What's next for the protein industry? Another year of uncertainty
The fiscal cliff crisis may have been averted (for now), yet there are plenty of reasons for processors to be wary in the New Year.
It has been many years since the meat industry could look at the start of a new year with something more than trepidation. Will the economy take a downturn? Will protein prices rise out of the reach of the average consumer? Will some unforeseen controversy sucker-punch the industry when it can least afford it?
Unfortunately, 2013 isn’t much different: It brings all those worries. As of this writing, the national fiscal-cliff crisis has been (temporarily) resolved, making the threat of another recession less imminent. However, the nation’s economy is still on shaky ground. It seems cautious optimism may be the only kind of optimism available for some time.
“Our financial advisors are saying that 2013 will, at best, be a repeat of 2012,” says John Starkey, president of the U.S. Poultry & Egg Association. “Unfortunately, that type of overall forecast means that we will likely continue to see softer foodservice demand and continued ‘value’ shopping by consumers conserving dollars.”
Kevin Good, senior market analyst for CattleFax, says that higher tax rates for some, combined with the end of the payroll tax holiday for others, could stretch finances.
“We would be concerned that the average consumer will have fewer dollars to spend in 2013 than in 2012, or at least the rate of growth will be very slow,” he adds. That combination of slow or stagnant growth and higher projected prices for beef, pork and chicken could decrease domestic demand.
“You’re already seeing a little bit of that in the Restaurant Performance Index (RPI),” Good explains. “It was negative [in October] for the first time in 14 months.”
The RPI, based on the responses to the National Restaurant Association’s Restaurant Industry Tracking Survey, gives a monthly look at how the foodservice industry views the current and future economy. A score of over 100 means that key industry indicators are in a period of expansion, while a score below 100 means they are in contraction. After a 14-month stay above 100, the RPI dipped to 99.5 in October. It rose to 99.9 in November but remained in a state of contraction.
’As a result, the NRA’s six-month outlook for sales, staffing levels and overall business conditions became decidedly less bullish, says Bruce Grindy, NRA’s chief economist.
“The RPI declines in recent months were due to an erosion of confidence among restaurant operators, due in large part to the fiscal and economic uncertainties,” he says. “This can all rapidly turn back positive, though, and as long as sales continue to grow as expected in 2013, restaurant operators will have a stable foundation upon which to build.”
Unfortunately, even with the latest data and top-notch industry expertise, there are some things that cannot be predicted. Take some of the largest events of 2012 in the meat industry, for example. Could anyone have foreseen that a blogger’s petition over “pink slime” would eventually cause Beef Products Inc. to close three of its four processing plants and have a ripple effect throughout the entire ground-beef market? Even though BPI’s lean finely textured beef has had its critics in the past, there was no warning that the combination of food activists and a news network eager for ratings could damage a strong, healthy company to that extent.
Nor could anyone predict that one of the largest food recalls to affect Canada could lead to one of the top American processors gaining a foothold in a brand-new market. That was what happened when XL Foods recalled millions of pounds of beef products that were linked to an outbreak of E. coli-induced illnesses. More than a dozen people were hospitalized in the outbreak, which put the Brooks, Alberta, facility in limbo for more than a month. As a result of the recall, XL Foods signed an agreement with JBS USA to have JBS manage the facility. The agreement also has an option for JBS USA to acquire XL Foods’ American and Canadian operations for $50 million in cash and $50 million in shares. That would give parent company JBS SA, already the world’s largest animal protein processor, an entry into Canada.
One potential controversy for 2013 could be over ractopamine. Although the feed additive used to promote leanness in pigs has been approved for use in the United States since 1999, ractopamine has been banned in the European Union, China and Taiwan, among other countries. It has come under fire in the United States, as an article in the January issue of Consumer Reports reported that about one-fifth of 240 pork products it tested contained low levels of the drug.
“Our food-safety experts say that no drugs should be used routinely in healthy animals to promote growth,” the magazine wrote.
Additionally, several food-safety and animal-welfare groups have petitioned the Food and Drug Administration to limit the use of ractopamine. The Center for Food Safety and the Animal Legal Defense Fund also asked FDA to study the long-term effect of human consumption and the impacts on animals associated with ractopamine, reports Reuters. The groups said that the drug is responsible for more animal illnesses and deaths than any other on the market.
Should the bad publicity for ractopamine increase, it is possible that pork sales could take a hit the same way that the “pink slime” controversy hurt ground beef. In a similar fashion to what happened with LFTB, this could be an instance where scientific facts and data lose out to public opinion and consumer fears.
Already, there is a potential negative financial effect, as Russia has barred all imports of beef and pork that has not been tested and certified free of ractopamine — a move jeopardizing the more than $500 million a year in exports of U.S. beef and pork to that country.
