Per capita animal protein consumption in the U.S. will climb to an all-time high in 2019, surpassing the previous record set in 2006, prior to the 2008 financial crisis and the run-up in feed costs. However, the animal protein sector is entering a period of transition as four consecutive years of significant domestic consumption growth is now beginning to pressure prices and producers’ bottom lines.
Export growth will be key for U.S. beef, pork and chicken producers as growing meat supplies and processing capacity outstrip domestic demand, according to a new report from CoBank’s Knowledge Exchange Division.
“The domestic consumption growth rate animal protein has experienced over the last five years is expected to plateau soon,” said Will Sawyer, animal protein economist with CoBank’s KED. “With the cow herd at multi-year highs and pork and poultry processors expanding capacity, exports will likely underpin further industry expansion for the U.S. in the years ahead.”
With U.S. consumers struggling to increase their appetite for meat and poultry going forward, and with significantly higher economic and consumption growth abroad, the U.S. animal protein sectors will need to increase their focus on international markets for growth.
In 2018, the U.S. exported 12 percent of beef production, 16 percent of chicken production and 23 percent of pork production. While these figures are far higher than where the industry was 20 years ago, further growth in exports will be needed if U.S. producers want to expand production in the coming years.
“While the need for increasing exports is clear, it’s frequently met with concern or skepticism among producers and all links throughout the supply chain,” said Sawyer. “Concerns lie primarily in the fear that the more exports play a role in supply and demand, the more exposure producers and industry participants have to increased market volatility and lower margins.”
Bigger Risk, Bigger Reward
Greater reliance on export markets has resulted in higher prices for the animal protein sectors in other exporting nations, including Australia, Brazil and Canada. However, analysis shows that greater profitability has offset that price volatility for beef, pork and poultry producers in each of those countries, despite declining domestic consumption in both Australia and Canada.
In the comparison of Brazilian poultry to U.S. poultry, Brazilian poultry price volatility over the last fifteen years has averaged approximately 15 percent per year, while in the U.S. it has been slightly less at around 12 percent. Conversely, over that same time period Brazil’s poultry producers have seen an average increase in prices of six percent, while prices for U.S. producers have increased just 2.6 percent.
“In other words, Brazilian producers experience just 2.5 percent of price volatility for every percent increase in prices while U.S. producers endure 4.5 percent of price volatility for the same degree of price change,” said Sawyer.
This superior risk-to-reward level is also true for Canadian pork and Australian beef relative to the U.S. In the case of Australia, fed cattle prices have been slightly less volatile than what U.S. producers have experienced over the last fifteen years, all while having a slightly higher rate of return. This is significant as Australia exported 71 percent of its production in 2018 while the U.S. exported just 12 percent, which were all-time high levels for both markets.
Growth opportunities involving exports can carry significant risks as demonstrated during recent trade disputes between the U.S. and some of the most important international customers for U.S. animal protein. However, those who accept these risks are often rewarded, according to Sawyer.
“Profitable growth has always been at the core of the industry, and has enabled producers and processors to recover from the historic volatility and costs from 2007 through 2012,” added Sawyer. “The groundwork has already been laid from the supply chain to industry representation to let trade drive the industry forward over the next decade. Long-term, exports will be the key driver for further expansion across the animal protein sector.”
With meat supplies back at all-time highs, opportunity for growth lies in international markets, Sawyer concludes. The increased market volatility that comes with greater exposure to export markets is offset by higher prices and improved profitability for producers.
A video synopsis, and the full report, “Protein Passport: Exporting Your Way to Growth,” are available at cobank.com.