “UK braces for budget cuts”


  • DJBarber on 22 June 2010

    Guess that means we’re up next….

  • margeolson on 22 June 2010

    Is anyone looking at the relationship between agriculture growth in Brazil and further rain forest destruction? Seems we’re between a rock and a hard place here!

  • EdMcGon on 22 June 2010

    Agriculture is a rough play at the moment. If we get inflation, the sector should do well, but there are better plays for inflation than agriculture. If we get deflation, the sector will take a hit (along with many others).

    As for AGU, the financials are ok, but they don’t excite me.

  • mopama on 22 June 2010

    Jamba and Ed,
    Related to the ag sector: I wish to point out one of The Jubak Picks 50 Portfolio: Monsanto (MON). In my opinion the stock has been so beaten down lately that anything positive will activate a big move upward. What do you guys think? (Full disclosure: I own MON in my portfolio and I am planning to increase my position soon).

  • amtrend10 on 22 June 2010

    fyi-there is a tax on dividends in Brazil

  • marsdon1201 on 22 June 2010

    thx. for info on tax on div. in Brazil, figured there would be a tax. Do you know what % of tax is on dividends? Other countries have some real high tax % !
    Been following CPL for a while. Are u an owner of the stock and have any further info. on it. Have been interested in it due to div. and being a Div. Income follower. thx.

  • jamba on 22 June 2010


    I have been looking at MON also since like you said it has been beaten down. I guess I am leaning toward AGU because of their diversified business( retail, nitrogen,potash,phosphate) and strong balance sheet. Since they are diversified it will limit their upside say if one are like potash explodes. But I guess in this market I will take a little off the upside for a less bumby ride.

  • Seaturtlelady on 22 June 2010

    Anybody else’s thoughts on buying MON stock?? It’s the lowest in price since ’07.

  • EdMcGon on 22 June 2010

    I’m not a fan of MON. If anything, it’s a weaker play than AGU, just based on financials.

  • mopama on 22 June 2010

    Ladies and Gentlemen,
    I read your comments. Fair enough! Back to MON, virtually debt free and 2% yield. Just to let you know that I (for what is worth) forecast +30% potential upside in one year, and as been noted, with generic Roundup, it is not likely that companies can compete on price forever. To be sure, on these assumptions, we have to wait August or better September with US harvest results. In the meantime I say: I could be totally wrong. :)

  • EdMcGon on 22 June 2010

    I forgot about Roundup. You may want to revisit some of your assumptions on MON:

  • mopama on 22 June 2010

    Thanks for the info. You have a point. However this status quo can change soon. Investor believe that is the Roundup business that has been challenged from competitors who is dragging down the company revenues. Now, it seems, that this is going to change. Even our Jim is thinking the above, please refer to his last post on MON:

  • mari on 23 June 2010

    15% is withheld on div. from Brazilian adr’s.

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