That said, not all thrived in 2011. For some companies, operating losses, layoffs, outrageous raw-material costs and, in some cases, business acquisition or even liquidation plagued the 2011 calendar year.

As a whole, however, the meat industry has dealt with numerous fluctuations. Whether it has been consumer demand, feed costs, retail costs or animal herd size, it is difficult to see when the industry will settle. Kenneth Perkins, analyst for Morningstar Inc., says that the operating environment in the first half of the year could remain difficult, as commodity costs remain elevated.

“Most meat processors have seen their profit margins come under pressure, as pricing has only partially offset higher input costs,” he says. “In addition, lack of product differentiation could make it difficult for meat processors to implement further price increases, and we expect industry supply and demand will ultimately determine the prices that meat processors can take.

“As a result, we maintain a conservative outlook and don't expect a full recovery in margins in the near future,” Perkins adds.

One of the rays of sunshine in a mostly cloudy year came via the export market. Both beef and pork broke dollar-value records, according to the U.S. Meat Export Federation. Through the first 10 months of 2011, pork exports were valued at $4.93 billion, and beef exports were valued at $4.49 billion.

“Establishing new annual value records just 10 months into the year is an extraordinary accomplishment, and one that the U.S. pork and beef industries should be very proud of,” said USMEF president and CEO Philip Seng. “Sustaining an aggressive export pace is critical for maintaining and creating American jobs and a positive balance of trade.”

Perkins believes strong international demand should continue.

“Most meat processors we talked to have expressed confidence that whatever final products are available on the market will be consumed; the important factor is determining where consumption will
take place,” he says.

By increasing meat exports, the domestic availability of meat further decreases, which would push the price up in U.S. markets. If U.S. consumers prove unwilling to accept higher prices, meat processors can continue to sell more products abroad, so long as the international supply/demand imbalance remains more attractive.

To help maintain profitability on the domestic front, processors have reduced supply-chain inefficiencies, increased prices and cut back production. Perkins says that reducing costs through the supply chain will continue for 2012, though that process is inherently limited. Other processors may cut back on production if they haven't already done so, which would allow them to charge higher prices. Some companies that deal with live animals may tweak their feed formulas to use more wheat and less corn.

Hoping for a poultry recovery

For the broiler industry, 2011 will be remembered as one of the worst financial years ever. Plants closed, slaughter shifts and hours dropped, and layoffs, bankruptcies, foreign takeovers and production adjustments all occurred.

Furthermore, poultry processors by and large held off in upgrading and modernizing their equipment, as they have historically done. There is, however, some optimism for the poultry industry in the New Year, and not just because there is nowhere else to go but up.

“After 2011, 2012 should be a much more favorable year economically, barring any unforeseen problems with feed costs or consumer demand,” says Thomas Super, vice president, communications for the National Chicken Council. “It should be a good but not excellent operating environment for the industry, due in some parts to production adjustments allowing higher feed costs to be passed on to the market.”

The USDA is projecting a 2.1 percent decrease in poultry production for this year, and analysts are projecting a single-digit increase in exports. Super notes that if feed costs can be contained and energy and labor costs remain the same, a growing economy in 2012 could help boost consumer demand in both the retail and foodservice sectors.

“If the economic climate improves [this] year, we’ll see companies step up and invest in better equipment and technology that they may have put on hold in 2011,” Super says. “We’ll see money being devoted to research and development for new products, and the industry will move back to more historic levels of allocation of new equipment, worker training, product development — those things that give you return in the future.”

Super adds that, although there was a flurry of mergers and acquisitions in 2011, this year should be a quieter year. He says there could be two acquisitions this year, but no new entrants in the market and a very slim chance of any more bankruptcies.

Rabobank, a leading financial services provider for the agriculture industry, notes that the poultry industry is facing permanent changes, rather than cyclical ones, and there will have to be significant changes in how the industry operates in the future. Those changes are detailed in a report titled, “This Is Not Your Grandfather's Chicken Industry,” from Rabobank’s Food & Agribusiness Research and Advisory department.

“Rabobank believes the industry will adjust eventually,” the report says, “but those who will survive and thrive in the future will be those who recognize that the operating environment has [changed] forever and alter the way they run their business.”

Those changes include:

—    Structurally higher and more volatile feed input costs

—    Maturation of the U.S. domestic market

—    Rapid globalization of the industry, requiring U.S. companies to develop new export products for new export markets

—    Increasing government regulation, which makes it difficult to achieve competitive cost management and efficiency

—    Excess supply in the industry, which has been made difficult to remedy given recent court rulings that inhibit companies’ ability to eliminate capacity or even reduce production.

The report points out that the demand growth will be oriented around smaller whole birds for exports to the Middle East, value-added export products and leg quarters. However, current industry production is largely designed for efficient production of breast meat for the domestic market.

“Our challenge in the future is to understand what domestic and foreign-market consumers desire and will pay for in terms of product preference and form, and then to develop and market products which fit these specifications,” it says. Rabobank also recommends that the industry begin to base production on projected demand, rather than running at full production and hoping to find a home for the products.

In the past six months alone, four chicken processors have either been forced to sell or filed for Chapter 11 bankruptcy protection. The report predicts that more consolidation is likely to occur.

