Beef, Pork & Poultry Trends
Date November 2018
Approximate net recovery on cost
By the numbers
- China raised its 12% import tariff on U.S. beef to 37% in July 2018; adding to the pressure, Canada also implemented a 10% tariff on some U.S. beef products
- China is targeting the U.S. pork industry especially hard, introducing a 25% tariff in April 2018 and an additional 25% in July
- In anticipation of impending tariffs, U.S. beef exports were at a record pace as of mid-year; reaching 279 million pounds in July 2018, an almost 17% increase over 2017
- Broiler production is expected to remain steady in 2019
- Lower hog prices are anticipated through the first half of 2019
Tariffs hit the industry: Tariffs on U.S. products have been rolling out from multiple countries over the course of 2018. Across the globe, China raised its 12 percent import tariff on U.S. beef to 37 percent on July 6, 2018. The increase hit just as the U.S. was beginning to make inroads into China’s grain-finished beef market after a 13-year ban due to concerns over mad cow disease. Adding to the pressure, Canada implemented a 10 percent tariff on some U.S. beef products in July, and Mexico imposed a 10 percent tariff in June on chilled and frozen pork muscle, which doubled to 20 percent in July. Both were retaliatory measures in the wake of the Trump administration’s duties on imported aluminum and steel. Hardest hit is the pork market into China; beginning in July, China added an additional 25 percent tariff on imported U.S. pork. When added with the previous import taxes totals a tax exceeding 70 percent, which industry analysts have said essentially shuts the door on U.S. pork imports into China.
In response, the U.S. Department of Agriculture recently announced a $12 billion support program to help farmers that are bearing the brunt of the current tariffs. Based on information from the U.S. Meat Export federation (USMEF), the losses for U.S. meat producers alone could be significant. Per the USMEF, industry losses for the U.S. pork industry from China alone could total over $1.1 billion in losses for the year. Tariffs imposed on pork from Mexico could mean an additional $300 million in losses for the balance of 2018. For beef, Chinese export losses will likely exceed $30 million for 2018. The USMEF also noted that once foreign markets are lost to competitors, it is difficult to regain them. With fewer international buyers, the U.S. meat industry is seeing an oversupply of protein and decreasing prices as a result. As one example, Tyson Foods recently cut its profit forecast citing lower U.S. meat prices due to duties on pork and beef exports.
Beef exports up at mid-year: In the run-up to the implementation of the new tariffs, through July 2018, U.S. total beef exports had reached 279 million pounds, representing an increase of almost 17 percent over the same period last year. Major Asian markets such as Japan, South Korea, Taiwan, Hong Kong, and the Philippines drove the record pace. U.S. beef exports to North American markets also exhibited positive growth, with a year-over-year share of 24 percent of the market, representing a 6-percent growth rate through July. Mexico led North America with 10-percent year-over-year growth, while exports to Canada improved at a slower pace of just 0.7 percent above last year. Based on the strong volume of exports through July and in consideration of USDA Foreign Agricultural Service Export Sales reports through August, the 2018 beef export forecast was raised by 40 million pounds to over 3.0 billion pounds. Given the momentum for 2018, the beef export forecast for 2019 was also raised 40 million pounds to over 3.2 billion pounds; however, it remains to be seen what effect tariffs may have on this forecast as it relates to future trade volume with China, Mexico, and Canada.
Strong pork exports despite tariffs: Year-to-date through July 2018, the U.S. pork industry produced 3.8 percent more pork over the same period last year. The increase in pork production was consumed both domestically and in foreign markets. In the first seven months of 2018 the per capita consumption was approximately 37 pounds as compared to 35.9 pounds in 2017. On the export side, 3.5 billion pounds of U.S. pork was exported through July, representing an increase of 6.5 percent over the same period last year. This volume constituted 23.1 percent of year-to-date commercial pork production, compared with 22.5 percent in 2017. Pork exports in the month of July 2018 totaled 425 million pounds, representing an increase of almost 9 percent over last year. Total exports were stronger despite lower shipment volumes to Mexico and China, both of which have imposed retaliatory tariffs on U.S. pork products. July export volumes were instead buoyed by strong shipments to South Korea, Japan, the Philippines, Australia, and Colombia. If the tariff situation remains unchanged or worsens in 2019, potential lower export volumes would be expected in 2019 compared to 2018, which would have a negative impact on the U.S. market.
