Protein demand to taper through 2018Protein demand to taper through 2018
August 4, 2016
LAST year was a momentous year for U.S. animal protein as it showed the largest increase in U.S. meat consumption since the 1970s, with per capita consumption up nearly 5% (Figure), according to a new report from the Rabobank Food & Agribusiness Research & Advisory group.
Report author and Rabobank senior analyst Will Sawyer noted that "2015 saw the largest increase in U.S. per capita meat consumption in 40 years. We expect growth to taper in the coming years (2016 through 2018) and for it to be much more evenly weighted (among) the three proteins," i.e., poultry, beef and pork.
In the report, titled "Chickens, Cows & Pigs ... Oh My! Implications of Record U.S. Protein Expansion," Rabobank forecasts per capita meat consumption to rise 1.2-1.5% per annum through 2018, with beef being the largest driver of the growth.
"This level of consumption growth may not sound like that much in the context of the consumption patterns we see in the emerging markets; however, the U.S. is a mature market, with high levels of historically stable protein consumption," the report notes, adding that 1.5% average annual meat consumption growth would be the highest three-year growth rate in the U.S. in a decade.
As U.S. protein producers continue to experience record growth in demand, however, Rabobank predicts that prices over the next couple of years will fall.
Production of protein in the U.S. is projected to grow at a rate of 2.5% annually, but after a 5% jump in consumption within the domestic market, there are still many questions about demand at home, the bank said.
"While we don't foresee margins falling to the lows of 2008 and 2009 as prices decline through 2018, any producer considering a possible sale or divestiture should move quickly, as the outlook for margins and valuation multiples isn't moving in their favor," Sawyer noted.
The report shows that the next couple of years will be significant for all protein markets due to the strengthening of the dollar, especially against currencies in Canada, Japan and Mexico.
For the chicken sector, Rabobank said highly pathogenic avian influenza (HPAI) will remain a major concern and a threat to U.S. poultry exports. While most countries have enacted a regionalized approach to bans, it would only take one case of HPAI for an entire state to lose the vast majority of its export markets, Rabobank explained.
Declining commodity prices have also affected the U.S. poultry industry, as many of the largest overseas customers have been hit hard by declining energy prices.
Headwinds in the pork sector include Mexico's herd expansion and ractopamine issues, according to the report.
Mexico is the largest customer for U.S. pork on a volume basis, but strong margins have been causing Mexico's pork producers to expand their domestic herd. Rabobank estimates that Mexico's breeding herd has increased 15% over the past two years.
Regarding ractopamine, the European Union has been capitalizing on robust pork demand from China. Since the EU pork industry is fully ractopamine-free, which China demands, Rabobank said pork exports from the EU to China have doubled in the last three years. In fact, the EU today controls more than three-quarters of all pork exported to China.
"While an increasing number of U.S. pork producers have adopted a ractopamine-free supply chain and exports to China have started to climb, we still see a number of missed trade opportunities in this very important market," the report notes.
Rabobank called the beef export picture "a real mixed bag," with opportunities and threats on both the export and import fronts.
The decline in Australia's exports will help tighten the available lean beef supply in the U.S. as well as drive export opportunities, especially in the Southeast Asian markets, the bank said.
"In the first quarter of 2016, U.S. beef exports to Vietnam, South Korea, Taiwan and Hong Kong are all up by double digits. We expect this to continue, as it will take a good deal of time for Australia to rebuild its beef supply," the report notes.
A new source of competition has entered the picture, though, according to Rabobank. South America — mainly Brazil and Argentina — received approval from the executive branch to export beef to the U.S. However, lack of approved plants and lack of available quota are stalling the process.
"While the political forces behind this new trade flow are quite significant on both sides, it is only a matter of time before the South American beef finds its way onto the U.S. market, becoming a serious competitor to domestic production," Rabobank said.
Good time for consumers
Rabobank said with the protein supply in the midst of one of the largest increases in U.S. history, consumers will likely enjoy lower meat prices, especially for beef and pork.
"In the last decade, there has been a significant rise in meat prices at retail, largely driven by the increase in feed costs during that period," the bank explained. "As meat prices have more than caught up with the increase in feed costs, and with additional supply from all three major proteins on the horizon, the major question that remains is to what degree prices will fall in the coming years."
Beef will see the largest deflation because it has the worst feed conversion ratio of the three main proteins, Rabobank suggested, adding that this will, in turn, put increased pressure on chicken. Rabobank forecasts U.S. retail meat prices to decline 14% by 2018.
August live cattle futures closed at $112.975/cwt. on July 1 but closed as low as $107.525/cwt. over the past month. Nearby contracts have since recovered and strengthened, closing higher Aug. 3 at $116.75/cwt.
August feeder cattle futures followed the same trend. Nearby contracts closed at $142.45/cwt. on July 1, fell to a low of $134.40/cwt. on July 21 but have since gained momentum, closing Aug. 3 at $147.475/cwt.
The beef cutouts fell during the past month. Choice closed at $199.20/cwt. on Aug. 3, down from $208.57/cwt. on June 29. Select closed at $191.66/cwt. on Aug. 3, slightly lower than $195.88/cwt. on June 29.
Lean hog futures have plunged significantly since the middle of June, when they peaked at $89.325/cwt. August contracts closed at $89.325/cwt. on July 1 but closed lower at $68.35/cwt. by Aug. 3. Large hog slaughter, poor pork cutout values and less-than-stellar exports were likely the culprits.
The wholesale pork cutout finished at $77.21 on Aug. 3, down from $88.69/cwt. on June 29. Loins and hams on Aug. 3 finished at $81.67/cwt. and $61.64/cwt., respectively. Bellies saw significant losses during the month, closing at $132.51/cwt. on June 29 but dropping to $96.12/cwt. by Aug. 3.
Hogs delivered to the western Corn Belt closed at $66.34/cwt. on Aug. 3, sharply lower than $81.12/cwt. on June 29.
In the poultry markets, the Georgia dock was $1.11/lb. on Aug. 3, down only slightly since June 29. Breast meat prices have remained nearly unchanged at $1.63/lb. Leg quarters decreased slightly to 31 cents/lb., while wings dropped to $1.405/lb.
Egg prices have fallen about 20 cents over the past month. Large eggs delivered to the Northeast were 50-54 cents/doz. on Aug. 3, down from 71-75 cents/doz. last month. Prices in the Southeast and Midwest were 51-54 cents and 46-49 cents/doz., respectively. Large eggs delivered to California were 97 cents/doz., down from $1.26/doz. last month.
In the turkey markets, prices for hens and toms were nearly unchanged from the prior month, at $1.15-1.22/lb. and $1.15-1.39/lb., respectively.
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