“Larger publicly owned companies will have to demonstrate more discipline than is currently the case among many smaller privately owned companies,” it states. “This can occur if the market drives out players, as is happening today, or if companies take action on their own through mergers and acquisitions.”

The benefits of diversification

Companies that operate in multiple proteins were likely to have a successful year, even if one part of the business struggled. Tyson Foods, for instance, reported a fourth-quarter operating loss of $82 million in its poultry division, down from $141 million in the previous fourth quarter. However, the company's beef, pork and prepared foods segments were so strong that Tyson still saw an income of $172 million in the quarter. Overall, Tyson reached a record $32.266 billion in sales, despite $675 million in additional feed and ingredient costs in its chicken segment.

"This is a testament to our quality, service and innovation and our focus on business fundamentals and operational efficiencies across all segments of our business,” said Tyson CEO Donnie Smith.

Smithfield Foods has seen steady growth through its fresh pork segment and its packaged meats segment. Through the first six months of fiscal 2010, the fresh pork segment had an operating income of $159.4 million, while packaged meats had an income of $142.8 million. Through the first half of the company's current fiscal year, the roles have reversed. The packaged meats income stands at $176.3 million, while fresh pork has dipped to $131.6 million.

“Our Farmland, Smithfield, Armour and Curly’s brands all achieved double-digit retail sales and volume growth in the quarter,” noted C. Larry Pope, president and CEO.

Having a diversified business can be beneficial to more than the top multinational corporations. Cooper Farms, located in Oakwood, Ohio, is a family owned business that was founded in 1938. The company raises turkeys and hogs, and also produces about 60 million pounds of chicken, turkey and ham a year, along with 32 million cartons of table eggs.

In 2010, Cooper Farms had its best year ever, and the company beat its own expectations to perform at about 85 percent of that level in 2011. This year is expected to be another positive one as well.

“With the wide diversity and the efficiency levels at which we run, when you mix everything together, it’s recently given us a strong formula for a company,” says Gary Cooper, chief operating officer.

With all of its divisions running at full capacity, the company has been successful at pre-purchasing its feed and pre-selling its live hogs.

“This past year, with eight-dollar corn, it was a big negative factor for many companies who didn't try to compensate for that earlier, back in 2010,” Cooper says, noting that predictions for the 2012 corn crop have been positive so far.

“Even if six-dollar corn is still expensive, it’s still better than eight-dollar corn,” Cooper says.

 The cost of regulations

Along with the costs of live animals, feed, employees and production, processors have to bear the costs of federal and state regulations. There are several pending rule changes that may have a large economic impact on the industry.

The backlash against the FSIS’ plan to ban six additional strains of E. coli has been building ever since the proposal was announced. FSIS plans to implement the policy on March 5, 2012, despite requests from several industry associations to delay the implementation. Ann Wells, director of scientific and regulatory affairs for the North American Meat Processors Association, fears that FSIS has not taken into account the cost of testing for the “Big 6” non-O157 STECs in raw beef products.

“Our recommendation to FSIS is that they should complete a more formal cost analysis for the entire industry,” she says. “They did some cost estimates in the FR Notice for the overall costs to the industry, which have already been criticized as being very underestimated.”

A particular concern for NAMP was the FSIS statement that it did not think the policy would have a significant impact on a significant number of small and very small plants.

“They did not define what they considered a significant impact or what they considered a significant number of plants. Based on our experiences with FSIS regulations, we think the impacts will be greater than FSIS anticipates,” she says.

The additional costs that are likely to affect those small and very small plants would include the increased costs of raw materials, the resources needed to validate and verify current control programs for non-O157 STECs, costs associated with testing for STECs at those plants, and the resouces needed for HACCP reassessments.

Along with American industry groups, major trading partners Australia and New Zealand have come out against the proposal. The Australian government questioned the justification for the ban, as the Big 6 variants are not considered a major health concern in the country.

To date, FSIS has extended the comment period by an additional 30 days and announced that a new federal register notice will be released prior to the implementation date to address concerns, but to date it has not backed away from the March 5 implementation.

Super says that the poultry industry is closely following the implementation of the final GIPSA livestock marketing rule, which is set to go into effect on February 7, 2012. The original rule was harshly criticized by members of the meat-processing industry, who claimed it would have set the industry back 50 years. Among the provisions, farmers would have been able to sue companies under the Packers and Stockyards Act for manipulating prices, underpaying farmers or other violations. Farmers would only have had to prove the company’s action harmed them rather than harmed competition in the entire industry.

Although the final version has been considerably stripped down by Congress, to the disapproval of the USDA, it contains new guidelines for the chicken processor-grower relationship. For instance, processors must give farmers at least 90 days’ notice before suspending delivery of birds, and it may be illegal if companies require farmers to borrow money to upgrade chicken houses as “the result of coercion, retaliation or threats of coercion.”

Super says that the remaining provisions under the final GIPSA rule are estimated to cost the chicken industry as much as $55.5 million annually, in the form of legal costs, industry adjustment costs and administrative costs.

“This is especially burdensome on an industry that has struggled financially in the face of this year’s difficult economic climate and the record high costs of production,” he says.