Mexico’s unwelcome Christmas gift to U.S. beef and pork processors was a reminder of how crucial exports are to the redmeat industry. Mexico temporarily suspended imports from 30 plants Dec. 23. In response, livestock futures fell hard Dec. 26 and share values of Tyson Foods and Smithfield Foods fell several percentage points.
Mexico’s trade officials lifted the restrictions on most plants within a week or so of its action, which it says was based on packaging, labeling and transportation issues. But at the same time, it said it wants to ban the use of combos for all imports. These containers, which can hold up to 2,000 pounds of meat, are widely used to send hams, bellies and trim to Mexico. A combo ban would affect up to 80 percent of all pork exports to Mexico, say packers. U.S. Dept. of Agriculture officials met with their Mexican counterparts Jan. 5 to discuss the issue. Mexico’s December disruption was also a wakeup call for the industry and USDA to do a better job of eliminating errors that can halt exports, say observers. The action was unprecedented in terms of the number of plants involved. It temporarily delisted 45 percent of the pork industry’s total daily slaughter capacity, says Steve Mayer, Paragon Economics. It delisted only three beef plants. But other beef companies’ exports were apparently held up at the border as well.
The U.S. cannot afford any disruption in its red-meat exports to Mexico, as it is by far the largest buyer of U.S. beef and pork. From January to the end of October 2008, Mexico bought $1.75 billion of U.S. beef ($1.2 billion) and pork ($550M million), versus $1.623 billion in sales to Japan. Mexico was even further ahead in terms of volume, importing 647,193 metric tons (339,137 mt of beef and 307,056 mt of pork), versus 442,311 mt into Japan.
Exports were key to pork processors’ profitable year in 2008. Operating margins averaged $5.75 per head, according to HedgersEdge.com. That’s about $657 million for the entire industry, based on a total slaughter of 114.2 million head. However, pork producers suffered heavy losses. Farrow-to-finish operations lost $21 per head, according to John Lawrence, professor of agricultural economics, Iowa State University. Yet producers might have a breakeven year in 2009, he says.
The industry produced an estimated 6 percent more pork than in 2007. But domestic demand held up well despite the economic crisis, and exports were dramatically higher than the year before. January-October saw 1.6 million metric tons exported (up 67 percent from the prior year) worth $4.1 billion.
However, pork exports are expected to decline 14 percent in 2009, which will be the first annual decline since 1993. USDA’s latest quarterly Hogs & Pigs report showed the U.S. hog population down 2.2 percent on Dec. 1 from a year earlier and the number of market hogs down 2.1 percent. These and several other numbers suggest that 2009 pork production will be 3 percent lower than in 2008, says Lawrence. With a reduction in exports, U.S. per capita pork consumption will be down only 1 percent to 2 percent.
This means the pork industry will depend more heavily on the domestic market than in 2008 and pork will compete even more with chicken and beef. Chicken exports in 2009 are expected to decline 8.2 percent from 2008 although production will be down only 2.7 percent. Beef exports are forecast to be up about 3-4 percent, which is a virtual flattening out after their 30 percent increase in 2008 vs. 2007. Meanwhile production will be down less than 1 percent.
Beef packers had their most positive year in 2008 in margin terms since 2003, thanks in large part to strong export demand in the second and third quarters. Margins averaged $11.68 per head, according to HedgersEdge.com. But packers had negative margins in the first quarter and even more negative margins in the fourth. Margins in the early part of 2009 might remain negative, given weak beef demand at home and little or no growth in exports, say analysts.
The weakened world economic outlook will force more beef exports from Australia and New Zealand into the U.S. market, says Andrew Gottschalk, HedgersEdge.com. This will reverse a four-year decline in beef imports into the U.S. The world will realize that income gained or lost by consumers internally impacts imports and exports more than the oft-quoted exchange rates, he says. The changes in the import/export outlook will temper the expected decline in net domestic beef supplies in 2009. So beef will face more competition in the domestic market for consumer dollars than previously expected. In the current period of economic weakness, the absolute price of each product is a greater driver of sales than the relative value of competing meats, he says.
The expected decline in the production of all three major proteins in 2009 will be the first-year-on-year decline in history. This would normally mean significantly higher wholesale meat/poultry and livestock prices. But the economic crisis and reduced consumer spending will override the benefits of smaller supplies, say analysts.
Producers welcome a new year
Most industry participants, particularly on the livestock side, were happy to see the end of 2008, one of the most challenging years in history. But 2009 might remain almost as tough for most of the year, say analysts. The key factors will be action by the new Obama Administration, renewed stability in the stock market, a steadying of consumer confidence in the economy and an increase in consumer spending and livestock feed prices.
