An unprecedented combination of factors affecting the production and movement of foods around the world is having a major impact on meat and poultry markets, and retailers and their supply partners won’t likely see that changing anytime soon.
“Given the strength in the markets during the first quarter of 2022, there is a high probability that wholesale prices will remain supported through the balance of 2022,” Brian Earnest, lead economist for animal protein for CoBank, said in a recent report.
The US Department of Agriculture is currently forecasting that livestock prices will be up 10% year over year for 2022 overall, Earnest said.
Surprisingly, he added, as dining restrictions have eased over the past 12 months, retail channel support has seen minimal contraction. With grilling season in mind, it’s likely that the retail meat department’s focus will shift to profit margins over sales volumes this year, meaning consumers can expect more creativity in the meat case.
Rather than vying for consumer dollars through aggressive price points, “no price” features will be an attractive solution, according to CoBank. Additionally, while prices for end cuts have been elevated, grinds show moderate price support, suggesting a likely increase in use of burgers and all-beef franks more frequently featured during grilling season.
“If consumers’ real incomes continues to decline along with higher meat prices, we may finally see a significant change in their willingness to pay for red meat,” Earnest said.
If that turns out to be the case, the US broiler industry may yet again be well positioned for modest growth and strong margins. But CoBank does not expect that the opportunity will likely rival the expansive growth that occurred from 2017-20, when eight new broiler plants were built in the United States.
Despite everything, surging demand
Over the past two years, ever-changing consumer behavior has buffeted the food sector. Initially, consumers responded to the pandemic by stocking up on grocery shelf staples and avoiding sit down dining. As COVID outbreaks ebbed and flowed, so has consumer restaurant spending.
But during that entire time, according to the report, retail meat demand has remained steadfast.
“These unprecedented changes in spending patterns have proved extraordinarily difficult for livestock producers, meat processors, and consumer-facing channels,” Earnest said.
Combined with the ongoing severe drought conditions in the Western US amid the backdrop of modest feeder calf prices, the nation’s beef cattle inventory remains in decline, according to CoBank. The combined cow and replacement heifer inventory has dropped by a whopping 12% since 2017, and the nation’s sow herd is contracting and is down nearly 6% over the past three years, primarily due to losses sustained in 2018-19, prior to the pandemic.
USDA is forecasting a 2% decline in U.S. beef and pork production in 2022. Given the broiler industry’s ability to quickly ramp up production, CoBank expected it to pick up the slack in terms of overall meat production, but that has not turned out to be the case. Broiler production expanded rapidly from 2013 to 2019, up some 2.4% annually on average. In contrast, during the most recent two years, (2020-21) annual broiler meat production growth averaged just 1.1%.
“Factors at play include uncertainties regarding the future of food service, high feed costs, ongoing chick survivability, and Highly Pathogenic Avian Influenza sweeping through US commercial poultry,” according to the report.
Overall, USDA expects minimal growth for chicken production, up just .7% in 2022.
The bottom line? Slightly higher poultry production and slightly higher red meat imports will leave the domestic meat and poultry supply essentially unchanged in 2022.
Feed, labor, energy — all higher
Animal feed prices also continue to play a huge role in surging markets. Feed prices have skyrocketed from where they were in 2020 as global grain balance sheets tightened amid smaller global harvests in 2021 and now by Russia’s invasion of Ukraine.
The invasion shocked grain markets and sent grain and oilseed crop prices up 20%-30% in a matter of days.
And while feed is the largest variable cost to livestock production, it’s not the only cost, as the CoBank report emphasizes. Labor and energy also represent major expenses, and both of those have been rising steadily as well.
The sharply higher costs for feed, and energy in particular, have yet to fully impact wholesale and retail meat prices. Thus far, the consumer has been assuming more of the burden of higher production costs as they’ve shown up in prices on shelves and menus.
“The intense media coverage of food inflation in recent months has prepared consumers, in a somewhat perverse manner, for higher food prices, which is minimizing ‘sticker shock’ in 2022,” Earnest said. “In previous times of real income reductions, consumers have traded down to ‘value’ options such as chicken breast and pork chops.”
Price volatility across the animal protein sector has become a daily headache for procurement teams to manage, according to the report. While prices started 2022 in post-holiday doldrums, wholesale values were still elevated compared with pre-pandemic levels.
Volatility in wholesale markets remains an obstacle for promotional planning. With combined cutout values of beef, pork, and chicken climbing 22% YoY for the first quarter of 2022, consumers are all but certain to see higher prices in the meat case.
Current dynamics playing out in whole turkey and ham segments may signal what to expect for on-shelf prices for the rest of the year. Turkey, and specifically whole turkey prices early in the year, can indicate retailer price expectations for the year because they contract and take delivery early in the year for the fourth quarter holiday period, Earnest said.
To start 2022, wholesale turkey prices were up more than 20% from a year earlier, and 30% above the three-year average. A major factor tightening ham availability is reduced labor availability. COVID exacerbated an already tight labor market hampering pork processors’ ability to de-bone hams, forcing larger bone-in ham volume into export markets. While bone-in ham prices have fallen to 10-year lows, boneless ham values have risen to levels not seen since 2015, doubling the spread between the two cuts, to about $160/cwt. With no end in sight to the industry’s labor woes, we can expect the premium for domestic boneless ham supply will remain elevated for the rest of the year.