Survey results indicate optimism among processors heading into 2017, but new challenges lie ahead.
The Processor Confidence Study was commissioned earlier this year by M+P and conducted by Kansas City, Missouri-based Cypress Research Associates LLC. The purpose of the study was to gather data on and provide insights into the meat and poultry industry outlook; company revenue and confidence; international sales; gross margins; operations and capital expenditures among other topics affecting the meat and poultry industry.
Processor Profile
Using a subscriber database of processing companies provided by M+P, researchers developed a sample of 10,385 meat and poultry industry executives from mid-level and upper-management job positions. Of that sample, 245 companies were represented among the 322 online surveys completed by individuals.
The Processor Confidence Study included responses from employees of slaughter facilities and processing facilities of poultry, beef, pork, lamb, veal and seafood. Companies were categorized based on gross annual sales for fiscal year 2016. Companies with less than $50 million in annual sales totaled 110; 34 companies reported annual sales of $50 million to $99 million; 76 companies reported annual sales of $100 million to $499 million; and 102 companies had annual sales of $500 million or more.
Among those companies, 144 respondents worked at companies that reported annual sales of less than $50 million or $50 million to $499 million; while 178 respondents worked at companies in the $100 million to $499 million and $500 million-plus annual sales range.
Twenty-eight percent of respondents were CEOs/executive management, while 18 percent of respondents identified as working in operations/manufacturing/product management. R&D/quality assurance management and sales/marketing management tied with 16 percent of respondents each, followed by plant/general management (12 percent); purchasing management (8 percent); and financial management (2 percent).
Telling Results
Ask a meat and poultry processor what is their main business concern and food safety usually tops the list. But the M+P study found that food safety came in a close second, at 56 percent, to concerns about the lack of skilled labor which garnered 59 percent of all survey responses.
Temple Grandin, Ph.D., professor of animal science at Colorado State Univ. and longtime M+P columnist, recently wrote about the shortage of skilled workers facing the meat and poultry processing industry in her “From the Corral” column.
“One of the reasons this shortage is occurring is that the older maintenance people are retiring and not enough qualified young people are available to replace them,” Grandin wrote. “A major cause of this shortage is that many high schools no longer offer classes in skilled trades such as welding, auto mechanics and other trades. Students need exposure to different careers in order to develop an interest. They are not going to get interested in mechanics or welding if they are never exposed to it.”
Labor costs came in third at 50 percent, with 59 percent of small companies earning less than $100 million indicating labor costs were a top business concern, and the recent changes to overtime pay requirements may be behind their concerns. M+P labor columnist, Richard Alaniz, senior partner at Alaniz Schraeder Linker Farris Mayes, LLP, a Houston-based national labor and employment firm, recently reported that wage-and-hour lawsuits represent the largest category of employment-related, class-action court filings, and changes in the law frequently result in an increase of those types of complaints.
This year, the US Dept. of Labor announced a significant change in the “white collar” exemptions test which more than doubled the threshold for exempt employees. Under the Fair Labor Standards Act (FLSA), the salary test to exempt an employee from overtime requirements was a weekly salary of $455 per week, or $23,660 per year. The announced revisions call for raising the salary test to $913 per week, or $47,476 per year, with subsequent increases of the salary threshold each year.
Twenty-one states sued the Dept. of Labor in opposition of the new overtime rule. Kansas Attorney General Derek Schmidt was among the state attorneys general to file a lawsuit challenging the new rule. “…the unauthorized federal mandate affects not only private businesses but state taxpayers, who will bear the added cost imposed on state government,” Schmidt explained in a statement. “Our legal objection is that any power to impose this mandate on states rests with Congress, which has not delegated that power to the bureaucrats at the US Department of Labor.”
But despite concerns about labor costs, 42 percent of respondents to the survey plan to add employees in 2017.
Eye on Economics
A majority of respondents reported their companies had high expectations for revenue growth in 2016. Eighty-two percent of respondents expected revenue growth in 2016; and a majority of large companies (81 percent) expected higher revenues in 2016. Seventy-nine percent of executives expressed a positive outlook for revenue growth in 2017.
When asked about gross margins, 30 percent of companies expected higher gross margins this year, while 34 percent of companies expect an increase in gross margins in 2017.
More than half of the companies surveyed for the confidence study export products, and this figure includes 78 percent of large companies. For 2016, exporters expected international sales growth of 5.9 percent, and 44 percent of companies surveyed expect growth in international sales in 2017.
The US Dept. of Agriculture forecasts agricultural exports for fiscal 2017 at $133 billion, up $6 billion from the most recent forecast and up from a revised $126 billion in fiscal 2016. China is projected to be the largest US export market in fiscal 2017, surpassing Canada.
Demand for pork in China is a significant driver of US export gains. In 2015, US pork producers exported 339,056 metric tons of pork to Hong Kong, including variety meat, with a value of $700 million, according to US Meat Export Federation (USMEF) data.
Exports of US beef to Hong Kong in 2015 totaled 120,905 metric tons with a value of $800 million, according to USMEF figures. The possibility exists for more beef exports to China after the government signaled its intention to restore imports of US beef to the mainland. In September, China’s Ministry of Agriculture and General Administration of Quality Supervision, Inspection and Quarantine said China would begin accepting US beef from animals less than 30 months of age, but did not specify when imports would resume. China imposed a ban on US beef after the US reported its first confirmed case of bovine spongiform encephalopathy (BSE) in 2003.
Operations Outlook
Hardly a month went by in 2016 when a meat and poultry processor didn’t announce plans to upgrade existing plants or build new ones. Processors expect the trend to continue into 2017, according the confidence study.
Sixty-two percent of companies are planning major new capital investments next year, with 77 percent of large companies reporting such plans. This makes sense given that the average for company-wide operating capacity is 73 percent, according to the confidence study.
Demands on processors continue to evolve as consumers seek out better-for-you options for meals. Among the most significant trends to sweep the meat and poultry processing industry is demand for antibiotic-free (ABF) and organic products. Greeley, Colorado-based Pilgrim’s Pride, a unit of JBS SA, is converting one of the company’s poultry processing facilities to USDA-certified organic production in the first quarter of 2017. The company also started work on converting a case-ready poultry plant to produce antibiotic-free, vegetarian fed chicken.
“Together with our prior announcements on organic and ABF fresh chicken as well as further processed products, we believe the latest conversion reinforces our strategy to better resonate with new consumer trends for more natural products while adding further value to our portfolio and supporting the growth of key customers,” CEO Bill Lovette said during the third quarter. “Furthermore, these investments signify our commitment to look for new sources of potential earnings drivers while lessening the impact of volatile commodity markets in the long run.”
