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Ethanol Falloff Drags Down Broilers' Profit

by 5m Editor
9 September 2010, at 9:59a.m.

JAMAICA - A huge falloff in ethanol production was blamed for the 49 per cent decrease in net profit to $219 million experienced by Jamaica Broilers Group (JBG) for the first quarter ended 31 July 2010, when compared to the corresponding period in 2009.

Revenues from ethanol production declined by $1.2 billion or 83 per cent over the corresponding quarters of August 2009 to July 2010 following a reduction in tolling activities of the processors.

Ian Parsard, vice-president of the JBG in charge of finance and ethanol, told the Jamaica Observer yesterday that the reduced production was as a result of the higher cost of raw materials coupled with reduced demand overseas and the tenuous nature of the Brazilian market. The majority of the ethanol produced by JBG is marketed overseas.

"The price of the raw material was priced in comparison to Brazil and in comparison to the price of fuel grade ethanol coming out of the United States and Europe. Therefore, it has to make sense in terms of price for us to produce it," said Mr Parsard.

He added that Brazil, being a major player in the production of ethanol and a tolling partner, exerts significant impact on the market.

"There are many different things that impact the price of raw material out of Brazil and ethanol production in the international market," Mr Parsard said.

Tolling is a contract arrangement to put a specified amount of raw material per period through a particular processing facility. For example, an agreement to process a specified amount of corn into ethanol at the JBG plant in Jamaica.

He explained that the sugar prices in Brazil are at an all-time high in relation to the last five years. The mills in Brazil, therefore, produce a lot more sugar than ethanol. Secondly, the demand for ethanol in Brazil is also high, making it unlikely that it would have excess raw material for exports. Inversely, the demand for ethanol on the international market has been low, even as the raw materials for processing remain high, a double whammy that has resulted in the decreased production here.

"The combination of the two means that there is really not a credible opportunity for JBG to produce this year," said Mr Parsard. Profit for the period, therefore, declined by $211 million, from $430 million to just over $219 million.

Distribution and administrative costs both increased by 10 per cent reflecting an 11 per cent inflation increase.

However, revenue increases in the Best Dressed foods division, which sells processed poultry and other products, and the HiPro-Ace Division, which sells manufactured feeds, baby chicks and other farm and household supplies, offset a fraction of the losses from ethanol. Revenues from Best Dressed Foods increased by $157 million or 5.7 per cent, while revenues from HiPro-Ace improved by $23 million or 1.4 per cent quarter on quarter following higher volumes and better product mix management.

Cash at the end of the period increased 51 per cent to $767 million following exchange rate gains of $12.7 million and increase of $953.8 million in cash from operating activities. This resulted from more focus being placed on cash sales given the ethanol fallout. Parsard said the increased cash should be used in debt reduction and to improve investment prospects.