Meat and poultry outlook clouded by inflation, drought and HPAI

KANSAS CITY – Three macro themes dominate the meat and poultry market: lower production despite high demand, a better job situation, and the indirect impact of the war between Russia and Ukraine.

Demand has been strong both domestically and in export markets, said Adam Stout, a risk management consultant with Kansas City-based StoneX Financial Inc.

“If you go back to the beginning of COVID and the pandemic, I don’t know if you could describe the demand as anything other than exceptional,” he said during a June 6 presentation at the Sosland Buying Seminar. “Demand has been great for all products.”

Unexpectedly, the US economy experienced spikes in income levels due to fiscal stimulus.

“US consumer cash on hand is unlike anything we’ve ever seen,” said Mr. Stout. “When the American consumer has money, he’s going to spend it, right? They will spend it in restaurants, they will spend it in the grocery store, and judging by the performance of some of these protein products, they will spend it in the case of meat.”

Despite the additional currency in the market, retail pricing has been a strain. Mr. Stout noted that retail prices across all protein categories are near record levels. Meat prices have increased by around 15%, largely due to domestic demand.

He also blamed higher costs as one of the many results of the ongoing war between Russia and Ukraine.

“We don’t trade much in the protein markets in either Russia or Ukraine, but the indirect impact is significant,” Stout said. “The concern is, are we going to continue to see demand?”

After the highest protein export shipments in 2021 the industry has seen, this year’s meat exports are already running at a slower pace, suggesting the start of a decline in demand.

As for keeping domestic demand alive, Mr. Stout believes that retailers use product promotions to get products moving. As a sign that produce may be running low, Stout recounted an anecdote of how supermarket chain Hy-Vee advertised the availability of a $1,300 beef side dish.

“That’s the one area where I think we might start to see some improvement in domestic demand that offsets some of these other inflationary pressures, if these retailers start cutting some of those margins and start introducing products,” he said.

The impact of the drought

While the jobs situation has recently been one of the biggest challenges facing all industries, including meat and poultry processing, Stout said it will likely be overshadowed by another pressing issue. She said widespread drought conditions are having the biggest impact on the food industry right now.

“Without the labor pact, where our focus is really on the biggest issues right now for cattle and beef and the long-term projections in that market, which is going to be drought,” he said. “Basically all areas west of the Missouri River have been significantly affected by the drought. That’s leading to a couple of things, which we’ll get into, but for the most part it’s just continuing our trend of contraction within the industry.”

Non-dairy cow slaughter rates are at their highest since the last drought a decade ago, leading to a reduction in overall herd size. Heifer numbers are hovering around 32%, compared to the usual 28%. With this trend, Mr. Stout expects supply issues to arise by the fourth quarter of 2022.

Inflation squeezes the pig

While the summer grilling season tends to be a sign of high demand for pork, foodservice and grocery store purchases are lower than anticipated, which Mr. Stout, may be due to the impact of inflation on consumption.

Hog slaughter volume is also down by about 5%, with reduced hog numbers and limited expansion, while margins are the highest in a decade.

“The concern on the industry side is simply the lack of expansion,” Stout said.

After the onset of African swine fever (ASF), which first began to appear in 2018, China has been working to make up for lost pig production. There has been an explosion of commercial processing in the form of pig hotels, with each level serving a different function in production. Mr. Stout said that, at the moment, China’s production figures have exceeded the targets set to recover from African swine fever.

“I think it came back much faster than anyone in the industry would have estimated,” he said.

bird flu blues

In the poultry segment, Stout attributed highly pathogenic avian influenza (HPAI) as the main denominator. He estimated between 35 and 37 million birds lost to date as a direct result of the disease.

One concern is the significant loss of turkeys from 5 million to 5.5 million, which is even more critical when considering the declining stock in cold storage, Stout said.

“It didn’t come at a good time in the industry,” he said. “If you look back and see where we are from a freezer inventory standpoint, our turkey stock was already running low, basically all year. This has been the case going back to COVID.”

Considering that broilers represent 90% of poultry production, they have the greatest impact on the sector. Although the loss for broilers is about half that for turkey, it is significant. Mr. Stout estimated that 800 million broilers are slaughtered per month compared to 20 million turkeys.

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