Broiler production expectations steady: Broiler production for July 2018 totaled 3.6 billion pounds, 2.4 percent higher than a year earlier after adjusting for one additional slaughter day this year. This growth was the result both of more birds being slaughtered as well as an increase of 1.0 percent in average live weights. As of August 1, 2018, a reduction of 1.0 percent of the breeder inventory from July reflected a seasonal decline typically associated with reduced temperatures and expectations for seasonally weaker broiler meat demand later in the year. However, the rate of decline has occurred faster than normal this year, most likely related to dynamics occurring within the breeder flock. In late September North Carolina’s Department of Agriculture issued a livestock casualty report stating that 3.4 million chickens had drowned in Hurricane Florence, which began on August 31, and continued through mid-September. Due to the quick turnaround timing of flocks for slaughter - birds raised for meat are killed when they are about six weeks old - most improvements that would reduce the risk of events like this would not be considered economically worthwhile to farmers. With hundreds of thousands of chickens in a typical operation (meat operations are smaller than egg-production facilities, but still in the hundred thousands), evacuation of birds from facilities in a storm is not feasible. Because of the volume at which poultry factory farming occurs, losses of this scale are managed as part of normal-course breeding, and this is not expected to have a material, long-term impact on the overall market. Broiler inventory levels have been at elevated levels this year to compensate for lower breeder productivity, including fewer eggs per layer and fewer of those hatching than in previous years. First-of-the-month inventory for 2018 has averaged 4 percent higher year-over-year, which is double the average growth rate seen in 2013 through 2017. Additionally, the USDA is forecasting a 1.9 percent increase in broiler production for 2019.
Broiler prices expected to decrease: In August of 2018 broiler prices had a five week-over-week period of over a 4 percent decrease in price. This downward pressure on broiler prices was believed to be due to a combination of large broiler meat supplies and competition from other meats. The USDA forecasts prices to continue in a downward trend through the remainder of this year and into 2019. For 2019, broiler prices are forecasted to average 92 to 100 cents per pound, a decrease of 4 cents at the midpoint from the September 2018 forecast.
Perishability: Due to the perishability of beef, the age and integrity of the goods is critical to recovery value. Most customers seek delivery of fresh products to stores or distribution centers within 10 days of packaging, maximizing salability. The short shelf life of fresh meat necessitates rapid turnover in finished inventory levels. It is common for meat to be sold before an animal is even slaughtered. Products that are not sold fresh are also typically frozen or rendered quickly. This short fulfillment cycle has a positive impact on recovery values in an orderly liquidation sale. Proper storage is key to maintaining freshness and value, which is why many meat processors contract with third-party cold storage facilities to manage inventory. However, lenders should beware of liens these third parties may have on inventory stored at their facilities, and should consider whether inventory held at these locations should be excluded from the Borrowing Base to minimize risk.
Recalls a risk: While appraisals typically do not consider the sale of inventory under extraneous conditions, such as recalls, lenders need to remain aware of the catastrophic effect such an event can have on value. During the first nine months of 2018, the Food Safety Inspection Service published multiple separate recalls involving beef, pork, and poultry products. The risks of food-borne illnesses such as Salmonella, E-coli, and Listeria remain very real and can have a devastating effect on health, reputation, and value. In rarer instances, just the perceived risk of contamination can be enough to dampen demand for products.
Grading is important: The USDA performs a voluntary grading program on many meat processes. Although it is voluntary, most retailers and restaurateurs require USDA products to align with marketing. Therefore, it has been in the best interest of packing companies to request and pay for USDA grading services to gain access to all markets and receive premiums for their graded product. There are eight quality grades for beef based on the amount of marbling, color, and maturity of the product. Prime, Choice, Select, Standard, and Commercial are commonly sold at retail. It is common for packers to grade all beef qualifying for Prime, Choice, and Select. Product that does not meet these requirements is not graded and is sold on a “no roll” basis. Pork is not graded by the USDA. Poultry is rated with letter grades. Grade A is the highest quality and is commonly found at retail. Grades B and C poultry typically awaits further processing but may still end up on retail shelves in products such as ground turkey but are not typically grade identified as such. It is generally the case that the higher the grade of meat, the higher the value it will achieve on the open market. Typically growers which sell live animals to protein processors are paid based on the yield and grade of the animals. Without a USDA grade it may be difficult to sell beef under an orderly liquidation scenario.