meat

Beef, Pork & Poultry Trends

Industry Insight

COVID-19 INDUSTRY BRIEF

EFFECTS OF THE CORONAVIRUS ON THE Beef, Pork, and Poultry INDUSTRY Updated October 28, 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 over the long term as the restaurant sector shrinks.
  • Impacts on Food Service: Almost all restaurant openings in the United States have been allowed with varying levels of social distancing protocols in place, including masks, occupancy limits, early closing times, 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 as infection rates have continued to spike throughout the fall. By some estimates, 30 percent of restaurants in the United States are projected go out of business because of the pandemic.
  • Trade Agreement Drives Surge in Protein Exports: Phase one of the U.S.-China Trade Agreement signed on January 15, 2020, affirmed China’s commitment to spend $200 billion more on U.S. goods and services by 2021 and eased some of the tariffs placed on U.S. products in 2018. Per the agreement, China pledged to remove unwarranted restrictions and spend more on American agricultural products, including beef, pork and poultry. China agreed to recognize the current U.S. beef and beef products’ traceability system, which exceeds World Organization for Animal Health (OIE) guidelines and to adopt internationally accepted maximum residue levels for three veterinary drugs that are commonly used for cattle, zeranol, trenbolone acetate and melangesterol acetate. Additionally, China agreed to expand the allowable product scope of U.S. pork to include bungs, intestines and processed products and adopt a protocol for poultry diseases to alleviate future trade disruptions, fully lift the ban on other poultry commodities and abide by OIE standards for international trade of poultry products. Since its March implementation, the first phase of the U.S.-China Trade Agreement has sparked growth in China’s demand for U.S. beef, pork and poultry. Year to date through August, exports were 121 percent above last year’s pace in volume, 12,288 mt, and 112 percent higher in value of $94 million. Continuing the trend, beef exports for the week of September 18 totaled 16,600 mt, which was down 5 percent from the previous week; however, exports to China set a new record with an increase of 49 percent, and exports to Hong Kong (+14 percent) were the second highest since May, per the U.S. Meat Export Federation.
  • Other Impacts: COVID-19-related meat shortages in March and April created an opening for plant-based meat alternative companies including Dow Jones Factiva, Beyond Meat Inc., Impossible Foods Inc. and Tofurky Co., which ramped up production and discounted their plant-based meat alternatives to appeal to more consumers. In September, Impossible Foods Inc. announced international expansion in Canada and Hong Kong, and secured $200 million to further penetrate the restaurant sector. Meat giants that have dominated the industry including Smithfield and Tyson are now pushing their own plant-based protein brands, as consumer preferences continue to pivot towards healthier, more sustainable protein options. In early October, Before the Butcher launched its Mainstream line of meat alternative burger patties achieving price parity with ground beef, which is a common goal of the plant-based meat industry.
  • 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.

COVID-19: Industry Brief Meter - Beef, Pork and Poultry


Protein Plant Closures Table

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Protein Plant Closures Table

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TARIFF ALERT

Date October 2020

 Beef, Pork, and Poultry Projected Values

 

Current Trends

  • The overall price of beef, pork, poultry, and fish in the U.S. increased 6.7% for September 2020 over 2019.
  • American beef exports to China have surged due to COVID-19-related meat shortages and increased market access granted by phase one of the U.S.-China Trade Agreement.
  • U.K. meat processors were given authorization to export beef to the U.S. after a two-decade ban due to mad cow disease.
  • The COVID-19 pandemic has caused volatile pricing in key inputs and a shift away from the food service sector.
  • Red meat alternatives continue to gain traction in the U.S. as plant-based protein processors expand and experienced meat producers create their own meatless brands.

