The meat and poultry industry is a vital part of the U.S. economy. It contributes $832 billion annually or 5.8 percent of gross domestic product. The industry impacts all sectors of the national economy and is the lifeblood of numerous small communities throughout the country. However, declining cattle, hog and chicken numbers threaten to shrink the industry and diminish this contribution.

The decline in numbers has varied by species, in part because of their different breeding cycles. But the common denominator has been economics. Processors, producers or both have lost colossal amounts of money over the past two years, initially because of soaring feed costs and more recently because of the global recession’s impact on meat consumption and U.S. exports. This has forced livestock and poultry producers to cut herds or flocks to balance protein supplies with demand.

This has forced most processors to reduce production by operating only five days per week or by closing plants. Declining numbers impact the beef industry most because of the length of the breeding cycle. It takes about three years for a cattle producer to retain a heifer, for it to produce a calf and for that calf to be raised, fed and processed into beef. In contrast, the hog breeding cycle from birth to a finished live hog is about nine months while the chicken cycle is about six months. This means the beef industry cannot respond any where near as quickly to market downturns or upturns as its competitors. With the likelihood that cattle numbers are unlikely to start increasing until 2013 at the earliest, more attrition in the beef processing industry and in the cattle feeding sector appear inevitable in the next 12 to 24 months.

Signaling changes

The first signs of a shrinking cattle herd came in 2007 when the U.S. Dept. of Agriculture’s annual inventory report showed the industry expanded its numbers in the preceding three years by only 2.2 percent. This was after an unprecedented eight years of herd liquidation. Concerns have mounted because the herd shrank in 2007 and 2008 and looks to shrink even more this year. The Jan. 1, 2009 cattle population totaled 94.491 million head, down 1.6 percent from the year before and is the lowest total in 50 years. The industry’s nursery has shrunk even more. Beef cow numbers on Jan. 1 this year were down 2.8 percent from a year earlier, while beef cow replacements (heifers kept back for breeding) were down 2.1 percent. The 2008 calf crop was down 1.8 percent and was the smallest in 57 years.

USDA’s mid-year inventory report showed that cow-calf producers continue to reduce their beef cow and beef replacement heifer numbers. Beef cows on July 1 were 98.6 percent of last year.

This was after USDA’s downward revision of last year’s beef cow number by 800,000 head. Beef replacement heifers were 97.8 percent of last year. This and other data meant USDA put the July 1 All Cattle and Calves total at 98.5 percent of last year, down 1.5 million head.

"The report confirmed views that cow-calf producers over the past year have reduced their herds due to increases in production costs, lower calf prices and, in some regions, weather conditions," says Jim Robb, director of the Livestock Marketing Information Center. The number of replacement heifers implies some further cowherd reductions are ahead. Additional declines may occur in drought-stressed areas, including Texas, as the year progresses, he says.

USDA estimated the 2009 calf crop at 35.600 million head, down from 36.113 million last year. But some analysts question the calving rate USDA used for this year’s estimate. The rate is estimated at 86.0 percent, says Andrew Gottschalk, HedgersEdge.com. This is 1.9 percent below the lowest level recorded in his data going back to 1998 and 2.8 percent below the previous 10-year average of 88.8 percent. The calving rate used by USDA is suspicious and subject to debate, he says. The feeder cattle and calf supply outside feedlots on July 1 is calculated to be 38.3 million head, down 200,000 head from last year. But if USDA used a normal calving rate, the number of cattle in the outside feedlot category would be up 579,200 head from last year, he says.

If one assumes a 3 million head decline in U.S. cattle numbers in 2008 (down by 1.544 million head from 2007) and 2009, it is understandable that beef packers and cattle feeders are worried. Such a decline is equivalent to the annual kill of the two largest beef plants in the industry or nearly 12,000 head of daily capacity, based on a five-day week. It is equivalent to 1.5 million head of cattle feeding capacity, assuming that feedlots feed two turns of cattle per year. Yet neither packing plants nor feedlots can afford to run at lower capacity utilization levels than they currently are.

Packers adjust operations

The packing sector currently has a much better balance than feedlots between capacity, supplies and utilization. This is mainly because Tyson Foods removed 7,300 head of daily capacity over two years. Packers have also sharply reduced their Saturday kills. These averaged 19,443 head from the start of January to the end of July, excluding holiday weeks. This was only 14 percent of maximum daily slaughter capacity. Only six normal Saturdays this year have seen kills of more than 30,000 head.

