Beef, Pork & Poultry Trends
Date October 2017
Approximate net recovery on cost
By the numbers
- Beef production in 2018 is forecasted to be incrementally higher based on expected feeder cattle markets. In the next few quarters, feeder steer prices are forecasted to increase on the strength of demand by cattle feeders and backgrounders
- Global broiler production is forecasted to grow 1 percent in 2018, primarily from gains in the United States, Brazil, India, and the European Union, per the USDA, and the Foreign Agriculture Service (FAS) noted that U.S. pork production is expected to grow 4 percent in 2018
- A new trade deal with the Chinese beef market, worth an estimated $2.5 billion, is being reopened to U.S. imports
Beef exports increasing: The volume of U.S. beef exports in August 2017 was up 14.7 percent year over year. Cumulative beef exports for January through August 2017 have maintained the pace of 14.5 percent above last year levels.
U.S. beef exports to Japan during August 2017 were 39 percent higher than the same period last year despite the implementation of the frozen beef safeguards. Japanese importers are more than likely substituting frozen beef with chilled beef during the implementation of the safeguards.
The forecast for beef exports for 2017 has increased by 50 million pounds on stronger-than-anticipated demand from major export destinations. Beef exports in 2018 are also adjusted higher over fourth quarter 2017 rates to 2.91 billion pounds based on the continued competitiveness of U.S. beef.
Change in access to medicated feed: Beginning in 2017, the Veterinary Feed Directive (“VFD”) began implementation of new regulations around the sale of medicated feed. The directive changes pork and poultry producers’ ability to purchase and use certain types medicated feed. Cattle feeders, although less affected, are no longer able to purchase medicated feed over the counter, which could leave livestock more susceptible to illness if product is not readily available.
All products that include the types of antibiotics affected by the ruling must include an FDA-approved label. As a result, manufacturers incurred additional costs related to the regulatory process of changing labels and developing new packaging. There are indications distributors of antimicrobial products have decreased inventory in anticipation of decreased demand. This has in turn resulted in a significant reduction of in-feed antimicrobials in the supply chain. As only certain types of antibiotics fall under the VFD ruling, not all distributors have paid a price. Over 70 percent of the medically important antimicrobials fall under the tetracycline category. Some large poultry producers such as, Tyson Foods, announced their branded chicken will be raised without antibiotics. Tyson Foods, in particular, eliminated the use of all antibiotics from its chicken carrying the Tyson brand sold at retail in June 2017.
Restaurant chains gradually embracing antibiotic-free meats: Many of the largest U.S. quick-service restaurant chains are taking steps to source more antibiotic-free meat, a trend that is putting additional pressure on suppliers to comply with the new policies. Fourteen of the top twenty-five chain restaurants in the U.S. (representing two-thirds of total fast-food industry revenue nationwide) have announced or initiated plans to serve only poultry products made from chickens that have not been treated with antibiotics that are used in human medicine, according to a new report published by the Natural Resources Defense Council (“NRDC”) and five other health and environmental advocacy groups. However, those chains have made no new commitments to curb their use of antibiotics in beef or pork items in the last year, citing logistical challenges and significantly higher costs. Animal producers should prepare to meet rising demand from the food service sector for antibiotic-free poultry in the short term and beef and pork in the longer term. Companies that make the switch may need to take additional precautions to prevent disease outbreaks.
Compared to chickens, cows and pigs take longer to raise for slaughter, making it more likely that the animals will require antibiotic treatment for diseases or infections at some point in their lives. McDonald’s and other major national chains source beef from hundreds of suppliers, which complicates the process of introducing and enforcing new antibiotics policies. Panera Bread and Chipotle are the only chains in the top 25 that currently limit antibiotics in beef and pork as well as chicken. Subway recently switched to antibiotic-free chicken and plans to do the same for turkey by 2019 and beef and pork by 2025. KFC announced in early 2017 that it will only serve chicken raised without medically important antibiotics by the end of 2018. As the trend toward more antibiotic-free meats continues, gross recovery rates for this product should hold or increase in value. However, it is also important to note that costs in this sector would be expected to rise as mortality rates will likely increase; it remains to be seen how successful producers are in passing these higher costs through to their customers.
China open to U.S. beef imports: In May 2017, China and the U.S. signed a deal easing agricultural and other industry restrictions. As part of the deal, the U.S. will accept imports of cooked chicken from China. However, the Chinese beef market, estimated to be worth at least $2.5 billion, is being further opened to U.S. beef imports. China stopped U.S. beef imports in 2003 after a case of mad-cow disease was discovered in the U.S. The ban was later lifted, but significant restrictions remained. Australia has helped meet China’s demand for beef, but U.S. beef is less expensive due to lower feed prices.
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 ten days of packaging, maximizing salability. The short shelf life of fresh meat necessitates rapid turnover in finished inventory levels. It’s 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. Consider whether inventory held at these locations should be excluded from the borrowing base to minimize risk.
Recalls a real 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 five months of 2017, the Food Safety Inspection Service (“FSIS”) published seven separate recalls involving beef, pork and poultry products. The risks of foodborne 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. Other 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 that 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.
New technology produces lab-grown chicken strips: Representing a potential long-term competitive threat for animal producers, companies in the U.S. and abroad have been working to develop synthetic or “clean” meat in hopes of reducing the financial and environmental costs of large-scale animal production. Thus far, production costs far outweigh practical applications or commercial usage (one pound of synthetic chicken meat costs approximately $9,000 to make), but according to The Wall Street Journal, major food manufacturers such as Tyson and Hormel have expressed interest.