Global supply chain disrupted by Brazilian meat scandal

MADISON - Beef prices in the United States bumped up slightly after an investigation in Brazil unleashed a scandal that has shut down many export markets for Brazil’s immense meatpacking industry and disrupted beef and poultry supply chains worldwide.

The scandal called into question the integrity of the food safety system, including export certificates, from the key global producer of meat. The South American nation has had a strategic plan with the goal of becoming the world’s largest supplier of red meat and poultry products. It achieved that goal, surpassing the United States and Australia but now is mired in scandal.

As world markets began to close for beef and poultry from Brazil, JBS, one of the companies named in the investigation, announced plans to shut down production in 33 of its 36 plants in Brazil for three days as it assessed the global hit it was taking on exports.

As part of that plan, JBS said it would also reduce by 35 percent its beef production in all of its plants as it evaluated the various beef trade embargoes among its global trading partners. The reduction plans were announced in a note to the multi-national company’s investors.

The company has also said it was “inappropriately connected” to the story.

In Brazil, JBS has 125,000 employees. Another, smaller company caught up in the scandal shuttered its business, throwing 280 people out of work.

The trouble for the Brazilian meat packers all started when the country’s federal police finished a two-year investigation which alleged that meat packers – of beef and chicken – adulterated tainted meat to make it look fresh and repackaged meat that was past its sell-by date.

Investigators dubbed the sting the “Weak Flesh Operation” -- apparently a Biblical reference to those health inspectors who couldn’t resist temptation and allegedly took bribes to provide certificates for unsafe or unsavory shipments of meat.

Federal investigators allege that meatpackers bribed inspectors and health officials to overlook unsanitary practices, including the re-processing of spoiled meat for export. Investigators made recordings of top executives in some of the companies allegedly discussing bribery of health officials. Wire taps were also used to make the case against the meat companies.

The sting snagged a total of 21 companies in its net, but most of the focus has been on JBS and BRF, the latter being the nation’s largest exporter of poultry. As country after country announced bans on beef and poultry from Brazil, stock prices of the two publicly traded companies plummeted. Stocks in JBS lost 11 percent and BRF stock dropped 7 percent.

The investigators allege that some of the companies used putrefied meat and illegally added ground up pigs’ heads into sausages. In some cases, they alleged that acid and carcinogenic chemicals were used to mask spoiled meat and that potato and even cardboard were used to stretch actual chicken meat to boost profits.

The European Union and 14 other nations, including China, Canada, Chile and Japan enacted total or partial suspension of their imports from Brazil. Some nations chose to limit their embargoes to the 21 plants that were caught up in the federal investigation.

South Korea imposed and then quickly lifted a ban on Brazilian poultry. The Asian nation apparently realized it was an untenable position – 80 percent of their chicken imports come from Brazil.

Data from the U.S. Department of Agriculture shows that Brazilian chicken accounts for nearly 40 percent of global poultry exports.

China is the export destination for one-third of Brazil’s meat exports. Oddly, China took 14 years to reopen its markets to U.S. beef (which happened just this week.) That ban had been put in place after the discovery of one imported cow (from Canada) with BSE, the disease also known as mad cow disease. However, China’s meat embargo against Brazil lasted only four days.

Court documents filed as part of the investigation showed alleged evidence that meat packers filed false documents for meat exports to Europe, China and the Middle East. Bribes were allegedly paid to allow company officials to gain access to government offices where they used computers to issue their own export certificates.

Investigators made recordings of officials from some of the companies allegedly dropping off coolers filled with meat and cash at the homes of food safety officials, in return for favorable health certificates.

According to figures from the Brazilian Ministry of Agriculture, export averages of beef and poultry had been valued at about $63 million (in U.S. dollars) per day, but after the raids that figure dropped to $74,000 per day. Brazil has strategically built its meat business to become a powerhouse in world trade, with annual exports valued at over $12 billion.

Last year Brazil’s beef exports totaled $5.5 billion and poultry exports were almost $7 billion.

Though JBS has processing plants all over the world – it has been on a strategic buying binge in recent years – it is still headquartered in Brazil. Last year JBS sold meat into 160 nations and had revenues of $55 billion.

Reportedly 73 percent of the company’s revenues are generated by its meat processing subsidiaries in the United States, Australia, Europe and Canada and those were not touched by the Brazil-based scandal.

On the other hand, BRF has most of its production within Brazil. The company is owned by Brazil’s richest retail entrepreneur and is the world’s largest poultry exporter.

Brazil has 4,850 meat packing plants and the meat industry accounts for 0.7 percent of gross domestic product.

Once the word was out on the sting, other nation’s inspectors began to scrutinize shipments from Brazil. In Italy, health inspectors found four shipments of meat from a plant in Brazil that were contaminated with salmonella.

In the wake of the investigation, Brazil’s Ministry of Agriculture closed three of the plants involved in the sting – one owned by BRF and two others owned by a smaller competitor. Their products were pulled off store shelves by food safety officials in Brazil.

Brazilian investigators have been conducting the undercover investigation for two years and presented evidence of at least 40 incidents involving bribes or shipments of tainted meat. Federal police carried out raids with 1,000 officers in 194 locations to kick off the international brouhaha on March 17.

The U.S. Department of Agriculture said it was monitoring the Brazilian situation through its Food Safety Inspection Service (FSIS) but said that the U.S. food supply is safe because there is a “re-inspection” system for all imported meats. They planned to increase inspections on all Brazilian meat imports, saying they would inspect 100 percent of Brazilian meat products at ports of entry.