The Saturday declines are a strong indicator as to how beef packers have adjusted their operational strategies. The focus for many years was on maintaining market share and running plants as much as possible. This meant full hours during the week and at least one full shift on Saturday. Most companies predicated their capacity utilization rates on a full six-day week. The result was, at times, a battle for market share that often defied economics. This was especially the case between 1989 and 1992, after IBP opened a new plant in Lexington, Neb. The battle at that time led to what some analysts dubbed a $3 to $5 per cwt "competition" premium in the live cattle market.

Those days are over. Packers have replaced their "market share" mantra with a new one: "margin management." Economics and the shrinking numbers have forced packers to manage the price spread between their raw material (fed cattle) and boxed beef prices as never before. In the new "spread" business, packers only kill cattle if they are reasonably sure they can make a profit on the beef and on the by-products.

This is why steer and heifer slaughter levels in July and August were the lowest for these two months in many years. The contrast with 2008 levels was startling. Total slaughter in July last year averaged more than 678,000 head per week. It averaged just over 630,000 head per week this July. Slaughter levels in August are expected to be down by a similar amount.

Tyson Foods’ top red-meat executive, Jim Lochner, referred to these trends when he spoke with financial analysts at the start of August. Tyson is running a significantly different beef business compared to a few years ago, he told analysts. Daily capacity utilization has improved dramatically over the past two years and Tyson has reduced its operating costs, he said.

Lochner, senior group vice president of Tyson Fresh Meats, said Tyson has been very careful during the current period of soft demand not to oversupply the pipeline, which would drive prices down. Its focus on execution continues to drive results, he said. His remarks came after Tyson announced its beef segment made $66 million in operating income in its fiscal 2009 third quarter ended June 27. This was a 2.4 percent operating margin (over sales). Its pork segment had operating income of $28 million for a 3.3 percent margin.

"Our fresh-meat team achieved very respectable results in the quarter in a tough economic environment with declining revenues for prolonged periods," said Lochner. "Our fresh-meat operations are functioning well; our plants are fully staffed and are running efficiently."

Lochner noted that capacity utilization at Tyson’s seven beef processing plants was 87 percent in the quarter, while utilization at its six pork processing plants averaged 84 percent. Interestingly, these percentages were based on five days, implying that Tyson no longer predicates utilization over a longer week. What appears to have occurred is that Tyson, and probably other fedbeef packers, have realized they can achieve similar production levels in five days that they previously spread over 5.5 days, because of increased efficiencies.

Beef packers will have to continue to do this, and reduce their costs per head even more. The industry still has 7 percent over-capacity and this percentage will grow because of the shrinking numbers without more plant closures. Economics and fewer cattle might already have claimed one casualty this year. Specialty-beef processor Premium Protein Products looks increasingly unlikely to reopen. The Lincoln, Neb.-based firm furloughed all its workers June 11, initially for up to two weeks. It extended the furlough several times until August 11.

Current and former employees say the company has no intention of reopening under its current ownership, according to the Lincoln Journal Star. Majority owner MatlinPatterson Global Advisors, a New York private equity firm, is trying to sell the firm. But it has been unable to get an offer for its asking price of $18 million. It reportedly drew only two bids, $3 million formally from American Foods Group and $11 million informally from Twin City Kosher, say employees. PPP has a beef processing plant in Hastings, with a capacity of 500 head per day, and a further-processing plant in Lincoln.

Pork segment squeals

Similar issues of shrinking numbers and poor economics face pork processors. The U.S. hog herd increased by 7.69 million head or 13 percent from March 1, 2004 to March 1, 2008. But it declined by 1.83 million head or 2.7 percent by March 1 this year. The total on June 1 was 66.1 million head, down 2 percent from a year earlier but up 1 percent from March 1.

Numbers are set to decline more sharply because of severe financial losses by producers. The industry has lost $4.4 billion since September 2007, says the National Pork Producers Council. That’s an average of $21.37 per hog. Given these losses, analysts wonder why producers have not reduced their sow herds as much as expected. USDA’s latest quarterly Hogs and Pigs report revealed that the breeding inventory on June 1 was down 3 percent from last year. Analysts say the sow herd needs to decline by up to 10 percent to bring supply back into balance with pork demand.

