Brazil-The Beef sector and who will survive based on Fitch Ratings.

BRAZIL-THE BEEF SECTOR.

While challenges from the global recession continue to affect the Brazilian beef industry, Fitch Ratings believes that free cash flow generation will turn positive in 2009 as select companies benefit from competitors’ bankruptcies, better working capital management and lower capital expenditures. In the special report, ’Brazilian Beef Sector: The Survival of the Fittest,’ released today, Fitch states that short-term fundamentals for some companies in the sector have been bolstered by temporary closing of plants and the increased availability of financing due to the recent announcement by the Brazilian government that it intends to support the food sector with BRL10 billion of loans.

’We are expecting the survivors of the current slump in the sector to eventually thrive in an industry subject to commodity price risk, disease outbreaks and vulnerable to international trade policies,’ said Jose Luis Villanueva, Director at Fitch Ratings. ’The funding by the government signals its support of the sector and it also provides breathing room as it lowers the cost of debt for industry participants and lessens their dependence upon short-term export financing.’

According to the report, in spite of these positive developments, challenges will continue for the industry during 2009 as the global recession continues. Price risk and volatility, protectionist trade policies and credit availability are among the strains. Weak demand from Russia also attributes to the challenges for the sector, as it is a key market for Brazilian exporters.

In Fitch’s view, the industry’s long-term fundamentals remain positive, as Brazil remains one of the lowest-cost beef-producing countries in the world at a time that production in Australia and the European Union (EU) is declining while demand is increasing. In 2009 Brazilian exporters are expected to regain access to the EU, which is one of the highest margin markets in the world, as farms obtain their traceability certification from the regulator. In addition, new markets such as Indonesia , Chile and Cuba are likely to open their markets to Brazilian beef this year.

’The credit quality in the sector will depend on the balanced use of debt in the consolidation of this fragmented industry, which is not likely to resume until 2010-2011,’ Villanueva added.

The special report, ’Brazilian Beef Sector, The Survival of the Fittest,’ is available on the Fitch Ratings web site at www.fitchratings.com.

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