Three interrelated issues will determine the outlook for the US meat and poultry industry in the second half of this year and into next year. Processors will be hoping that demand for their products remains strong at home and abroad. Global demand for US protein will depend on the global economy, the removal of punitive tariffs on US pork and on the growing impact of African Swine Fever (ASF) on China’s hog population.
Two other related developments will also be important to watch. These include congressional ratification of the US-Mexico-Canada Agreement (USMCA) and the outcome of talks between the US and Japan to agree to a bilateral trade agreement. Neither area however will produce tangible changes this year or possibly during 2020.
The industry for the third year in a row faces the task of disposing of more than 100 billion lbs. of red meat and poultry. Total production first hit the triple-digit mark in 2017. Last year’s total was 102.429 billion lbs., according to USDA, and this year’s total is projected to be 104.245 billion lbs.
The industry will dispose of this protein but the key question is, at what price? Will beef wholesale prices hold up domestically and internationally as they did in 2018 because of strong demand? Will pork prices continue to strengthen because of the way ASF has already severely damaged China’s pork industry? Will US chicken prices remain depressed in light of another 1 percent increase in production this year versus last or strengthen on global demand for all proteins?
Beef had a year for the history books in 2018 in terms of domestic and export sales. The latter totaled 1.35 million metric tons (mt), up 7 percent from 2017, and exceeded the 2011 record by 5 percent. Export value soared to $8.33 billion, breaking the 2017 record by $1.06 billion, a 15 percent increase.
Pork export volume in 2018 came up just short of the record set in 2017 while value slipped 1 percent year-over-year. This was a remarkable achievement given that US pork faced retaliatory tariffs in Mexico and China/Hong Kong from June through December. The tariffs resulted in lost value of $11.75 per head or $860 million, according to the US Meat Export Federation (USMEF).
However, exports of both species cooled in February this year after a strong start for beef in January. January-February exports were 3 percent below last year’s record pace in volume (199,651 mt) but steady in value at $1.22 billion. The volume decline was mainly due to lower exports to Hong Kong and Canada, as shipments to most other major beef markets have trended higher in 2019, said USMEF. For January and February, pork exports were 5 percent below last year’s pace in volume (388,580 mt) and 13 percent lower in value ($950 million).
The stiff headwinds that trade disputes have created for US pork exports have certainly not subsided, noted USMEF President and CEO Dan Halstrom in March. USMEF is encouraged by reports of progress toward resolution of these disputes but in the meantime missed opportunities for export growth are mounting, he said.
On the beef side, there is still much to be excited about, especially with the launch of US-Japan trade agreement talks, Halstrom said. A great deal is at stake for both US beef and US pork in these negotiations. Exports to Japan deliver remarkable returns for the entire US supply chain and it is essential the US gets back on a level playing field with its competitors, he said.
However, a trade deal with Japan is unlikely to be finalized this year. Meanwhile, competition in Japan will intensify, as major competitors enjoyed another decrease in import duties on April 1. The duty rate for beef cuts from Australia, Canada, New Zealand and Mexico fell from 27.5 percent to 26.6 percent, while the US rate remained at 38.5 percent. The duty rate for beef tongues and skirt meat from these competitors is now 5.7 percent, while the US rate remained at 12.8 percent.
Pork exports could rebound in the second half of the year if Mexico and China remove their retaliatory tariffs of 20 percent and 50 percent (for a total of 62 percent), respectively. But Mexico is unlikely to remove its tariff until the Trump Administration removes its tariffs on steel and aluminum. The Canadian and Mexican tariffs on US products are a tax on Americans, and they jeopardize USMCA’s prospects of passage, noted Sen. Chuck Grassley (R-Iowa) in late April in an article in The Wall Street Journal.
Challenges in China
Increased exports to China will depend on whether China lifts its tariffs and how badly it needs US pork. The tariffs bit into US exports last year. A combined China/Hong Kong bought 495,637 mt of US pork in 2017 but only 351,774 mt in 2018. But China’s purchases in the last two weeks of April this year totaled 101,200 mt as ASF took its toll.
China had 19 percent fewer hogs in March than a year ago, estimated its agricultural ministry. This would cut the global pork supply by 6 percent on an annualized basis, according to Heather Jones, a financial analyst with investment firm Vertical Group. Earlier, Chinese officials had warned that pork prices in China could surge more than 70 percent this year.
Increased Chinese buying would benefit US pork processors, all of whom suffered much lower pork profits last year than the year before. Tyson Foods had pork operating income of $361 million in fiscal 2018 (ended Sept. 29), versus $648 million in 2017. Tyson in March gained approval for two plants in Iowa to begin shipping pork to China, the first such approval for US pork facilities since January 2016, according to USDA data. JBS USA Pork had a 2018 EBITDA of $537 million versus $780 million in 2017. More buying would be a boon for Prestage Farms, which opened a new $309 million pork processing plant in Iowa in March.
A global drawdown in pork supplies will also boost poultry processors, say analysts. Chickens’ much shorter lifespan allow producers to expand production quickly, and Chinese consumers are expected to supplement some of the pork they would have bought with poultry, as The Wall Street Journal noted in an April 29 article. China is going to import much more protein this year, Andre Noguiera, head of JBS USA, told analysts on a March 29 conference call.
“ASF has the potential to impact the global protein industry on a level that we have never experienced, and it is an event that will underscore the power of the Tyson business model,” Tyson President and CEO Noel White told analysts on a May 6 conference call. “A worldwide decrease in pork supply would offer significant upside to our pork business, while also lifting the chicken and beef businesses as substitutes and increasing raw material costs in our prepared foods business.”
Tyson’s protein businesses in fiscal 2018 had operating income of $2.240 billion ($1.013 billion for beef, $361 million for pork and $866 million for chicken). Income for the first six months of fiscal 2019 totaled $957 million ($461 million for beef, $195 million for pork and $301 million for chicken). This was somewhat lower than the combined $1.067 billion in the first half of fiscal 2018. JBS USA in 2018 had $3.054 billion in EBITDA ($1.719 billion for beef, $537 million for pork and $798 million for chicken).
The bottom line is that depending on how the trade variables play out, US meat and poultry companies will have another excellent year. Beef profits look set to challenge or exceed 2018’s records while pork profits might return to their levels prior to the imposition of retaliatory tariffs. The US meat and livestock industry however will be holding its breath that, in the event of USMCA not being ratified, President Trump does not carry out a threat to withdraw from NAFTA.