The U.S. Meat Export Federation has supported calls from U.S. Trade Representative Ron Kirk and USDA Secretary Tom Vilsack to suspend the new measures and restore market access for U.S. beef and pork products.
“We are confident that a science-based solution to the disagreement over testing and certification can be found quickly so that exports of U.S. beef and pork to Russia can resume in the near future,” the group said in a statement.
In late November, Randy Blach, vice president for CattleFax, told a crowd of cattle producers at the Kansas Livestock Association convention that meat prices will rise to record highs because livestock production has fallen dramatically after ranchers culled animals during the 2012 drought. Blach estimated that the nation’s herd will be down by 1 million cattle by the time the government releases its semi-annual cattle inventory in January, reports Bloomberg Businessweek.
He also predicted at least one major meatpacking plant and several feedlots will likely shut down as slaughter numbers continue to decline.
“We have a lot of excess feeding capacity; we have a lot of excess packing capacity. We will likely see some closures start within the next 12 months,” Blach said. “And that is never good because once you start seeing them close — and it is always particularly from a packing standpoint — it is tough to get them back open.”
Good adds that the amount of animals has declined for 15 of the last 17 years, and that CattleFax expects that beef packers will harvest about one million less cattle in 2013.
“There’s a squeeze, and I think everybody recognizes that,” he says. “You’ve got overcapacity in both the feedlots and the packing side, and with narrow margins, you’d have to assume that something has to give.”
Along with a decrease in domestic cattle slaughter, Good also predicts that trim prices will be historically high. That combination should draw more raw product from overseas, leading to an increase in beef imports.
The USDA Economic Research Service (ERS) reports that on the demand side, retail beef prices appear to have reached at least a temporary upper limit, seemingly unable to break much above $5 per pound (Choice beef). Relief for either cattle feeders or beef packers looks unlikely over the coming year, except at the expense of one or the other, until higher cattle prices are matched by higher retail beef prices, feeder cattle prices decline, and/or lower corn prices result in feed costs low enough to allow cattle feeding profits.
The ERS does not anticipate the price in corn to decline until the corn supply increases significantly, and it does not anticipate an increase until the fall 2013 harvest.
“How long the apparent $5-per-pound ceiling on Choice beef will hold is uncertain, but perhaps beginning with October’s Choice beef price of $5.03, the ceiling will likely be solidly exceeded some time during the last quarter of 2012 or first half of 2013, which should provide some relief for packers,” ERS reported.
On the poultry side, Starkey recommends that poultry processors have good cost control and a robust marketing program in order to maintain profitability in 2013.
“With input costs where they are, grain sourcing is obviously important,” he adds. “Continued or even greater discipline in production will be the key to the industry’s profitability. Further, given the short 2012 crop, being prepared for volatility that could occur — a wet spring, another drought — will be critical.”
Broiler meat production has fluctuated over the past few months. For instance, production was down 8 percent in September 2012 compared to the previous year, only to rise 8 percent in October. Broiler meat production for fourth-quarter 2012 is forecast at 9.05 billion pounds, an increase of 50 million pounds from the previous estimate and 2.7 percent higher than the previous year, reports the ERS. However, the number of chicks being placed for growout continues slightly lower than in the previous year, and the ERS does expect that broiler integrators will scale back production in 2013, thanks in part to the high corn prices expected for most of 2013.
Starkey notes that with increased competition from the international community, continuing to become more efficient is essential for any processor. Fortunately, the vertically integrated model that dominates the poultry industry allows for companies to look at the overall supply chain and decide the most effective means to tackle those challenges.
“For example, an integrator can evaluate how to enhance food safety more effectively: [is] investing at the farm level, or is a new intervention at the plant a better way to go?” he adds. “[If] a company wants to improve its environmental sustainability — again, it can look across its supply chain from breeding to marketing and decide what yields the greatest benefit.”
USDA lowered its pork production forecast for the fourth quarter of 2012 and for all quarters of 2013, as hog producers are likely to market animals at lower weights than initially expected. Feeding margins are expected to tighten compared with last year, pressuring producer returns and encouraging producers to market hogs as rapidly as feasible. For 2013, the USDA lowered commercial pork production estimates by 35 million pounds to 22.9 billion pounds, a decrease of 0.3 percent.
It is expected that production increases and a slowing export market will leave more pork available for domestic consumption, reports the USDA, which will likely push pork prices downward in 2013.
A bright spot for the meat-processing industry could come from the foodservice industry. Despite the negative news from the last couple of monthly RPI reports, the NRA’s 2013 Restaurant Industry Forecast reported that total restaurant industry sales are expected to exceed $660 billion in 2013 — a 3.8 percent increase over 2012 — marking the fourth consecutive year of real sales growth for the industry.