Largest producer Smithfield Foods has already culled 127,000 sows from its herd. This might have encouraged other producers not to cut numbers. Sow slaughter increased only slightly after the impact of the H1N1 influenza this spring caused pork exports to plummet. Smithfield says its reduction was not calculated to have a guaranteed effect on hog prices. If 10 percent didn’t fix the industry, then another 3 percent won’t, Smithfield president and CEO Larry Pope told financial analysts in June. He was referring to the percentages by which Smithfield reduced its sow numbers. Livestock analysts say between 300,000 and 600,000 sows will need to be culled to return most hog producers to profitability.

The export declines meant more pork on the domestic market so pork processors reduced their production in July and August. Kills barely averaged 2 million hogs per week, with daily kills during the week averaging about 415,000-420,000 head. Yet pork-processing capacity is still about 445,000 head per day, versus 408,000 head in the fall of 2004, says Steve Meyer of Paragon Economics.

Pork processors are currently operating at slightly higher levels on Saturdays than their beef counterparts. That’s partly because the number of market-ready hogs seasonally increases from mid-August into November. The expectation is that several large hog producers will dramatically reduce their numbers or go out of business in the next few months because of pressure from their lenders, unless market conditions improve dramatically.

That seems unlikely, say analysts, most of whom have producers losing $20 per head or more the rest of 2009.

The cattle producers most impacted by shrinking numbers are cattle feeders. This sector has at least 30 percent overcapacity. The sector in 2008 had 2,170 feedlots 1,000 head or larger. They had a total one-time capacity of 16.7 million head, according to USDA. These feedlots marketed 22.4 million head in 2008.

The number of cattle in these feedlots on July 1 this year totaled 9.75 million head, so they were only 58 percent full. Part of the reason is that placements in May and June were down sharply from a year earlier. But even the January 1 cattle on feed total of 11.2 million head meant feedlots were only 67 percent full. Dozens of feedlots are said to be for sale, with no takers.

Mandatory country-of-origin labeling (MCOOL) is another reason why packers face declining livestock numbers. Imports of Canadian feeder and slaughter cattle, and feeder and slaughter hogs, began to decline well before MCOOL came into full effect March 16 this year. The biggest decline has been in hogs. A total of 3.70 million hogs (including 3 million feeder pigs and 310,000 slaughter hogs) came south from Jan. 1 to July 18 this year. This was down 1.965 million head or 35 percent from the same period in 2008.

Canadian cattle imports for the same period totaled 617,000 head, down 272,000 head or nearly 30 percent from the same period in 2008. The total included 299,000 slaughter steers and heifers (vs. 394,000 last year) and 213,000 feeder cattle (versus 383,000 last year).

Mexican feeder cattle imports are up this year. But they have gone against historically low numbers in 2008. Imports to Aug. 1 totaled 477,000 head, up 22.5 percent from the same period last year. Imports were down all of last year, with MCOOL affecting numbers from July on, says USDA Market News’s John Langenegger. MCOOL continued to affect imports into February, but numbers began to pick up as MCOOL-related price discounts on the cattle declined. Most Mexican feeder cattle are currently priced $8-$10 per cwt below native cattle, he says. The U.S. in 2008 imported 702,900 Mexican feeder cattle, vs. 1.074 million head in 2007. Imports for all of 2009 look to be well below 2007 levels, says Langenegger.

Quantifying industry impact

The meat industry is very concerned about the shrinking livestock numbers, says Patrick Boyle, president of the American Meat Institute. The industry is in a period of national shrinking herd sizes and rising input costs. This puts pressure on packing and processing capacity and on pricing. There is a close alignment and interdependence between a healthy livestock sector and a healthy packing and processing sector, he says.

The $832 billion that the meat and poultry industry contributes annually to the national economy came from an AMI-commissioned study. Of the total, the slaughter and meat processing sectors (excluding poultry) contribute $105 billion in output, pay $10.95 billion in wages and have 271,000 jobs, said the study. The slaughter sector has $55 billion in output, pays $5.74 billion in wages and has 153,000 jobs. The meat sector has $50 billion in output, pays $5.21 billion in wages and has 118,000 jobs. The hides, skin and offal sector has $900 million in output, pays $94 million in wages and has 1,827 jobs.

The economic contribution of the meat industry will shrink because of the declining livestock numbers and subsequent pressure on the meat industry, says AMI’s Boyle. That’s a message the industry will need to repeat as it fights on other fronts to prevent further restrictions being placed on the way the industry does business.

Steve Kay is editor and publisher of Petaluma, Calif.-based Cattle Buyers Weekly
(
www.cattlebuyersweekly.com).