Beef, Pork & Poultry Trends
COVID-19 INDUSTRY BRIEF
EFFECTS OF THE CORONAVIRUS ON THE Beef, Pork, and Poultry INDUSTRY Updated June 15, 2020
- COVID-19 Impacts: Protein producers are seeing relatively stable demand as the pandemic evolves with grocery store demand being positively impacted. However, food service shipments have been materially negatively impacted, and expectations are that the impact will extend through the medium and long term as the restaurant sector shrinks.
- Impacts on Food Service: The U.S. Census Bureau Advance Retail Sales report issued on May 15, 2020, showed a 23.6 percent drop in food service and beverage retail sales for the month of April 2020 compared to pre-pandemic levels. From mid-April to mid-June, restaurants in most states had reopened in some form. Even some of the hardest hit states, such as New York and New Jersey have begun to reopen this sector. Restaurant visits hit a low point as of the week of April 12, 2020, being off over 40% from pre-pandemic levels, according to research firm NPD Group. By the week of May 24, 2020, rates had recovered over 50 percent of that decline and were back to within 18.8 percent of normal levels according to available foot traffic metrics. Almost all restaurant openings in the United States have been allowed with varying levels of social distancing protocols in place, including masks, occupancy limits, and other requirements. It is estimated that there will be an occupancy reduction of 25 to 50 percent due to social distancing requirements for on-premise dining going forward Overall, consumers remain cautious in relation to eating out. By some estimates, 30 percent of restaurants in the United States are projected go out of business because of the pandemic.
- Labor and Production Impacts: Labor disruptions have been heavily affecting the sector due to COVID-19 outbreaks among food processing workers, as well as issues admitting guest workers into the United States. Multiple reports of COVID-19 infections in food processing plants that arose in March accelerated in April and continued into May. The latest reporting indicates that 73 plants in the United States and Canada have been closed, forced to slow production, or have reported COVID-19 infections onsite.
- Slaughterhouse Volumes and Prices: Beef, pork, and poultry prices rose sharply in April and May on production constraints due to COVID-19-related processing plant outages. While some of these price increases were volatile, pricing levels have retreated as production levels have reached more normal levels. For the week ending June 8, 2020, cattle cutout values for choice steers were 7.1 percent over the 2019 level, and pork carcass prices had declined by 12.9 percent despite being significantly higher in April and May. While slaughter levels for cattle dropped by over 35 percent in May, rates had recovered fully by the week of June 8, 2020, with slaughter levels up 1.7 percent over the same period in 2019. Hog slaughter levels were similarly impacted in April and May (down over 30 percent from pre-pandemic levels) but had recovered to within 0.7 percent of the 2019 level by the same date. While the export outlook for 2020 had been positive, first-quarter export levels were below expectations due to the impact of the coronavirus on Chinese markets; exports in the second quarter have been strong, but there is uncertainty in the marketplace on how much export demand there will be in China due to trade tensions.
- Other Impacts: The shortage in various meat and poultry products that was evident in grocery stores in April and May has provided an opening for the plant-based meat alternative segment to exploit. According to Dow Jones Factiva, “Beyond Meat Inc., Impossible Foods Inc. and Tofurky Co. say they are ramping up production, discounting their plant-based meat alternatives to appeal to more consumers, and expanding into more stores—sometimes at the request of grocery chains that had been running short of staple meat products.”
- Valuation Outlook: From a valuation perspective, on a mark-to-market basis, Gordon Brothers would not expect a material impact on values given the stable overall demand in the sector. Food service products, especially private-label products to that sector will likely be impaired.
Date October 2019
- American beef is currently subject to a 47 percent tariff in China following an additional ten percent tariff that went into effect on September 1, 2019.
- The U.S. and Japan signed a new trade agreement in September 2019 that will cut tariffs on some U.S. farm goods including beef and pork.
- The spread of African swine fever has caused production in Asian countries to drop and continues to threaten the global pork market.
- The poultry industry is expected to grow due to the current shortage of pork in the marketplace.
- Rising demand and an increase in population will boost the global market share for meat alternatives from 1 percent in 2019 to about 10 percent in 2029.
Approximate net recovery on cost
By the Numbers
U.S./Japan trade agreement: On September 25, 2019, the United States and Japan signed a limited agriculture trade agreement that will reduce tariffs on some U.S. farm goods including fresh and frozen beef and pork and Japanese machine tools. The deal also guarantees tariff-free digital commerce between the two countries. The new deal, expected to go into effect on January 1, 2020, will cut tariffs, and will also provide for the limited use of safeguards by Japan for surges in imports of beef, pork, and other items; these safeguards will be phased out over time. When the agreement is implemented by Japan, American farmers and ranchers will have the same advantage as Comprehensive and Progressive Agreement for Trans-Pacific Partnership countries selling into the Japanese market, according to the U.S. Trade Representative’s fact sheet. The United States is Japan’s largest beef supplier by volume, and reducing these tariffs will significantly help American farmers and ranchers. With U.S. pork heavily dependent on exports (more than 25 percent of total production goes to foreign markets), Dr. Dermot Hayes, an economist at Iowa State University, predicts pork exports to Japan will increase from $1.6 billion to more than $2.2 billion over the next 15 years. Japanese consumers purchased more than $2 billion of U.S. beef in 2018, which accounted for almost one-quarter of total U.S. beef exports. This effect could also carry over to South Korea, where tariffs will eventually drop to zero percent in 2026. With U.S. beef exports reaching record highs in 2018, a memorandum was signed between the European Union and the United States, potentially tripling the amount of U.S. beef allowed annually into the 28 E.U. countries, further helping the beef and pork industry.