USDA’s latest Cattle on Feed report showed that cattle feeders placed fewer cattle in feedlots than a year earlier for the ninth month in a row apart from July. Record losses ($120 per head or $3.1 billion for the sector) had a lot to do with this, as did tighter borrowing requirements. Cattle feeders are also convinced the price of cattle outside feedlots will decline in the coming months. This should help feeders eke out modest profits in the second half of 2009. But it’s bad news for producers who still own their 2008 calves and others who have cattle out on winter grazing. In 2008, many cow-calf operators saw their first cash-based loss in as many as 10 years. Just when they expected to be in the drivers’ seat in terms of prices for young cattle because of shrinking cattle numbers, they face the same pressures that cattle feeders and packers are under.
The industry might see a bigger-than-expected increase in beef production from the second to the third quarters, say analysts. The lower 2008 placements mean there were an estimated 600,000 more cattle outside feedlots on Jan. 1, 2009 than a year earlier. Some cattle are grazing on winter wheat pasture and will come into feedlots at quite heavy weights, say analysts. Should placements increase rapidly in late January-early February, a large number of cattle might be marketed in the third quarter. Beef production in the quarter might be higher than a year earlier but then decline year-on-year in the fourth, they say.
Supply, demand and today’s economy
A wider challenge facing packers and cattle feeders is the declining cattle numbers in the U.S. and Canada. The industry’s top 30 packers reduced their daily slaughter capacity in 2008 by 2.1 percent from the year before, according to the Cattle Buyer’s Weekly annual survey. That was mainly because Tyson Foods in February ceased slaughtering cattle at its Emporia, Kan. plant. The top three (Cargill Meat Solutions, Tyson and JBS USA) increased their capacity by 5.3 percent, but this reflected JBS’s acquisition of the Smithfield Beef Group. The top 30 packers now have capacity to process 132,000 head per day. Adding all other plants to this number suggests the industry still has about 10 percent over-capacity on a daily basis. Saturday kills of any size were rare in 2008 and that trend will continue in 2009.
Downsizing because of the smaller cattle population will continue in 2009.
Speculation mounted in December as to whether JBS might close a plant to satisfy the Justice Department’s complaint against its acquisition of National Beef Packing. The plant most often cited is JBS’s Cactus, Texas plant. But JBS has repeatedly said it is not acquiring U.S. assets to close any of them. So it remains to be seen what action it might agree to, if any.
The beef industry’s biggest concern though is soft demand in light of consumer cutbacks in spending. For years, Americans have spent relatively freely. That’s why consumer spending represents 70 percent of GDP. Some of that spending went on credit cards and came out of homeowners’ equity. Americans still have a lot of debt but less equity savings. They are spending less on everything, including food.
This is affecting beef demand in several ways. Consumers are transferring their food dollars from eating out to eating at home, and they are trading down in their meat purchases. The mid- and upper-tier restaurant business is hurting – two mid-tier chains filed for bankruptcy protection in 2008 – but fast-food chains and grocery chains are thriving. Restaurants are seeing both their top and bottom lines suffer.
But McDonald’s saw November sales in its U.S. stores up 4.5 percent from the previous year, while global sales were up 7.7 percent. This followed October sales, which were up 5.2 percent and 8.2 percent, respectively. Largest grocery chain Wal-Mart is seeing more store traffic than ever. These two companies are the only two of the 30 companies that make up the Dow Jones Industrial Index that have a higher stock price than a year ago. Largest conventional grocery chain Kroger reported its sales in its latest quarter were up 9 percent from a year earlier.
Consumers are eating fewer steaks and more hamburgers and ground beef. Middle-meat wholesale prices are lower than normal. Cheaper cuts such as chucks, rounds and fatty trim are higher priced than a year ago. But these items can’t sustain the overall value of a carcass. So that value has declined and was struggling as 2009 began.
Lack of consumer spending has put retail meat managers in a bind. They are unwilling to lower their everyday beef prices much because they’re trying to maximize their profits on reduced beef sales. They’re also buying beef virtually for immediate sale because they don’t know how consumers will spend their dollars. This led packers to carry out their biggest Christmas-New Year production cuts in years. They killed an estimated 175,000 fewer cattle than the year before in a four-week period, including the two holiday weeks.
Such cutbacks raised concerns that cattle ready to be marketed might start backing up if weekly slaughter levels don’t pick up sharply in January. The industry will have to process an average 660,000 head per week during the month, say analysts. But the market will be swamped with beef if that occurs. An even bigger concern is how packers struggled to raise prices at year-end despite the cutbacks. This reinforced the belief that more consumer spending and improved demand hold the key to profitability for the red meat sector in 2009.This article can also be found in the digital edition of MEAT&POULTRY, January, starting on Page 26. Click here to search that archive.