No more great deals for consumers in the meat case. The factors that kept livestock prices low this year – dairy herd liquidation, weaker than expected feedgrain prices and heavy animal weights due to exceptionally good weather, among other causes – are not likely to repeat in 2010, according to two Morgan Stanley analysts, Hussein Allidina and Jeremy Freisen.
In their Nov. 12 report on meat prices, provided to MEATPOULTRY.com, the pair wrote: "The weakness observed over the past 12 months in both livestock and meat prices is likely coming to an end with demand improving and continued herd liquidation. These factors are long-term positive for all livestock prices, though higher corn prices will weigh on feeder cattle prices through 2010."
They believe "resilient" domestic demand will hold steady, while improved exports, "driven by rising [export market] wealth," will put upward pressure on prices. Ultimately we see a new equilibrium with reduced meat production at a higher price," the analysts report.
But improved prices do not necessarily portend improved bottom lines for packers and processors. "The U.S. livestock industry is facing significant long-term challenges in rising feed, fuel and land costs. Increased costs have prompted a contraction in inventories across animal groups. This headwind was coupled with a precipitous drop in demand, related to a falling U.S. and global economy as well as health-related fears with respect to H1N1 in the pork industry," Allidina and Freisen point out.
"Though a blessing to the industry, better weather and breeding improved animal weights as well as quality in the case of cattle both added to the temporary oversupply in the domestic market and weakened prices. We believe that a combination of continued herd liquidation and a rebound in consumer and export demand will help lift live cattle and hog prices moving forward. Feeder cattle prices will struggle to increase in the face of rising corn prices, but will eventually need to move higher to maintain a stable herd size. We see 2010 prices averaging 6.9% and 14.5% higher [year over year] for live cattle and lean hogs from our 2009 average price forecasts, while feeder cattle prices fall 1.9%," they added.
But on the bright side, the Morgan Stanley economists note that total slaughter less net exports has not fallen to the degree that the recession-caused collapse in U.S. retail sales suggests. This means that "domestic demand has actually been quite healthy, which bodes well for domestic demand when consumer spending recovers," they write. Moreover, the ongoing growth in the U.S. Hispanic population, which consumes a higher-than-average quantity of meat, will also help keep domestic consumption up.
On the export side, U.S. beef exports are already recovering somewhat, though they remain more than 4% below 2008’s volume through August. Pork exports are more problematic, according the Allina and Freisen. Pork exports "have been frustrated by a better than expected rebuild in the Chinese hog herd, with [Chinese] pork production likely up 5% in 2009, and reduced pork demand related to H1N1 virus fears." Total U.S. pork exports through August are down more than 19% compared to 2008. "Key near- to medium-term risks to pork relate to disease. On the demand side, the continuing global threat of H1N1 may continue to weigh on pork demand despite the risks being misunderstood. On the supply side, blue ear disease remains a threat to China’s rebounding stock. China’s announced reopening of imports to U.S. pork, which were banned in response to the H1N1 outbreak, increases the risk of a spike in U.S. pork exports should a supply problem reoccur in China," state the analysts. A weak U.S. dollar will help, too.
The high weight gains in cattle and hogs encouraged in 2009 by excellent weather aren’t likely to be seen again, even if the weather proves benevolent again. The delayed corn crop this year resulted in lower-quality feed corn with lower starch content, which will impact weight gain in feedyards and hog barns. In the feedlots, "feeder prices will face pressure from higher corn prices, though higher live prices should give feedlots some reprieve. Net, higher meat demand together with reduced supply should help live prices rise more rapidly than feeder — though feeder prices are most responsive to corn prices," according to Allina and Freisen.