Assessing the fallout
October 22, 2012
by Steve Kay
North America’s meat and poultry industry must feel it is in constant crisis mode. From the first BSE (bovine spongiform encephalopathy) cases in Canada and the US in 2003, to the H1N1 virus to avian influenza, the beef, pork and poultry sectors have each faced and overcome severe animal-health issues. They’ve had to defend against animal activists over crates and cages, and endured national and social media attacks that nearly eliminated a legitimate beef product.
Now the industry faces a challenge with threats, at least for the US beef sector, that are as far-reaching as BSE. The damage from this year’s widespread drought in the US has already impacted businesses on both sides of the border. Two of Canada’s larger hog producers in early September sought the equivalent of bankruptcy protection, citing high US feed prices. US hog producers began to experience some of their heaviest losses in several years and cattle-feeding losses remained in triple digits. Operating margins for fed-beef processors turned negative for the first time since the spring and poultry producers saw their feed costs sky-rocket.
This might be a harbinger of what the US meat and livestock industry may face over the next two years. The result will be an industry that might be significantly smaller than it is today. This prospect would have enormous consequences for all involved in the food-production chain, from producers to processors to companies that supply products to the industry.
Price to pay
The deepest impact will be on consumers. A shrinking supply of domestically produced protein, especially beef and dairy products, will force retail and foodservice prices higher. It might force Americans to buy more imported meat and other foods.
USDA’s latest forecasts are for available beef supplies this year to be 57.5 lbs. per person, but only 55.2 lbs. in 2013. It forecasts pork supplies to be 45.8 lbs. this year and 45.2 lbs. next year. It forecast broiler supplies to be 80.4 lbs. this year and 78.9 lbs. next year.
The drought’s impact, though, isn’t likely to fully hit consumers until 2013. The drought will raise the year’s grocery bill for a family of four by $351.12, according to projections by the Food Institute. Higher grocery bills will be most notable in the meat section where a family of four can expect to pay $44 more in 2013 than this year, says the institute.
Such price advances might seem modest. But they must be put in the context of Americans’ ongoing struggle to pay more for food as the economy remains weak and unemployment remains high, say economists. That struggle began in 2008 at the height of the recession, and its effects on the beef industry remain to this day.
More than half of all beef is now consumed in some form of ground beef, as that is the only affordable beef item for many Americans. This trend will continue. Both wholesale and retail beef prices were at or close to record levels coming into September, and beef was becoming less competitive price-wise with pork and chicken. This showed up in grocery store sales and is likely to be the trend well into 2013, analysts say.
The cause of likely higher food prices has been well documented since the drought began. Less documented was the immediate impact on livestock and poultry producers and the ongoing consequences, particularly on the beef industry. It has been hurt not just by record-high corn prices but by widespread deterioration of pasture and range conditions. This has meant a lack of hay and other forage crops for fall and winter use by cow-calf producers and, more significantly, the death knell to any chance of beef herd rebuilding for the next two years.
This year’s drought contains two ironies. The first is that ideal conditions throughout the Corn Belt led to one of the fastest and earliest corn plantings in decades. USDA subsequently forecast a yield of 166 bushels per acre, a record crop of 14.7 billion bushels and an average price of $4.60 per bushel. Given that the average price of the 2011-2012 crop might be $6, such a price decline would have brought much-needed relief to cattle feeders, pork and chicken producers.
Now producers face the reality of corn close to $8 per bushel, especially if this year’s crop comes in lower than USDA’s latest forecast of 10.727 billion bushels. This would be the smallest crop since 2006 and would be 13 percent smaller than last year’s crop. USDA also forecast soybean production at 2.634 billion bushels, down 2 percent from its August forecast and down 14 percent from 3.056 billion bushels last year. Soybean prices are currently at more than $17 per bushel, up 31 percent from this time last year.
The second irony is that the drought will not cut overall farm income, largely because crop growers will receive government-backed crop insurance. In fact, USDA’s Economic Research Service (ERS) forecasts that net farm income will be $122.2 billion in 2012. This would be up 3.7 percent from last year and the highest level since 1973 on an inflation-adjusted basis.
Conversely, ERS notes that among livestock-related expenses, the price of feed is increasing, affecting prices paid for animals, particularly cattle. Following a $9.2-billion or 20 percent jump in 2011, feed expenses are expected to increase another $7.2 billion or 13 percent in 2012, it says.
Whatever the final size of the corn crop, several points have emerged in relation to corn prices and livestock production, analysts say. Prices and demand will ration how much corn goes to feed livestock and how much goes to ethanol production. The latter has declined as cash corn prices have increased. Meanwhile, cattle on feed numbers are expected to drop below year ago levels shortly and remain below them throughout 2013.
