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Ongoing uncertainty to stymie animal protein growth in 2023

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Rabobank says opportunities exist but will be more restricted.

Global animal protein production is expected to grow modestly in 2023, but more change is on tap, bringing ongoing uncertainty for producers, according to Rabobank’s “Global Animal Protein Outlook 2023.” Elevated disease pressure, high costs, swings in consumption and regulatory and market-driven changes will all continue to muddy the outlook.

“It has been a year like no other for the animal protein industry. Companies have grappled with rising input prices, supply chain disruption and geopolitical strife, many of which are unresolved as we head into 2023," said Justin Sherrard, global strategist for animal protein at Rabobank. "These factors have increased costs across the market, but while prices rise quickly, they tend to fall more slowly."

Rabobank said opportunities still exist but will be more restricted, recommending that animal protein companies view 2023 as “a year to recalibrate their growth expectations and plans.”

Prices are expected to remain high next year, even as the market enjoys steady production growth on the back of a growing supply of aquaculture and poultry, Sherrard added. "This masks reductions in the supply of beef, due to contraction in the U.S. after years of drought, and the weakening pork market in Europe."

Stll, the greater challenge for animal protein companies is how they wll approach the next decade of growth, not simply the next year.

"Structural changes in the market, such as increasing awareness of carbon footprints and a proactive approach to managing disease, offer opportunities for the most forward-thinking companies to invest and prosper. In other words, it is now decision time,” Sherrard said.

Given the ongoing pressures, Rabobank said animal protein companies need to choose either a near-term or long-term approach. Companies choosing to focus on near-term cyclical pressures should “stay the course” with the lessons learned from the pandemic and invest to improve market intelligence, to further develop networks, and to better read market signals and ensure partners can shift directions quickly. On the other hand, companies choosing a longer-term focus should keep their eyes on the horizon “by building supply chain resilience to strengthen access to inputs and customer connections, which will also enable the transition of production systems and the achievement of sustainability goals.” 

Feed cost relief will be rare

According to the report, global grain and oilseed prices nearly doubled (up 94%) from May 2020 to May 2022, due to stronger demand, ongoing supply issues, and growing geopolitical uncertainty. Rabobank explained that these price challenges are not unprecedented as similar headwinds created a 170% increase in global feedstuff prices from 2005 to 2008. During that timeframe, animal protein producer margins turned negative, and the same result is possible this time, the report suggested.  

Rabobank expects prices in 2023 to remain relatively rangebound, as the primary factors that led to the most recent rally remain intact.

Drought will continued limit growth in grain and oilseed balance sheets as three years of a La Niña weather pattern have capped global production. While long-range weather forecasts predict a transition to a more neutral pattern by Q2 2023, Rabobank said a warmer and drier Q1 could still lead to drought in 2023 for the Northern Hemisphere.

Input costs influence competitiveness

The impact of higher input costs varies by region and species, influencing competitiveness, according to Rabobank. The poultry and aquaculture sectors have the ability to manage the impact of costs more easily due to efficient feeding and shorter production cycles, but pork and beef face greater challenges.

“Skyrocketing energy prices and a weakening euro are already affecting Europe’s competitiveness, while the strength of the U.S. dollar may affect U.S.,” the report noted, adding that regulatory and market-driven changes, such as the Norwegian government’s proposal to tax aquaculture, could also impact competitiveness.

North American animal protein

Rabobank provided a snapshot of the North American beef sector, forecasting that the cow herd will be down nearly 2.5 million head from its January 2019 highs. With around 50% of operations experiencing drought and near-record-high feed and forage prices, the lows of 2014 will be revisited by 2024, the firm suggested.

“Expect beef production to decline in 2023 and to continue to decline as herd rebuilding keeps heifers and cows in pastures, away from processors.”

A 3% decline in U.S. beef production in 2023 and then another 2-5% decline in the following three years will shift movement of beef throughout the global marketplace, the report noted.

“In the near term, growing beef production from key global exporters likely won’t fill the void left by the U.S., and, in all likelihood, lower U.S. exports over the next several years will be compounded by stronger demand for imported beef by U.S. consumers as domestic supply shrinks.”

On the pork side, Rabobank expects some improvement in North American pork production in 2023. This comes after two years of battling herd health challenges.

“Stronger biosecurity protocols and increased herd immunity are likely to limit the impacts of disease, with reduced herd losses and better health to drive productivity growth by midyear,” the firm stated.

As a result, U.S. production will rise by 0.2% year over year, although Rabobank forecasts little to no sow herd growth. Mexico's pork production is forecast to rise by 3%, while Canadian production will remain flat.

Rabobank emphasized the importance of exports to carcass valorization but expects challenges to remain given weaker global economic trends. The report suggested trade within North America is likely to remain steady, and although the probability is low, stronger exports to China could dramatically enhance North American export potential and tighten domestic supplies.

Regarding the poultry sector, the report said gains in productivity in late 2022 and a shift toward larger bird weights will result in an 0.8% increase in U.S. ready-to-cook broiler meat availability in 2023.

“Improvements in hatchability are driving a majority of the increase, allowing integrators to shrink the breeder flock to reduce costs,” Rabobank said.

The turkey and egg sectors continue to be affected by highly pathogenic avian influenza (HPAI). Rabobank said 9.2% of the U.S. turkey flock has been affected by the virus, which will constrain production through the first half of 2023. Given the ongoing risk, the industry will also be slow to repopulate.

Egg supplies will also remain constrained through Q1 2023, but Rabobank said repopulation should accelerate as HPAI risks are contained.

While broiler flocks in much of North America have seen limited impact from HPAI, given shorter production cycles, Rabobank said the overall record losses due to HPAI in 2022 and the high cost of culling are forcing a re-examination of biosecurity and potential vaccination measures.

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