Beef, Pork, & Poultry
Date September 2016
Approximate net recovery on cost
- Values for beef products declined in the second quarter due to an increase in some costs associated with bringing meat to market and lower prices driven, in part, by excess supply
- Fluctuations in pork and poultry values have been less significant
- Low feed prices continue to benefit producers, who have enjoyed favorable conditions since 2013, but looming changes in access to medicated feed pose a concern for some producers
Prices Falling but Reversal Expected in 2017: After years of increases, beef prices are on the decline in the U.S. The United States Department of Agriculture’s (“USDA”) Economic Research Service (“ERS”) reports the average retail price of ground beef was $3.69 in July, more than 12 percent lower than the same time last year. Prices began falling during the second half of 2015 and continued dropping into 2016. On the whole, the Consumer Price Index (“CPI”) for beef and veal is expected to fall 3 to 4 percent in 2016. Declining exports (caused in part by high prices and a strong U.S. dollar) have increased supply in the U.S., bringing prices down. But as prices have fallen, American beef is looking more attractive to overseas buyers. In turn, the ERS now expects exports to climb 8 percent in 2016, providing a needed outlet for mounting domestic supply. Beef production is projected to top 24.8 billion pounds, marking a 4.8 percent increase from the previous year; this is one reason a projected steep decline in imports this year should be unsurprising. Prices are expected to begin to recover in 2017, when the CPI for beef and veal is expected to increase 2 to 3 percent.
Prices for most cuts of pork have fallen as well, albeit less dramatically. In July, the retail price for pork chops was just 2 percent lower than the same period in 2015. The ERS expects pork prices in aggregate to decline between 0.5 and 1.5 percent this year but to rise up to one percent in 2017.
An increase in broiler production has restrained retail chicken price inflation so far during 2016. However, import bans or restrictions of U.S. chickens resulting from concerns about aviation bird flu by countries, including China, South Korea, and Mexico, have weakened exports. This, along with a strong U.S. dollar, has moderated prices. The retail price of boneless chicken breast was five percent lower in July than the same period last year. Overall, the ERS forecasts poultry prices to decline up to one percent in 2016 but rise between 1.5 and 2.5 percent in 2017.
Feed Prices Down: After plummeting in 2013, the price of corn remains low, and it may go lower. In August 2016, the USDA commented in its World Agricultural Supply and Demand Estimates report that the current corn crop will exceed expectations as a result of sharply increased yields. It now forecasts corn production at a record 15.2 billion bushels, up 613 million from the July projection. It also steeply reduced its season-average farm range price, from $3.10-$3.70 per bushel to $2.85-$3.35 per bushel. This is good news for the gross margins of meat processors that could see savings on live animals.
However, the change in access to medicated feed in 2017 could leave livestock more susceptible to illness. Beginning in 2017, the Veterinary Feed Directive (“VFD”) will be implemented. This directive will change pork and poultry producers’ ability to purchase and use certain types medicated feed. Cattle feeders, although less affected, will no longer be able to purchase medicated feed over the counter.
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’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 just the first six months of 2016, the Food Safety Inspection Service published 26 separate recalls involving beef, pork and poultry products including one in which more than 47 million pounds of product were recalled. 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 processors, although the system is primarily associated with the beef industry. 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, 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 await 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.