2009 Economic Outlook
In the midst of the country’s worst financial crisis since the Great Depression, meat and poultry processors â€” both big and small â€” are struggling to hold on to profits while looking to 2009 with more than a little hope.
Profits are shrinking in the wake of high commodity prices for crucial inputs such as corn and oil. These prices are moderating after reaching record highs in the summer of 2008, but they are still elevated for producers. Further hurting the industry is a drop in demand in foodservice and an oversupply of meat on the market. These factors â€” and more â€” are keeping prices down and making it difficult for meat makers to recoup high input costs.
As the recession deepens, people are eating less beef, pork and poultry, leading to the biggest per-capita decline in meat consumption since 1982.
In 2008, however, experts forecasted chicken and pork to abundantly fill meat cases. And while supplies of beef were projected to be less, it would still be plentiful. Economists predicted abundance. At the same time, analysts cautioned demand would be the wild card.
Meat demand in 2008 depended very much on the overall health of the U.S. economy, analysts said. And one thing that would throw a monkeywrench in it all would be a recession, which could depress the consumption of meat.
And depress it did.
The U.S. recession began in late 2007. Since then, the collapse has spread to Europe and Asia. World growth has slowed to declining levels due to crises in world financial and asset markets and the lagged effects of sharp energy-price increases. Credit constraints and higher interest rates have sharply curtailed U.S. and European growth, which are now negative.
At presstime, the dollar was expected to generally appreciate against most currencies in 2009. However, it will remain weak by recent historical standards. Nevertheless, prospects for U.S. exports are far less favorable for 2009 than in 2008. The U.S. and European recessions are expected to continue into 2009 with both economies shrinking despite aggressive action by the U.S. Federal Reserve Board and European Central Bank.
The good news is that energy prices should fall, with crude oil prices falling 20 to 30 percent compared to 2008, easing inflationary pressures. Other raw-material prices should drop as well as the commodity-price bubble continues to deflate. And the dollar â€” despite some modest strengthening against some currencies â€” will remain relatively weak, which helps U.S. trade.
Modestly higher exports and falling imports will moderate the shrinkage of the U.S. economy in early 2009. As the world market further slows, total world-trade growth will fall sharply â€” possibly further pinching world and domestic growth.
Baseline projectionsAccording to the USDA Economic Research Service Agricultural Baseline Projections: U.S. Livestock, 2008-2017 report, production of all meats slows or declines in the first half of the said projection period, reflecting higher feed costs as more corn is used in ethanol production.
Higher grain prices â€” as well as effects of drought in recent years â€” hold down cattle inventories, pushing U.S. beef production down through 2010. Production is said to then rise as returns improve and herds are rebuilt.
Pork production is projected to decline in 2009 to 2011 in response to higher feed prices, then grow for the remainder of the projections as higher hog prices improve returns.
The report forecasts poultry production to slow down in 2009 to 2013 while adjusting to higher feed costs, but says it begins to rise towards the end of the projection period. During this time, rising exports account for a larger share of total production. Livestock sector production adjustments to higher feed costs, as well as gains in meat and poultry exports, are said to result in higher consumer prices and lower per-capita consumption.
Per-capita beef consumption is reported to decline through the projection period, reflecting production adjustments in the industry to higher feed costs. U.S. beef exports are forecasted to rise through the projection period, further limiting domestic beef consumption.
Strong demand for consistent, high-quality beef will continue in the domestic hotel and restaurant market, and increasingly in the retail market, says the report. Demand for U.S. beef in export markets also will be primarily for high-quality beef.
Higher feed costs lead to reductions in pork production, the report says, which combine with rising pork exports to push per-capita pork consumption down through 2012. A gradual rebound in pork spending is expected over the remainder of the projection period as production gains strengthen.
Due partly to higher feed conversion rates, poultry prices will remain lower than red meat prices. However, as returns are squeezed, it is predicted that slower production growth and higher exports will result in per-capita consumption declines in 2010 to 2012. Following these adjustments, production strengthens and consumption is projected to slowly grow toward the end of the projection period.
Although the domestic market remains the dominant source of overall meat demand, exports account for a growing share of U.S. meat use. Despite higher prices, U.S. meat exports are reported to rise as global economic growth and a continued weak U.S. dollar support increases in demand.
