Pushing for profitability

by Kimberlie Clyma
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At the start of each year, economists and forecasters attempt to predict what lies ahead for the industry – but no one came close to predicting the challenges the meat industry faced in 2012. There was no crystal ball showing the “pink slime” fiasco and the economic and job losses that would follow. And the fallout from this summer’s drought is still being assessed and will most likely impact beef supply and demand well into 2013 and beyond.

According to US Dept. of Agriculture reports, total red-meat production for 2012 is projected slightly lower than in 2011, as is per capita disappearance (or consumption). While poultry per capita consumption was down during the first half of 2012, it is projected to be down only about 2.4 percent for all of 2012, with total red meat and poultry per capita consumption down less than 1.5 percent.

Relief for the agriculture and livestock industry is not likely to come soon. According to USDA forecasters, “Relief for either cattle feeders or beef packers looks unlikely in 2013, except at the expense of one or the other, until higher cattle prices are matched by higher retail beef prices, feeder cattle prices decline and/or lower corn prices result in feed costs low enough to allow cattle feeding profits. Feeder cattle prices will likely move higher over the longer term as feeder cattle supplies dwindle, reflecting heifer retention for breeding and successively smaller calf crops.”

Corn prices are not likely to decline much until corn supplies increase significantly, which is not anticipated before harvest begins in fall 2013.

“Lower corn production has raised commodity prices and this combined with the amount of corn diverted to the ethanol industry has exacerbated input costs for producers,” said J. Patrick Boyle, president and CEO of the American Meat Institute.

“Fighting for significant reform of the Renewable Fuel Standard will help ease the pressure on high grain prices and help us rebuild our herds,” he added. “It is essential that we all be vocal about the need to let our nation’s ethanol industry stand on its own and operate in the free market as all other users of corn do.”

Year-end results

As of Oct. 28, 54 percent of pastures and ranges in the United States were rated poor to very poor, compared with 58 percent on Sept. 9, just 40 percent at the same time in 2011, and 31 percent on average from 2000 to 2010. Lack of pasture is forcing growers to place cattle on feed at lower weights; this coupled with higher grain prices is further reducing prices of feeder cattle in the near term.

The impact of placing cattle on feed sooner is likely to result in greater production declines in 2013 than in 2012, potentially leading to higher prices in 2013 and beyond. The final numbers for beef production in 2012 is projected to end up being 2.3 percent lower than 2011 levels, and decline another 4.2 percent in 2013, according to USDA Economic Research Service data. In addition:

• Feedlot operators are paying lower prices for cattle as higher feed costs and reduced availability of pasture lead to increased supply of feeder cattle. Feeder cattle prices are expected to remain in the mid to upper $140 range for the remainder of this year and into 2013.

• Imports of feeder cattle from Mexico began to decline in July and August and continued to drop in September.

• Heat stress, higher feed prices and the potential for reduced hog and poultry inventories continue to dampen the outlook for pork and poultry production into 2013.

• Broiler production estimates for 2012 and 2013 have been reduced to 36,889 and 36,445 million lbs., respectively, down from 37,201 million lbs. in 2011, due to higher feed costs.

• Hog farrowings are expected to decline in the second-half of 2012 and the first three quarters of 2013 because of high anticipated feed prices. Pork production for 2013 is expected to be slightly more than 1 percent below 2012 at 22,940 million lbs.

• Milk production in 2012 is projected to be 1.7 percent higher than 2011, but high feed costs are expected to result in essentially no change in milk production in 2013. While milk prices are projected to remain lower than 2011 levels in both 2012 and 2013, anticipated prices for 2013 were raised somewhat in the November World Agricultural Supply and Demand Estimates (WASDE) report. Milk prices received by farmers averaged $20.14 per hundredweight (100 lbs.) in 2011, and are projected at $18.50-$18.60 per hundredweight in 2012 and at $19.10-$20.00 per hundredweight in 2013.

Consumer effects

Experts predict the impact of the 2012 drought on consumers won’t be fully felt until 2013. The Food Institute predicts the drought will raise the year’s grocery bill for a family of four by $351.12 – $44 of which will be toward meat purchases. These increases come while Americans are still battling the recession.

“According to CattleFax, consumers can expect to pay 5 to 8 percent more at the meat counter next year whether you buy beef, pork or chicken,” Boyle said. “While we are seeing an initial rise in meat supplies due to herd liquidation, which may offer some relief from high prices, in the long term, our shrinking herds will send meat prices higher.

“Fortunately, consumer demand has remained strong despite these price increases. We hope we can continue to maintain that demand by providing high-quality products,” he added.

These days, more than half of the beef consumed is in ground form, since it tends to be the cheapest option in the red-meat case. Average price per lb. for beef at the end of October was $4.77, up $0.10 since May. Retail beef prices appear to have reached at least a temporary upper limit, not yet breaking much above $5 per lb. for Choice beef, according to USDA’s ERS. How long the apparent $5 per lb. ceiling on Choice beef will hold is uncertain, though.

At the start of 2012, forecasters said beef supplies would likely decrease in 2012. According to USDA forecasts, beef supplies were set to fall to 54.1 lbs. per person, down 3.3 lbs. from 2011’s 57.3 lbs. As it turns out, the reduction in beef supply didn’t drop as much expected – the prediction for year-end beef supply for 2012 is 56.8 lbs. per person; still down, but not as bad as anticipated. However, a further decline is expected in 2013 as available beef supplies are set to fall to 54.8 lbs. by the end of the year.

“US demand for the higher-quality and higher-priced cuts will be pressured by the lack of supply. We can expect overseas demand for high-quality US red meats to remain strong but to what point – this depends on the elasticity of demand in each market,” Boyle explained.

“As well, US meat exporters will explore increasing demand for non-traditional beef and pork muscle cuts in foreign markets to diversify product availability,” he said. “We should see strong demand in the US for imported lower-quality beef to assist in easing prices of processed meat products at least as long as US to foreign currency exchange rates are favorable [‘weak’ relative to the US dollar] to foreign suppliers.”

Pork processors don’t face the supply and retail price challenges that the beef industry is experiencing. High corn and soybean meal prices are issues, but pork producers can adjust production quicker in order to accommodate price issues. Forecasters are predicting that there will be plentiful supplies of pork into 2013 which may result in consumers looking at pork as an alternative meat selection to beef as prices remain high.

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