Approximate net recovery on cost

By the Numbers

Synopsis

Trade Agreement Drives Surge in Protein Exports: Phase one of the U.S.-China Trade Agreement signed on January 15, 2020, affirmed China’s commitment to spend $200 billion more on U.S. goods and services by 2021 and eased some of the tariffs placed on U.S. products in 2018. Per the agreement, China pledged to remove unwarranted restrictions and spend more on American agricultural products, including beef, pork and poultry. China agreed to recognize the current U.S. beef and beef products’ traceability system, which exceeds World Organization for Animal Health (OIE) guidelines and to adopt internationally accepted maximum residue levels for three veterinary drugs that are commonly used for cattle, zeranol, trenbolone acetate and melangesterol acetate. Additionally, China agreed to expand the allowable product scope of U.S. pork to include bungs, intestines and processed products and adopt a protocol for poultry diseases to alleviate future trade disruptions, fully lift the ban on other poultry commodities and abide by OIE standards for international trade of poultry products.
 

Since its March implementation, the first phase of the U.S.-China Trade Agreement has sparked growth in China’s demand for U.S. beef, pork and poultry. July beef exports to China were at record-high levels of 2,350 metric tons (mt), up 160 percent from the same month in 2019, and up 92 percent in value at $14.9 million. Year to date through August, exports were 121 percent above last year’s pace in volume, 12,288 mt, and 112 percent higher in value of $94 million. Continuing the trend, beef exports for the week of September 18 totaled 16,600 mt, which was down 5 percent from the previous week; however, exports to China set a new record with an increase of 49 percent, and exports to Hong Kong around +14 percent were the second highest since May, per the U.S. Meat Export Federation.
 

Since approximately one-third of China’s hogs were lost to African Swine Flu in 2019, the country is still relying heavily on pork imports to keep pace with demand. U.S. pork exports to China in the first eight months of 2020 totaled 535,647 metric tons, up 209 percent over the same period in 2019. Although sales in the first quarter of 2020 were impacted by COVID-19-related meat shortages, pork exports to China are expected to remain strong as African Swine Flu continues to create major obstacles in rebounding the country’s hog supply. Additionally, pigs in China are becoming increasingly infected with another group of influenza viruses dubbed “G4” that has also been spreading to pig farmers, according to a study published in July in the Proceedings of the National Academies of Science. As of July, there had been no cases of human to human transfer of the new variant in China, and the G4 viruses had not been detected in pigs or people in the United States per the Centers for Disease Control.
 

U.S. poultry exports to China in March were the largest for any month since August 2013. Since phase one of the trade deal was implemented in March, China is now the number one destination for U.S. poultry exports, and exports to China now have the potential to exceed $1 billion per year, according to the U.S. Department of Agriculture (USDA).
 

U.K. Beef Exports Resume: After two decades of bans on U.K. beef products due to the Bovine Spongiform Encephalopathy crisis, U.S. authorities have given authorization for four meat processors to resume exporting their products to the U.S. as of fall 2020. Kepak Group Limited in Wales and Granville Food Care Limited were among the first to receive export authorization from the USDA. In addition, two Northern Ireland meat plants, Foyle Food Group and WD Meats have also been given the go-ahead to export meat to the U. S. after successful inspections of their facilities and livestock were performed by the USDA in 2019.
 

The U.K. will now put pressure on other European beef exporters, such as the Republic of Ireland. In the first half of 2020, exporters in the Republic of Ireland took advantage of the elevated meat demand in the U.S. as a result of the COVID 19 pandemic, more than doubling their beef exports to the U.S. Now, the Republic of Ireland and others will have to compete with newly approved exporters from the U.K. who are also looking to penetrate the U.S. meat market.
 

COVID-19 Impacts on Protein Market

  • Food Service Impacts: Protein producers have experienced stable demand during the pandemic due to grocery store sales being positively impacted by the COVID-19 pandemic. However, as grocery stores flourish amidst the global pandemic, the food service industry has experienced the opposite. Since the start of the pandemic, restaurants have been forced to close indoor dining areas or significantly limit their occupancy. The U.S. Census Bureau Advance Retail Sales report issued on May 15, showed a 23.6 percent drop in food service and beverage retail sales for the month of April compared to pre-pandemic levels. Restaurant visits hit a low point as of the week of April 12, being off over 40% from pre-pandemic levels, according to market research firm NPD Group. By the week of May 24, 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. However, surges of the virus have led to renewed closures, with at least six states recording record new cases as of October. By some estimates, 30 percent of restaurants in the United States are projected to go out of business because of the pandemic, and retail sales for food and beverage services remained 14.9 percent below their February rate as of the end of September.
  • Labor and Production Impacts: Since the start of the COVID-19 pandemic, reports indicate 73 meat processing plants in the U.S. and Canada have been closed, forced to slow production or have reported COVID-19 infections on site. Reports of infections in food processing plants that arose in March accelerated in April and continued in May. A decrease in production from processing plant outages caused a spike in beef, pork and poultry prices in April and May. While some of these price increases were volatile, pricing levels have retreated as plants have reopened and production levels return to normal

