Case study: Reputational risk and Brazilian beef

An emerging scandal that has dramatically affected Brazilian meat producers serves as an example of hazards posed by sector-wide reputational risk.

A poultry processing plant in Brazil.
A poultry processing plant in Brazil. Photo: Alf Ribeiro / Shutterstock.com

 

Background

Brazil produces over 15 per cent of the world’s beef, second only to the United States and more than the entire European Union combined. It is also the third largest producer of poultry and the main base of operations of two of the world’s three largest poultry companies. With meat and other animal products for consumption making up approximately 7.5 per cent of Brazilian exports, and other agricultural products accounting for a further 29 per cent of exports, the country is heavily dependent on its reputation as a reliable source of food.

That reputation was shattered virtually overnight with the revelation this month of a major food safety scandal that began with a single inspector filing a routine report.

From rural complaint to country-wide scandal

Three years ago, Daniel Gouveia Teixeira, food inspector in the rural state of Paraná, reported that a local meat processing plant was allowing too much bone and marrow to contaminate its beef. When he was promptly removed as the plant’s inspector by the country’s agriculture department, he complained to the police that his removal was the product of corruption within the ministry, and suspected that his supervisors may had have taken bribes from the managers of the plant.

This month, Brazil’s police announced that their three-year-old investigation into Gouveia Teixeira’s allegations is ongoing and has bourgeoned into a major case involving over 100 suspects who they believe took bribes in exchange for overlooking dangerous practices at least 21 meat processing plants. They also announced the case has so far led to the arrest of 33 people, mostly inspectors, who they accuse of corruption. Those arrested stand accused failing to carry out inspections in exchange for illicit payments and deliberately overlooking illegal practices such as using ascorbic acid to mask the fact meat for sale is rotting, altering expiration dates of meat for export to minimise issues involving shipping times, and injecting water into poultry to make it heavier and thus more expensive.

While the investigation so far appears to be focused on government employees who failed to properly fulfil their duties, the announcement by the police quickly cast of pall over the country’s major meat producers. JBS, SA, the world’s largest producer of beef, finds itself at the centre of the scandal, as authorities revealed that several of the plants where they believe such acts occurred were owned by JBS. Police have also said that the company is under investigation for corruption. While JBS denied any wrongdoing, it suspended operations at 33 of its 36 plants and said its remaining three plants will only operate at 35 per cent of their production capacity. JBS’s main competitor, BRF, likewise is under investigation and has been revealed to have owned some of the plants at which the accused inspectors worked. Like JBS, BRF also denies any wrongdoing.

Equities markets quickly punished the companies named by investigators: common stock of JBS, for example, dropped by about 6 per cent, and sources within the company told media outlets that its management is seriously considering cancelling or delaying its planned initial public offering on the New York Stock Exchange, which the company had hoped to finalise by mid-2017.

Where’s the beef? The scandal goes global

The near total collapse of Brazilian meat exports represented a board distrust of all meat from the country, whether or not it was produced in a facility or by a company currently under investigation.

The economic damage, however, was not at all limited to a handful of firms. While the Brazilian government has rushed to emphasise that the 21 plants at which police believe inspectors were bribed represent only a small fraction of the thousands of facilities requiring inspections throughout the country, global commodities markets have not drawn such fine distinctions. On 21 March, the trade ministry announced that Brazil exported only USD74,000 worth of beef and chicken, off nearly 99.9 per cent from the USD63 million of the country the exports daily on average. The near total collapse of Brazilian meat exports represented a board distrust of all meat from the country, whether or not it was produced in a facility or by a company currently under investigation.

Exports were further harmed by a number of governmental actions by countries both near and far from Brazil. For example, Chile banned all Brazilian meat imports, while the E.U., Japan, and Uruguay banned meat that had passed through any of the 21 plants where corruption is alleged to have taken place. China temporarily prohibited Brazilian meat from being unloaded from ships at its ports, while Mexico and Jamaica announced similar broad measures designed to prevent tainted Brazilian beef and poultry from coming to market. Argentina, the U.S., and the U.K, meanwhile, announced that they would increase customs inspections of Brazilian food imports to ensure they meet safety standards.

Although some of the countries that took such actions later softened their stance, the damage to the reputation of Brazilian meat producers had already been done. Furthermore, the Brazilian government seriously undercut its own argument that the scandal is limited to only a very small percentage of facilities when it suspended the operations of an additional three meatpacking plants on 27 March, leading to inevitable speculation that police have once again broadened their investigation and have evidence that unsafe practices are more widespread than first believed.

Analysis

Whether unsafe and corrupt practices occurred at 21 plants, 24 plants, or even some multiple of those numbers, one can be certain that many innocent companies have been negatively impacted by the Brazilian meat scandal. This perfectly demonstrates the contagious nature of reputational risk in fast-moving consumer goods, particularly food and beverage products: once the public is made aware of any wrongdoing, it often begins to wonder whether all firms are engaged in wrongdoing and to make consumption choices based on worst-case assumptions. Indeed, even before public awareness of an issue becomes widespread, mid-level actors in the supply chain such as the importers of Brazilian beef and the restaurants to which they sell must price-in the potential for products to become virtually worthless as local authorities refuse to allow questionable imports to be unloaded and consumers refuse to purchase them even if they do get to market.

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