Power of Protein

by Steve Kay
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 Power of Protein
Protein production this year will top the 100-billion lb. mark for the first time ever.
 

The US meat and poultry industry faces a blockbuster protein year, which means that consumer demand at home and abroad will be more important than ever. The industry will be hoping that carnivores step up to the plate and devour the two most expensive proteins – beef and pork. The first two months of the year saw encouraging signs this will occur. Americans responded to aggressive beef promotions by retailers, the restaurant business showed signs of recovery and red meat exports continued to grow year-over-year.

Protein production this year will top the 100 billion-lb. mark for the first time ever. That’s good news for American consumers, who will continue to see lower prices in grocery stores and possibly in restaurants. Three years of herd rebuilding means beef production will increase again this year from last, after a surge in 2016. Pork and chicken production will also be higher again. Total red meat and poultry production will be an estimated 100.195 billion lbs., vs. last year’s 97.517 billion lbs. This 2.7 percent increase will follow a 3.1 percent increase in 2016 from 2015.

The biggest increase will be in beef. The US Dept. of Agriculture (USDA) forecasts that production will be up 3.2 percent to 25.940 billion lbs. over last year’s 25.140 billion lbs. Pork production will be 25.800 billion lbs., up 3.5 percent, and broiler production will be 41.550 billion lbs., up 2.1 percent. The higher beef production in part reflects the fact that the total US cattle herd expanded significantly in 2015. It grew another 1.8 percent in 2016 from 2015, with the herd going from 91.918 million head on Jan. 1, 2016, to 93.585 million head one year later.

Growth this year is expected to continue but only by a modest 1 percent in 2017. USDA’s Annual Cattle Inventory report at the end of January revealed that much of last year’s growth came from a 3.5 percent increase in beef cow numbers. In addition, the 2016 calf crop grew by 996,000 or 2.9 percent from 2015. However, the national herd will still be lower than it was in 2010 and will be far below the record of 132 million head in 1975.

Live cattle prices will be lower again this year vs. 2016 prices. But they will fall much less than they did last year. Prices for the year are likely to average $108 to $111 per cwt live, according to forecasts from analysts and USDA. This would be down 8 to 9 percent from 2016’s average $120.79 per cwt live for a 5 area Choice steer. That average though was down 18.5 percent from 2015’s $148.12 per cwt live. This was the biggest year-to-year decline in annual live cattle prices in many years.

Better times ahead

Prices will be lower again because of the increase in cattle numbers. But most producers are looking forward to 2017 being a better year than the one just passed. Two key factors will determine how much, if at all, cattle prices decline this year. The first factor is demand. The positive news is that beef demand from last June was stronger than expected. Sharply lower wholesale beef prices allowed retailers to aggressively promote beef. Lower prices meant Americans rediscovered their love of a good steak and bought a lot of them.

Lower prices also boosted beef exports, with especially strong sales to Japan. This increase in sales was in part driven by a dramatic year-on-year decline in exports to Japan from Australia. Larger beef supplies also make the resumption of US exports to China a must this year. This would be the single most significant boost to the cattle and beef markets.

Live cattle prices might also be stronger than expected if cattle feeders sell cattle at lighter weights. Fewer pounds per animal could largely offset an increase in fed steer and heifer slaughter each week. Weights are now declining seasonally and this trend will be closely watched into the spring.

Lighter, smaller carcasses would relieve some of the merchandising dilemmas that retailers and restaurant operators have faced over the past decade. The dilemma has been how to present out-sized cuts of beef, notably ribeyes, with Americans eating smaller portions.

Larger cattle supplies, lower live cattle prices and demand will be the keys in determining beef processing margins. This combination in 2016 helped fed beef processors enjoy their most positive operating margins in many years, bolstered by fourth quarter margins that were a record for any quarter. Total commercial cattle slaughter this year will be up an estimated 3.4 percent on last year, according to the Livestock Marketing Information Center. That’s up by just over 1 million head. This increase will increase plant utilization rates and reduce per head production costs, thus boosting operating margins.

Operating margins in the first quarter last year averaged only $1.72 per head, according to HedgersEdge.com. But they picked up steadily in the next two quarters (positive by $28.73 per head and $43.61 per head, respectively) and exploded in the fourth. It saw margins average $89.33 per head, with margins in triple digits in seven of the 13 weeks. This was nearly double the next largest quarterly margin, $45.82 per head in 2003’s third quarter.

Margins for the full year were positive by $43.35 per head, according to HedgersEdge.com. This far exceeded the next best year (since at least 1991) of $25.66 per head in 2000. The fourth quarter results achieved another first by being the only quarter since 1991 to show positive margins every week. The margins were even more remarkable as 2015 saw fourth quarter margins just above breakeven and negative margins each of the previous four years. The last 26 years saw margins negative 11 times in the fourth quarter.

HedgersEdge.com margins reflected the trend of what two of the largest beef packers reported as publicly-traded companies in 2016. Tyson Foods reported beef operating income of $46 million in 2016’s calendar first quarter, $91 million in the second, $139 million third and a record $299 million in the fourth. National Beef Packing, the industry’s fourth largest packer, reported income before taxes of $21.4 million in the first quarter, $63 million in the second and $108.3 million in the third, and possibly well over $200 million in the fourth quarter. National Beef’s previous best fourth quarter was $84.8 million of net income in 2008.

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