Q&A: The 2020 Meat Industry Outlook
The meat industry has seen many changes over the last year, as the export market has seen great volatility, the plant-based meat industry has surged into public view and consumers are changing how they buy their groceries. Todd Southerland, Food & Agribusiness Industry Manager at SunTrust Bank, answers questions about what might be happening in the industry in the future.
What is the economic outlook for 2020? How might the economy affect consumer food shopping habits the coming year?
Many economic indicators are being interpreted as a signal for a recession ahead, and the natural volatility expected during an election year makes for the possibility of a degree of economic weakness. However, interest rates remain very low, which continues to spur lending and investment activity. Despite our low rate environment, the United States is very attractive globally when you consider relative levels. Countries like Germany and Japan continue to experience negative rates, and this is encouraging foreign funds to flow into the U.S. There is also a very interesting concept in play that is sometimes referred to as a “TINA” market: “There Is No Alternative.” Equity market valuations are extremely high, which often leads to a natural concern about a recession as investors seek safe havens ahead of a potential storm. Meanwhile, the bull market continues because investors simply have no alternatives.
Food shopping habits are being driven by lifestyle decisions as much as financial ones. The balance between meals-at-home and meals-away-from home seems to have landed at nearly a 50/50 split. Of course, eating out is a more expensive proposition, but convenience to accommodate on-the-go lifestyles continues to be a more important factor in purchasing decisions for many families. Within the grocery segment, there is more brand stratification than ever before, which offers families an abundance of choice among price, value, and perceived quality. This is one of the primary advantages that traditional grocery stores have over non-traditional food retailers, which are generally experiencing higher growth. I expect this trend to continue, particularly as mass retailers and convenience stores expand their offerings and fine tune their merchandising strategies. Meanwhile, the restaurant industry seems poised to have an impact as well, as delivery options, curbside takeaway, and mobile ordering have significantly expanded accessibility options in this channel.
The ag sector has been hit pretty hard by the various trade wars and lack of trade agreements in 2019. What will 2020 bring in terms of international trade issues?
This topic centers on our ongoing trade dispute with China, the outcome of which is impossible to predict. Recent signals would suggest that a resolution could be reached in the coming months, but as the election approaches, decisions could become even more political. There is no question that farmers have been among the hardest hit as a result of the dispute with China, and their economic woes will be top of mind come November 2020 if a resolution isn’t reached.
I think what is often lost in the discussion, however, is that China needs the U.S. as a willing trade partner especially in light of their recent food and fiber catastrophes. U.S. products have always been favorably received by China, and it would seem that they have similar motivations to reach an agreement. The decimation of the Chinese hog industry due to African Swine Flu will have lasting effects on the availability of pork for several years to come absent the ability for U.S. processors to export without tariffs. I would be surprised if the dispute isn’t resolved soon, hopefully for the appropriate economic reasons and benefits to the citizens of both countries as opposed to any political motivations that will likely spur cooperation.
Beyond trade, what do you see as issues and opportunities for the meat and poultry industry in 2020?
I’m very optimistic about the future of plant-based proteins and meat alternatives, but this is a market that will develop slowly in response to consumer demand. Growth in this sector has been remarkable over the last few years, but this industry is still very small relative to overall protein consumption. In that respect, I think it’s fair to compare it to organic proteins, which despite higher growth rates still only comprise about three percent of the overall market. I’m not suggesting that plant-based proteins pose any near-term threat to traditional meat consumption. However, many of the larger processors are examining this sector very closely and I would encourage all protein processors to begin thinking about their distribution territories and which ones might be impacted in the years ahead. Demand will develop more quickly in metropolitan areas, largely due to demographics. As a result, some businesses may have greater opportunities or experience more threats to consumption than others.
2019 has been an interesting year for poultry companies, which haven’t experienced a significant downcycle in almost seven years. The year has been marked by divergent trends in chicken prices, with breast meat showing uncommon weaknesses. I believe part of this is due to competing protein prices, which are still a factor in buying decisions for consumers. I don’t expect this to be the case in 2020, which signals another positive year for broiler processors, because I expect pork prices to increase as China reopens. I also anticipate that the opening of additional further processing and cooking capacity will spur industrial demand for white meat. Despite the challenges being experienced by the American farmer, there is no indication at this point that feed grain supplies will be tight, which signals adequately low corn and soybean prices to ease any cost pressures at the grow-out level.
What should meat and poultry companies, particularly the small and mid-sized, family businesses, be doing with their income right now? Should they be investing into the company to make improvements? Should they be putting money away for a downturn?
With the pace of innovation in the industry along with increasing scrutiny around the safety/traceability of the supply chain, most businesses are wise to reinvest some amount of earnings to keep pace with their peers and to ensure continued compliance with regulations. Of course, that assumes that the re-investments are accretive to the business and/or that the company’s balance sheet can support it. Access to capital is as good as any time in my career in this industry, and while I typically take a conservative view on leverage in what can be a highly volatile industry, I also encourage companies to be mindful of their capital structure and use moderate levels of debt to help with capital projects. One characteristic that makes a great lending partner is an institution with the expertise to evaluate what a downturn looks like and how it will affect your business; this amplifies the importance of being aligned with a knowledgeable capital provider, because it will understand what constitutes a good investment and help maintain balance sheet discipline to protect all parties.
For those business owners who are less inclined to reinvest in their companies, I would add that it’s a great time to sell a business. Sales multiples are very good right now, and the sheer volume of M&A activity reflects that. There is no question that running a protein business in today’s environment requires controls and oversight that didn’t exist at the turn of the century, and I believe that requirements around traceability and food safety are only going to become more stringent.