Tariffs dampen beef exports: In 2018, China imported just $61 million of American beef despite a record-setting year for total U.S. beef exports to Asia. According to non-profit trade group the U.S. Meat Export Federation (USMEF), total beef exports increased 15 percent in 2018 to approximately $8.3 billion, representing an increase of over $1 billion dollars. More than half of the increase came from South Korea, as red-meat consumption continues to rise there. Despite the significant increase in total exports, the ongoing trade dispute and other economic decisions by the Trump administration have kept U.S. ranchers and meatpackers from expanding into China after a 14-year ban (due to mad cow disease) on U.S. beef ended in 2017. According to a March 2019 CNBC article, Joe Scheule, a USMEF spokesperson commented, “We just regained access to China in the middle of 2017, so about a year later we got slapped with a higher tariff rate.” He added, “China is still the fastest-growing beef market in the world, and we feel there’s a lot of potential there, but a lot of obstacles keep it from being a major market for us at this time.” American beef is currently subject to a 47 percent tariff in China, 10 percent of which went into effect on September 1, 2019, in retaliation to a new round of U.S. tariffs announced in the summer of 2018, making Chinese tariffs the highest on U.S. imports. Recent reporting from Harvest Public Media (HPM) noted that the unpredictability of the trade situation is detrimental for ranchers who typically must raise an animal for at least a year prior to slaughter. Dawn Caldwell, a rancher and board member of the Nebraska Cattlemen stated in the September 2019 HPM report, “it’s a risk that can’t be managed for an extended period of time, especially given the flooding that happened across much of cattle country this year.”
Trade issues notwithstanding, retail pricing for some beef products were up on a per-pound basis year-over-year for September 2019 including ground chuck (+5.0 percent), all ground beef (+2.2), and (choice) round roast (+4.5). Others were down, such as (choice) chuck roast (-0.7) and (choice) sirloin steak (-5.4), indicating ongoing volatility in supply for some types and grades of beef. It remains to be seen how the ongoing tariffs will affect pricing and what consumers are willing to pay given that most additional costs will ultimately be passed along to the consumer.
Spread of African Swine Fever: The spread of African Swine Fever has continued to threaten the global pork market. This spread has not only caused production to drop, it has also created uncertainty in trade and production in other parts of the world. African Swine Fever has spread throughout Southern China. As a result prices have steadily increased, indicating that the supply of pork is shrinking. According to Rabobank’s Pork Quarterly Q3 2019, China’s pork production is expected to fall by 10 to 15 percent in 2020, which is in addition to a 25 percent drop in 2019. Additionally, the report notes that the country’s pig herd decreased by half in the first eight months of 2019 and will likely shrink by 55 percent by the end of the year.
Though not harmful to humans, African Swine Fever is deadly to hogs, and there is currently no vaccine available. It surfaced for the first time in China in 2018 and has now spread to over 50 countries, according to the World Organization of Animal Health. This includes the countries responsible for three-quarters of the global pork production. As supply goes down, pricing increases. Food price data from China on September 10, 2019, showed pork prices rose 47 percent in August 2019 after rising 27 percent in July. New cases of the disease have been reported in Southern China, where hog inventory has dropped approximately 26 percent year over year, while some additional regions’ rates are down 40 to 60 percent since August 2018. U.S. retail pricing per pound for September 2019 was up year-over-year for major pork categories, including all pork chops (+1.4 percent) and all non-canned, unsliced ham (+3.9 percent). Pricing for sliced bacon was up slightly for September 2019 over last year, and is expected to rise in 2020.
Meatless makeover: As consumers strive toward healthier lifestyles, higher fat, meat-based diets have come under scrutiny, with many consumers opting to add more plant-based options to their diet. Additionally, concerns over climate change have driven a wider group of consumers to also rethink how much meat they eat. As such, the market for plant-based protein products designed to mimic the taste and appearance of meat has been growing over the past decade, with an even higher growth rate in the last five years. Two companies dominating the plant-based protein market today are Beyond Meat and Impossible Foods. In May 2019, Beyond Meat, which makes meatless alternatives to beef, pork, and poultry, went public. At the same time, its main competitor, Impossible Foods, reported that demand was so high it was causing a shortage for the company. Many fast food chains, including Burger King, White Castle, Carl’s Jr., and Qdoba offer Beyond Meat or Impossible Foods items on their menus, and both brands are available at supermarkets nationwide.
Given the expanding popularity and customers’ positive response to the taste of these products, the trend of Americans replacing their favorite types of meat with plant-derived alternatives does not show signs of abating. Barclays recently forecasted rising demand, and an increase in population will boost the global market share for meat alternatives from 1 percent in 2019 to about 10 percent in 2029. In dollars, that represents an increase from $14 billion in 2019 to $140 billion by 2029. Food Dive recently noted that, while meat alternatives still comprise a much lower share than the conventional meat market value of $1.4 trillion, the impact is not insignificant.
Growth for poultry: The consumption of poultry has remained steady in the United States for the past decade. Poultry consumption is expected to grow slowly over the next five years, at a rate of 0.3 percent year over year. Similar to other meats, the growth of disposable income will allow Americans to purchase more processed food and dine out more frequently. However, strong competition from other types of meat such as pork and beef will keep the price of poultry low, leaving producers with lower revenue.
Research firm IBISWorld expects industry operators to be better equipped to deal with fluctuations that occur in the poultry industry. Poultry farms are expected to consolidate to achieve economies of scale similar to that in the beef and pork industry. In addition, technological advances will help growers prevent factors that negatively affect the growth of poultry, like the spread of disease. The U.S. Department of Agriculture also estimates poultry production growth will cause an increase in bird numbers and average weight over the next 10 years. As a result, IBISWorld expects industry revenue will generate slight growth of 0.1% year over year for 2019.