Protein and profits
Jan. 31, 2018
After a banner 2017, producers and processors are asking, 'What's next?'
Red meat and poultry processors are probably looking back on 2017 and saying: ‘How can we possibly top that?’ The last year saw the most money ever made in beef, pork and broiler processing. Every sector fired on all cylinders to produce record beef and pork profits and near-record chicken profits. Every company that reports their earnings had record years.
Can such a banner year be repeated? The cautious answer is yes, but it will take even stronger fundamentals than last year. The key requirements include demand at home and abroad, an increased supply of livestock and birds, and an even stronger US economy. These drivers brought weekly smiles to processors’ faces, and no doubt their lenders and investors. These drivers are still intact and barring some unforeseen crisis, might propel earnings this year to the same lofty levels seen in 2017.
The only shadow currently hanging over the industry is the contentious talks between the US, Canadian and Mexican governments to re-negotiate terms of the North American Free Trade Agreement (NAFTA). The entire agricultural sector, including the meat and poultry industry, has lobbied anyone who will listen as to the vital importance of NAFTA to US agriculture and how NAFTA’s agricultural provisions must be maintained.
They no doubt have reminded the White House and members of Congress that America’s food and agriculture sectors account for roughly one-fifth of the country’s economic activity. The two sectors support 22.8 million jobs, which equals 15 percent of total US employment. These jobs pay $763.12 billion annually in wages. The sectors have a direct output of $2.82 trillion and pay $891.4 billion in business taxes. The sectors annually export $146.32 billion of products.
Data from the US Dept. of Commerce says that meat packing, meat processing and poultry slaughter and processing in 2015 had total sales of $211.5 billion. This included: meat packing, $99.250 billion; meat processing, $48.326 billion; and poultry slaughter and processing, $63.980 billion. These numbers were likely much larger in 2017 because of larger production.
Industry lobbyists will also have pointed out that the meat and poultry industry employs nearly 900,000 workers. More than 488,000 work in meat packing plants (those that slaughter animals) and nearly 119,000 work in meat processing plants that further process meat cuts into ground beef, hot dogs, ham and other products. An additional 281,000 people work in poultry processing plants.
They will also have pointed out the value of NAFTA in boosting exports. The US meat and poultry industry contributed $16.22 billion to the estimated $135 billion in agricultural exports in 2016. Industry analysts say the future strength and growth of the US meat and poultry industry depends upon the expansion of trade into foreign markets, particularly as domestic per capita consumption of meat and poultry remains fairly stable and production increases, as it will likely do again this year in all three proteins.
Last year saw record performance in the beef, pork and broiler processing sectors in the US.
Blockbuster protein year
At the start of 2017 the industry faced a blockbuster protein year. Several equities and other analysts forecast doom and gloom for the markets and for profits for publicly traded companies. The exact opposite occurred because demand at home and abroad for beef, pork and chicken was far stronger than forecast. This turned out to be the industry’s “story of the decade,” for there has never been a year when consumers drove industry profits to new record levels.
The industry’s fortunes have historically relied on the strength of demand because all wealth to the industry comes from consumers at home and abroad. Stronger-than-expected demand for beef and pork in both markets last year surprised most in the industry and helped prices for cattle and beef, hogs and pork, to be higher than forecast. Demand is likely to remain strong this year, as the macro-economic indicators are positive. US gross domestic product (GDP) is growing steadily year-over-year. The New York Fed last November raised its fourth quarter GDP growth estimate to 3.8 percent and 4 percent might have been achievable. An annual growth of 4 percent this year would add approximately $800 billion to total US GDP. This is a big positive as consumer spending accounts for approximately 65 percent of GDP.
Another key factor is that Americans who earn the lowest wages are finally seeing larger percentage increases in their wages than those above them. This will enable those who can only afford to buy red meat infrequently to buy it more often. But Americans will also keep eating more chicken due to its affordability.
Production of beef, pork and broilers from 2014 to 2016 saw beef production decline to a multi-year low in 2015. This was because extreme drought conditions in 2010-2012 forced significant beef cow herd liquidation. Production has since recovered as beef producers started aggressively rebuilding their cow herds in 2014. Pork production exceeded beef production in 2015 but then slipped back. Broiler production increased slightly over the three-year period and will continue to do so (See Table on Page 26).
Strong exports will be critical to clear the extra production this year. Exports of beef cuts and variety meats in 2016 totaled $6.343 billion in value, accounting for 13.7 percent of total beef production. Exports of pork cuts and variety meats totaled $5.941 billion in value, accounting for 25.8 percent of total pork production. Chicken exports in 2016 totaled just over 2.9 billion metric tons (6.644 billion pounds) and represented 16.5 percent of total US production. Their value was $2.652 billion.
In addition, the US hide, skin and leather industry exported more than $2.04 billion in cattle hides, pig skins, and semi-processed leather products in 2016. US hides and skins companies, including producers, processors, brokers and dealers, regularly export more than 90 percent of total US production of these products and are one of the top raw materials suppliers to the global leather manufacturing industry.
Livestock numbers indicate that fed cattle and hog supplies will increase 1 to 2 percent and 3 percent, respectively, this year from last year. This will allow beef processors to continue to operate efficiently and for pork processors to do so as well, even though the pork industry has added, and will add this year, additional processing capacity through new plants.
Chicken processors barely talk about supply, as broiler production can be quickly expanded or reduced. But an indication of the demand for fresh chicken was Tyson Foods’ announcement last November that it will build a new $300 million chicken production complex in western Tennessee. The new plant will produce tray-packed fresh chicken for retail grocery stores nationwide.
Perhaps the biggest issue meat and poultry processors will face this year is a growing labor shortage, particularly in beef processing plants. The shortage involves a lack of both unskilled and skilled workers, say processors. Most processors in the industry cite labor as the No. 1 challenge facing the industry.
Concerns are growing that beef packers will not have the ability this spring and summer to process all the cattle that will need to be harvested, although they have the capacity to do so. The constraint will be on the labor side. Pork processors last year were said to be exporting more bone-in hams, primarily to Mexico, as a shortage of skilled boners did not allow them to produce as many boneless hams as they normally would.
Tyson is focused on paying higher wage rates to attract higher-skilled employees, according to President and CEO Tom Hayes. It is introducing automation such as robotics in the most difficult jobs, he said in 2017. Cargill works diligently to be the employer of choice in the meat processing space, said Cargill Protein President Brian Sikes this past year. The labor shortage has become an ongoing concern that Cargill is working hard to address. Changing immigration policies and limited labor pools in many rural areas pose challenges. This, combined with an improving economy and competition from manufacturing and agriculture, creates competition for both skilled and unskilled labor, he said.
Several market analysts last fall addressed the issue of increased production and the need for more workers. Analyst Dave Weaber of EMI Analytics and Express Markets noted the expected increase in beef production to record levels and its price implications. An additional concern is finding the labor needed to handle the increase in slaughter coming from record production amounts, he said. Trying to find the labor to slaughter an extra one million head in beef packing plants today isn’t an easy task. Handling the 10 percent growth in pork packing capacity is not going to be done by growing the labor force, it is going to be done through automation. The market has to provide the margins and incentives to packers to make these kinds of changes in operations, he said. That’s why continued strong profits in meat and poultry processing this year will be so important.