As expected, USDA’s latest corn crop estimates caused a coalition of livestock, poultry, meat and dairy groups in early September to renew their call for the Environmental Protection Agency to issue a full, one-year waiver from the Renewable Fuels Standard in an effort to provide producers with some relief and to create a more balanced playing field for the end users of corn.
Scrambling for cattle
The scramble for cattle will intensify into 2014 because the US herd shows no signs of stabilizing until then. Total cattle numbers have declined 13 out of the past 17 years, from 103.548 million head on Jan. 1, 1996, to 90.769 million head on Jan. 1 this year. Numbers are expected to decline again this year to below 90 million. Drought ended most efforts to rebuild beef herds and even if net heifer retention occurs next year, more cattle might not start showing up for feeding and processing until late in 2015.
The beef industry has adjusted to the loss of 14.5 million cattle since 1996 in the national herd in several ways, notably by improving productivity per animal and better red meat yields. Cattle feeders are feeding to record heavy weights and are selling more cattle on a carcass basis to offset higher feed costs. They are partly achieving this by using two beta-agonists that add from 17 lbs. to 33 lbs., on average, to hot-carcass weights.
With 90 percent or more of steers and heifers on these feed supplements, the question is: Can they be used even more aggressively without detrimental effects on carcass quality, or has their use maxed out? If the latter is the case, the industry will have to find other ways to increase productivity.
Heavier carcasses and larger cut sizes in the past caused retailers and foodservice users to complain about ribeyes being too large and boxes being too heavy. Such complaints dissipated as end users found ways to create new cuts. But they will emerge again if beef cuts continue to get larger, say analysts. In addition, beef will need to improve its quality and consistency if the industry expects consumers to keep paying higher prices.
More beef from fewer animals won’t, however, compensate for fewer head to be fed or harvested. This will exacerbate the 30 percent over-capacity in the cattle feeding industry. Southern feedlots, in particular, face three supply setbacks next year.
First, there is the trend of more cattle being fed up north, where corn is cheaper and dried distillers’ grains are more available. Second, exceptional drought in Mexico might force as many as 1.6 million young cattle to come north this year. But these numbers might decline by 750,000 head or more next year. Third, Texas and Oklahoma lost 966,700 beef cows in 2011, largely due to drought. Conversely, Nebraska’s beef cow numbers increased by 112,000 head.
This means fewer calves down south and more up north. This suggests that northern fed-beef plants might be better positioned the next two years than those down south. Tyson Foods might be best-positioned of the major packers, with four of its seven plants in the Corn Belt.
Conversely, Cargill Meat Solutions has four of its five solely fed cattle plants in Colorado, Kansas or Texas. There’s much conjecture about Cargill’s ability to operate two plants so close together in Texas. They have a combined daily processing capacity of 9,150 head. But Cargill has invested heavily in these plants over the past 15 years and is unlikely to consider closing one, analysts say.
Absent a major plant closure, fed-beef packers will focus on increased efficiencies and better yields to make more money per animal even as they face record high fed-cattle prices. They will operate even less on Saturdays. Those kills last year averaged 22,900 head, excluding holiday weeks, down from 24,401 head in 2010. Saturday kills this year have averaged only 12,000 head. Packers will run slightly reduced hours during the week, which will lower their capacity utilization rates around 80 percent, which is the lowest level in seven years.
The beef industry has relied in recent years on the dairy sector for a growing supply of Holstein steers to feed and harvest. But high feed costs have taken a financial toll on many dairy farmers, says the Livestock Marketing Information Center. The milk-feed cost ratio registered its lowest level since 1984 in July 2012, even worse than 2009’s. Milk prices will not catch up with rising input costs for many dairies and cow liquidation, which began in 2012, will likely persist well into 2013, it says.
Pork and chicken
Pork and chicken processors face nothing like the supply and retail price challenge that fed-beef processors are already experiencing. Both sectors face high corn and soybean meal prices but are able to adjust production quickly if prices don’t decline, say analysts. The US hog herd totaled 66.361 million head on Dec. 1 last year. But the breeding herd fell to 5.8 million head so total hog numbers on Dec. 1 this year might be down 2 percent, says Univ. of Missouri’s Ron Plain. Productivity gains mean market hog numbers at the end of 2012 might be up 1.5 percent on last year. So there should be ample hogs for processors well into next year, he says.
Hog producers currently face record high finishing costs so are losing money, Plain says. But when producers look at 2013, they see corn getting cheaper, hog futures looking promising and sow numbers down. By early next year, producers might even be considering starting to expand their herds again, he says.
This raises the prospect of plentiful supplies of pork, unless pork exports increase dramatically, as beef supplies continue to fall.
It seems the former “Other White Meat” will become “The Other Red Meat” for many Americans.