U.S. imports of processing beef from Australia and New Zealand are said to increase. With more demand in East Asian markets being met by the United States, it is expected that exports from Australia and New Zealand will be reduced in that region, resulting in more of their product being shipped to the United States.
Despite higher feed costs, increased efficiency in U.S. pork production will enhance the competitiveness of U.S. pork products, the report says. Nonetheless, longer-term gains in U.S. pork exports will be determined by costs of production and environmental regulations relative to competitors.
The value of the U.S. dollar â€” relative to currencies of other pork exporting countries â€” is expected to enhance U.S. pork export volumes, particularly in the early years of the projection period.
U.S. broiler exports will rise through the projection period, the report says, although at a slower pace than in earlier years. It is projected that the demand for poultry will remain strong due to its lower cost relative to beef and pork. U.S. producers will continue to face strong competition from other major exporters, particularly Brazil.
Projections also assume that tax credits available to blenders of biofuels (ethanol and biodiesel) and the 54-cent-per-gallon tariff on imported ethanol used as fuel remain in effect. Combined with the Energy Policy Act of 2005, state programs, high oil prices and other factors, returns for ethanol production provide economic incentives for a continued expansion in the production capacity of the ethanol industry over the next several years. As a result, more than 12 billion gallons of ethanol are assumed to be produced by 2010.
Corn starch is expected to remain the primary feedstock for ethanol projection. Cellulosic-based production of renewable fuels is assumed to meet the minimum specified in the Energy Policy Act of 2005 of 250 million gallons in 2013 and subsequent years. Biodiesel production is assumed to increase to near 600 million gallons by 2013.
Strong expansion of corn-based ethanol production in the United States affects virtually every aspect of the field crops sector, ranging from domestic demand and exports to prices and the allocation of acreage among crops. A higher portion of overall plantings is allocated to corn. Higher feed costs also affect the livestock sector, mitigated somewhat by the increased availability of distillers grains.
Ethanol production in the United States is projected to remain strong through 2009 to 2010, with slower growth in subsequent years.
Source: The USDA Economic Research Service Agricultural Baseline Projections: U.S. Livestock, 2008-2017; and Agricultural Baseline Projections: Summary of Projections, 2008-2017. For more information, visit www.ers.usda.gov.
Call for change â€” a note from the American Meat InstituteAccording to Patrick Boyle, president and chief executive officer of the American Meat Institute (AMI), the pace at which the world is changing is astonishing.
“This new reality needs to be taken seriously,” he says. “New realities must be confronted; we must change the nation’s ethanol policies, food-price increases must change, tax tariffs can be undone and we must fight for reform.”
AMI promises to go face-to-face with Congress in 2009 to engage lawmakers on workforce issues.
“We must screen our workers and fight to verify eligibility,” says Boyle. “We need immigration reform, and the means to secure our borders for the future. We need to expand our political grassroots system.
As our plants are facing new realities, we will initiate and highlight best practices for employment and workforce issues.”
AMI will also highlight sustainability in 2009.
“We need to embrace new sustainability roles,” says Boyle. “In fact, we will call our first-ever sustainability conference, and sustainability toolkit will be released. We must get ahead of the curve.”
It is AMI’s opinion, that despite economic woes, the industry will see a turnaround.
“I think as an industry we are extremely competitive in the world marketplace and we will sustain, we will overcome,” says Boyle. “We will continue to be very competitive in the world market. Exports are key, and it is extremely important from a congressional standpoint to keep markets open, to reopen some markets, and open, wider, others.”
The inside viewThe National Provisioner queries an industry insider about the nation’s economy and how the new administration will affect meat manufacturers in 2009.
The National Provisioner (NP): What does the new administration mean for the meat and poultry industry in the short term and the long term?
Industry insider: With respect to both the short term and long term for food production and agriculture, the new administration will be listening more to groups that are considered activists regarding issues, such as returning agriculture to small farms, crop- and animal-raising practices that are considered to be more sustainable and environmentally friendly, and using agriculture to be more of a source of energy even if the energy source is not cost-effective. These activist groups look at agricultural policy and programs somewhat differently than the traditional mainstream groups that have been more aligned with commodity programs. The new administration will work with agricultural groups that say farms have gotten too big and believe the food supply should be produced here at home rather relying on imports.
