SNEAK PEEK: The power of protein in the New Year

Meat & Poultry, Dec. 28, 2017 - by Steve Kay
A strong demand for beef in 2017 surprised many in the industry.

At the start of 2017, meat and poultry processing companies faced a blockbuster protein year. Several equities and other analysts forecast doom and gloom for the markets and for profits for publicly traded companies. However, the exact opposite occurred, because demand at home and abroad for beef, pork and chicken was far stronger than forecast. This turned out to be the industry’s “story of the decade,” for there has never been a year when consumers drove industry profits to new record levels.

The industry’s fortunes have historically relied on the strength of demand because all wealth to the industry comes from consumers at home and abroad. Stronger-than-expected demand for beef and pork in both markets last year surprised most in the industry and helped prices for cattle and beef, hogs and pork, to be higher than forecast. Demand is likely to remain strong this year, as the macro-economic indicators are positive. US gross domestic product (GDP) is growing steadily year-over-year. The New York Fed last November raised its fourth quarter GDP growth estimate to 3.8 percent and 4 percent might have been achievable. An annual growth of 4 percent in 2018 would add approximately $800 billion to total US GDP. This is a big positive as consumer spending accounts for approximately 65 percent of GDP.

Red meat and poultry processors are probably looking back on 2017 and saying: ‘How can we possibly top that?’ The last year saw the most money ever made in beef, pork and broiler processing. Every sector fired on all cylinders to produce record beef and pork profits and near-record chicken profits. Every company that reports their earnings had record years.

Can such a banner year be repeated? The cautious answer is yes, but it will take even stronger fundamentals than last year. The key ingredients will be demand at home and abroad, an increased supply of livestock and birds, and an even stronger US economy. These were the drivers that brought weekly smiles to processors’ faces, and no doubt their lenders and investors. These drivers are still intact and barring some unforeseen crisis, might propel earnings this year to the same lofty levels seen in 2017.

The only shadow currently hanging over the industry is the contentious talks between the US, Canadian and Mexican governments to re-negotiate terms of the North American Free Trade Agreement (NAFTA). The entire agricultural sector, including the meat and poultry industry, has lobbied anyone who will listen as to the vital importance of NAFTA to US agriculture and how NAFTA’s agricultural provisions must be maintained.

They no doubt have reminded the White House and members of Congress that America’s food and agriculture sectors account for roughly one-fifth of the country’s economic activity. The two sectors support 22.8 million jobs, which equals 15 percent of total US employment. These jobs pay $763.12 billion annually in wages. The sectors have a direct output of $2.82 trillion and pay $891.4 billion in business taxes. The sectors annually export $146.32 billion of products.

Data from the US Dept. of Commerce says that meat packing, meat processing and poultry slaughter and processing in 2015 had total sales of $211.5 billion. This included: meat packing, $99.250 billion; meat processing, $48.326 billion; and poultry slaughter and processing, $63.980 billion. These numbers were likely much larger in 2017 because of larger production.

Industry lobbyists will also have pointed out that the meat and poultry industry employs nearly 900,000 workers. More than 488,000 work in meat packing plants (those that slaughter animals) and nearly 119,000 work in meat processing plants that further process meat cuts into ground beef, hot dogs, ham and other products. An additional 281,000 people work in poultry processing plants.

They will also have pointed out the value of NAFTA in boosting exports. The US meat and poultry industry contributed $16.22 billion to the estimated $135 billion in agricultural exports in 2016. Industry analysts say the future strength and growth of the US meat and poultry industry depends upon the expansion of trade into foreign markets, particularly as domestic per capita consumption of meat and poultry remains fairly stable and production increases, as it will likely do again this year in all three proteins.

Read the rest of this outlook report in the January 2018 issue of MEAT+POULTRY.