Pork, poultry industries face supply and labor challenges
June 11, 2018
by Joel Crews
Christine McCracken, an executive director at Rabobank, explained how the pork and poultry industries have many of the same concerns including consumption, labor and tariffs.
KANSAS CITY, Mo. – The two “Ps” of the meat industry – poultry and pork – face many of the same challenges in today’s market as consumption of both proteins continues to grow and expected production increases have analysts weighing the impact and possible outcomes. During a June 4 presentation at the Sosland Purchasing Seminar, Christine McCracken, an executive director at Rabobank focusing on animal protein, discussed how both segments face headwinds when it comes to labor shortages at processing plants now and in the foreseeable future, but issues such as the impact of retaliatory tariffs on exports and trade conflicts are bigger hurdles for pork than for poultry.
McCracken pointed out that employee turnover at slaughtering facilities has doubled in the past two years, peaking at 220,000 workers this past February. She anecdotally mentioned recent reports where 50 percent of line workers walked off the processing line on a Friday afternoon to express their discontentment, even after wage increases of up to 20 percent were implemented.
“I expect this to be the No. 1 issue that comes into play over the next year,” she said of the labor shortage. McCracken said in some cases, the shortage has resulted in some packers being unable to have raw product deboned and many are considering exporting product to be de-boned and then shipped back to the US, which would create logistical hurdles processors want to avoid.
She said at least two of the newest pork plants have announced plans to add second production shifts to keep up with production demands but going to the additional shift has been delayed because of a lack of applicants needed to fill hundreds of positions. This, she said is “a massive issue for the industry because those pigs are already on the ground.”
Part of the labor shortage is based on the fact that many new and existing processing plants are clustered together in the same geographic region, specifically, Seaboard Triumph Foods (Sioux City, Iowa), Prestage Farms (Wright County, Iowa) as well as Tyson Foods’ massive beef plant in Dakota City, Nebraska and its poultry plant in Council Bluffs, Iowa. This creates an opportunity for workers to shop for a position that best suits their needs.
Meanwhile, the push for more product is unrelenting and the pork industry especially is being challenged by the addition of four new processing plants that are already online and a fifth (Prestage Farms) expected to be added within a year. “That’s adding about 10 percent incremental capacity,” McCracken said, a substantial production increase in a relatively short amount of time. The aggressive ramp-up would put a significant strain on the market not only from a supply standpoint but also as it relates to the labor shortage already hamstringing the industry.
“So, there’s some question about whether or not all this production is going to come on-line later this year,” McCracken said. Through the spring, however, production has increased more than expected as many predicted an uptick in animal disease to hinder numbers in the winter. But that didn’t happen as reported cases of Porcine Epidemic Diarrhea virus and Porcine Reproductive and Respiratory Syndrome were very low. “It has just been a very good growing season for pigs,” she said.
As for US exports of pork taking a hit now that Mexico has begun implementing tariffs, McCracken said she didn’t anticipate a sudden drop off in shipments, the clear majority of which are hams. “We still expect product to go to Mexico,” she said. “There isn’t a next-best alternative for Mexico. Our product will be competitive even with a 20 percent tariff, we’ll just sell less.”
In the poultry segment, an incremental increase of capacity of 10 percent in the chicken industry is expected, which is fueled by nine new plants coming on-line in the next two years, including Tyson Foods’ massive poultry complex in Humboldt, Tennessee, where ground was recently broken. This uptick in production is sure to bring more poultry to market, but also calls into question how or if the market can absorb the additional production and whether there are resources available to support that supply. Looking at production data for the past four years, McCracken pointed out how processors and producers have seen positive expansion, due in part to historically cheaper feed costs which had profitable results in the past two years and likely for the year to come. “It’s been a very profitable several years for the broiler industry and that’s part of why they’re expanding,” McCracken said, thanks to growing demand in the retail and foodservice segments.
Decreasing hatchability rates is another issue challenging poultry companies’ ability to increase production. The lower rates, McCracken said, are due largely to a transition in breeding among broiler producers to address changing consumer demands. “Part of it’s been the move toward antibiotic free that’s dramatically dropped the hatch rate by 2 percent to 3 percent over the past three years,” she said.
Increases in production and weights have helped offset some of the negative impact of the decreases in hatchability, but overall growth in production has remained basically flat while pricing has been favorable for processors, according to McCracken.
Consumption of meat and poultry in the US has been a trend that is hard to ignore and one that has many thinking it will relent. McCracken shared graphs illustrating a steady increase in protein consumption across the board, with annual chicken per-capita consumption leading the pack at over 230 lbs. for the past three years. But she questioned the sustainability of this trend.
“Really, how much more protein can the US consumer afford?” she asked. “A big part of why the US consumer has been able to absorb the additional production is because the economy has been on a roll,” in terms of consumer income growth, soaring consumer confidence and low unemployment rates. However, she cautioned there are red flags appearing on the horizon, including historically high consumer credit card debt and record-high delinquency rates on car loans among US consumers. “I would say that generally, right now there are some signs that we might be nearing a top rather than a bottom,” in terms of the US economy, she said.
The impact of trade issues and tariffs were a big part of McCracken’s presentation. Just one day before Mexico levied retaliatory tariffs on US pork shipped there, which will be ratcheted up from 10 percent to 20 percent in the next month, McCracken pointed out that concerns over how US policies with regard to the North American Free Trade Agreement (NAFTA) will affect the US economy is top of mind for Rabobank clients. She pointed out that US reliance on shipments of beef, pork and chicken to NAFTA partners and China is significant, comprising 40 percent of total proteins exported from the US. She said the US chicken industry isn’t as dependent on exports as some other proteins, including beef and pork. The last significant hiccup for the US export market is Woody Breast Syndrome which continues to be a challenge for the poultry industry as the mysterious myopathy inexplicably takes a toll on the profitability of boneless chicken breast meat along with the competition for center of plate among all proteins.
While the number of birds slaughtered in the spring are down, demand at retail and foodservice remains strong, and US exports of leg quarters are offsetting sagging pricing and demand for wings. “That goes back to when wings rallied last summer, and it essentially killed foodservice demand for wings,” McCracken said. Wing prices topped $2.15 per lb. in September 2017 but dropped to under $1.40 per lb. in May 2018.
Pork segment pricing is somewhat of a mixed bag looking to the future. “Hams have been under pressure in the last several weeks partially due to the export issues and partially due to this big increase in slaughter over the past two to three months,” McCracken said. Prices for loins have begun to rebound from a colder-than-expected beginning to the grilling season. Belly inventories are low for this time of the year and well below the same time a year ago, but a summer rally is expected.