“Despite a continued challenging operating environment, the restaurant industry remains a strong driver in the nation’s economy,” says Dawn Sweeney, president and CEO of the National Restaurant Association. “Ours is a resilient and flexible industry that continually finds new ways to keep growing, relying on the creativity and innovation exhibited by the entrepreneurial spirit. In 2013, restaurant operators will continue to explore ways of navigating the rocky economic landscape to find the road to success.”
Higher food costs will be one of the biggest challenges that face the restaurant industry in 2013. The NRA notes that restaurant operators will continue to use creativity and innovation to drive out cost inefficiencies and increase productivity to not pass along the increases to consumers at the same rate. Restaurants will also have to navigate the ramifications of the new health-care rules, as any significant increases in health-care costs will eat away as the industry’s already slim profit margins.
Fortunately, the NRA reports a pent-up demand for restaurants, with 2 out of 5 consumers surveyed stating that they are not dining out as much as they would like. If the economy continues to improve, even slowly, that demand should translate into increased sales.
Forecasting the export market
Compared to 2007, the last steady year for U.S. meat consumption, the USDA expects U.S. beef consumption in 2013 to be down 10.4 pounds, pork down 6 pounds and poultry down 8 pounds.
“Consumption does not equal demand, and the U.S. beef demand index has actually been positive this year, while pork has been lower than 2011,” says Erin Borror, USMEF economist. “Overall, the U.S. market remains relatively saturated, especially without significant growth in consumers’ disposable income (possibly meaning less eating out, less wasted food, more price-conscious protein choices, etc.)
“As has been the case over the past several years, exports will be the growth market for U.S. red meat, and at the very least will provide much-needed premiums to help producers maximize the value of every animal at a time when high input costs mean significant losses,” she adds.
Pork exports in 2012 exceeded the record pace of the previous year, with exports through October at 1.875 million metric tons, up 3 percent and valued at $5.24 billion, up 6 percent. Beef exports struggled to keep pace with its 2011 record numbers, on the other hand. Beef exports were up 2 percent in export value at $4.597 billion but down 11 percent in volume at 951,886 metric tons. Higher beef prices affected the amount of exports to Mexico, while an increase in domestic beef production in Korea hurt exports to that market.
USMEF’s Borror predicts that the outlook for 2013 is bullish for both pork and beef exports. For the pork industry, she notes that all eyes will be on the European Union.
“The implementation of the partial sow stall ban in January, combined with high feed prices and year of producer losses, could mean a significant number of producers will exit the industry,” she says.
It is difficult to predict how the EU will react to those factors, given the diversity of the member countries, the uncertainty about enforcement of the new regulations, and how many farms will expand/consolidate to offset those exiting the industry. However, EU prices hit near-record levels in the fall of 2012, which could be a sign of things to come.
“The EU is the largest pork exporter, along with the U.S., and thus any decrease in EU exports should present opportunities for the U.S.,” Borror points out. “Looked at another way, high EU prices will open opportunities for U.S. pork, which is currently undervalued in the world market.”
Although the ractopamine-related restrictions from Russia could limit what had been a strong growth market for both U.S. beef and pork products, there are other opportunities for American exporters. The U.S. continues to recover market share in Korea for beef exports, notes Borror. There are also potential opportunities for exports to the Ukraine, Sri Lanka, smaller southeast Asian markets and certain areas of western and northern Africa with rapidly expanding economies and growing incomes.
Of course, the biggest opportunity for any protein in the export market could come from Japan, whenever that country decides to loosen its age restrictions on U.S. beef exports and allow for beef from cattle aged 30 months or younger. Although it is too soon to say exactly when the U.S. market access to Japan will be expanded, USMEF president and CEO Philip Seng notes that the regulatory agencies are reaching the final stages of their review process.
“We expect to have expanded access for a significant portion of the 2013 calendar year,” Seng says. “If this happens, I feel we can conservatively estimate that U.S. beef exports to Japan will expand by 20 percent.”
Seng points out that the beef consumption level in Japan has never fully recovered to its pre-2003 level, which indicates that foreign competition has never been able to fill the void left by U.S. beef. Thus, the U.S. has an opportunity to not only recover its share of the beef market in Japan but also to expand the entire scope of the market.
The best part about the opportunity to expand the beef market in Japan is that it is being done so with enthusiasm on both sides. Previously, when the Korean market was re-opened to U.S. beef, there were significant protests over unfounded food-safety concerns, and many Korean retailers and foodservice operators were very hesitant to carry or use American beef. In Japan, however, the mood over U.S. beef is considerably more welcoming.
“Consumer confidence in U.S. beef is at a very high level in Japan,” Seng says, “and the proposal to expand market access for U.S. beef has very strong support among importers, distributors, retailers and restaurateurs. This is not happening under a cloud of controversy, but rather with a lot of momentum and support within the market — so it’s a very exciting development.”