The new farm bill does not have the words “farm,” “rural development,” or “agriculture,” but does have words like “food,” “conservation” and “energy.” This is a reflection of Congress stating that while agriculture is important, a lot of other things are happening such as food assistance. The vast majority of the USDA budget is going to the consumer, not the farmer or processor. On one hand, we have the American taxpayer helping consumers pay for food because it is high, but in the same bill we have measures that keep prices high. For example, corn for ethanol has pushed the food prices higher.
NP: In the midst of this country’s massive financial crisis, are our processors truly in trouble?
Insider: The chicken industry is in one of its longest and deepest economic downturns in history, but there is good evidence that suggests the market is turning and will recover in 2009 both on the cost side and on the demand side of the picture. Exports will be good in 2009 but not as good as in as 2008. There are reasons to believe it will be a good year for exports but not a great year. Domestically, chicken will continue to offer value â€” demand will be better but not great. We will have more support domestically than through exports.
NP: Is 2009 going to be a spiral downward or are we going to bounce back as an industry?
Insider: We are going to bounce back. We have hit bottom and will glide upward. We will not have a pronounced “bounce” upward. We cannot afford to drain more financial resources from the industry.
NP: President-elect Barack Obama has promised a lot of green initiatives and alternative energy sources. What do you think this means for our industry?
Insider: Short term, this emphasis does not mean too much; longer term, we will see more changes than what we are already seeing in terms of production of biofuels and ethanol. There is an undercurrent of whether or not there needs to be more ethanol in our gas supply. There is talk of raising the ethanol mandate. The reason to do that is to increase the demand for ethanol, which would help alleviate the overabundance of ethanol. However, the environmentalists and hunger groups are more and more questioning the wisdom of such increases.
There will not be a lot of immediate green initiatives on the energy side. Nonetheless, poultry processors are using more green initiatives and environmentally friendly methods that are more compatible with current green objectives in the food industry. Companies want to resonate with consumers, so they may take the initiative to comply rather than wait for different production methods to be mandated by government. The new administration will become more proactive and with green initiatives and may offer a “carrot and stick” to those wanting to become more “green.” However, much of those efforts will have to wait for a better U.S. economy.
NP: Let’s talk about the international market for a moment. What does it look like now, and how will affect our meat and poultry industry in the new year?
Insider: There will be good competition in the international market. For U.S. poultry exporters, the toughest competition will be coming from Brazil. The questions will be more on the import side with the world economy not as robust as is should be. Trading relationships will be more difficult. The coming year will be a decent year for exports but not as good as it was in 2008. But this really depends on how quickly the world economy recovers, how the current financial crisis gets addressed, and how the U.S. dollar fares relative to certain other currencies during these times.
NP: How does our dollar move in relation to world currency and how is this going to affect the price of chicken on the international market? Will it hurt our chicken and/or beef processors?
Insider: The stronger the U.S. dollar, the more difficult it will be for U.S. poultry exports. Higher-priced U.S. beef faces an even tougher challenge. Stronger U.S. dollars will make all meat and poultry exports more difficult. Credit tightness impacts more costly products, such as beef more so than value products, such as poultry.
NP: Can you give some advice to individual processors on how to weather the financial storm? What steps can individual processors take?
Insider: Processors have taken a lot of their own advice over the past year or more. That is, tighten the belt, conserve cash and be poised to advance when the better market returns. For example, companies have tightened their belts by containing costs and trying to do more with less. Companies must continue to offer value and affordable convenience.
There may be opportunities for larger packages offered at a favorable price. Consumers may be willing to trade convenience for a lesser price or be willing to eat leg meat or dark meat because the price is significantly less than boneless, skinless breasts. “Feature” prices will be looked at more readily by the more frugal food shopper.
My advice? I would tell processors not to step up production at the first sign of profit or economic upturn. Companies need to rebuild their rainy-day reserves and fund projects they have put off. They need to increase their financial cushion.
As we look forward into 2009, there are good reasons to be optimistic that the industry is going to return to profitability. As the U.S. economy recovers and consumers regain more confidence in their economic well-being, chicken will benefit. Globally, the challenges and difficulties will likely take longer and be slower in being resolved. Nonetheless, there is good evidence that the U.S. chicken industry will return to more normal profitability and maintain the black ink for some time in the new year. It is a time to be hopeful, if not, in fact, reasonably optimistic.