 

COVID-19 Accelerates Meatless Trend: 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 rethink how much meat they eat. As a result, 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.
 

COVID-19-related meat shortages in March and April created an opening for plant-based meat alternative companies including Dow Jones Factiva, Beyond Meat Inc., Impossible Foods Inc. and Tofurky Co., which ramped up production and discounted their plant-based meat alternatives to appeal to more consumers. In September, Impossible Foods Inc. announced international expansion in Canada and Hong Kong, and secured $200 million to further penetrate the restaurant sector. Meat giants that have dominated the industry including Smithfield and Tyson are now pushing their own plant-based protein brands, as consumer preferences continue to pivot towards healthier, more sustainable protein options. In early October, Before the Butcher launched its Mainstream line of meat alternative burger patties achieving price parity with ground beef, which is a common goal of the plant-based meat industry.
 

Plant-based foods grew 11.4 percent in 2019 to a record $5 billion, according to a report by data technology company SPINS for The Good Food Institute and the Plant Based Foods Association. As plant-based protein brands continue to expand their operations and distribution capacity, plant-based proteins are expected to gain considerable market share in the next five years.
 

Industry Shift to Efficient Larger-Scale Operations: As the industry is operating in a mature stage, companies must find new ways to create a competitive edge against peers. Manufacturers’ sales branches and offices (MSBOs), which are used primarily to distribute a manufacturers’ own products at the wholesale level, will continue to expand operations, achieving economies of scale to better compete with small independent wholesalers on levels of price and efficiency. MSBOs are expected to continue scaling up their operations through acquisitions and vertical integration, saving on equipment and transportation costs. This anticipated efficiency will be needed since the industry is expected to contend with stagnant profit over the five years to 2025. MSBOs will likely increase the overall efficiency of the industry, putting greater pressure on external competition. Smaller wholesalers that survive the transition will likely consolidate or focus on niche and local markets to remain competitive.
 

In addition, further optimization of employment levels is likely to occur due to the growing availability of advanced technologies. However, workforce metrics are anticipated to remain relatively stagnant as employers navigate a shift toward processes containing more advanced machinery and equipment.
 

Volatile Pricing in Key Inputs: The price of red meat is an essential input to determine the industry’s profitability. Red meat pricing is expected to grow by 2.4 percent by the end of 2020. Although increased prices for red meat makes it more expensive to purchase upstream, wholesalers can typically pass on the additional cost to consumers in the form of higher prices. Another major input for wholesalers that has experienced drastic volatility over the last five years is diesel pricing. This is an essential input since industry operators transport many goods with trucking fleets, which usually run on petroleum-based fuels such as diesel. The price of diesel has fallen drastically in 2020 due to travel disruptions related to the COVID-19 pandemic. This has been a tremendous benefit to wholesalers and has offset rising red meat prices. However, diesel prices are expected to increase by an annualized 2.2 percent through 2025, according to data from research firm IBISWorld.
 

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, and 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 products. 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. Products that do not meet these requirements are not graded and are sold on a “no roll” basis. A “no roll” category refers to all carcasses that do not meet the requirements for the USDA Select grade and would likely grade USDA Standard if graded so a grade stamp is not rolled on these carcasses.
 

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. Generally, the higher the grade of meat, the higher the value it will achieve on the open market. Typically, growers who 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.
 

Perishability: Because of the perishability of meat products, the age and integrity of the goods is critical to recovery values. 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 and many meat processors contract third-party cold storage facilities to manage inventory. Lenders should be aware of the 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.