Consumer demand rises | Beef production decreases, leading to price increases for meat
Beef and pork prices should rise in 2013, says a leading agricultural economist.
An increasing middle class that is consuming more meat combined with declining beef production is a recipe for higher prices, said David Nelson, global strategist with Rabobank International.
Global gross domestic product has gone up 35 percent over the past six years despite the economic slowdown. The growth has been led by China, India and Indonesia, three countries where consumer demand for protein is accelerating as people become wealthier.
Every day in China a new KFC retail outlet opens. Nelson said it’s hard to keep up with the demand from fast food outlets in that country.
Meanwhile, world beef production fell over the same six-year period as pasture lost ground to high-priced crops like corn and soybeans in major beef producing countries like the U.S. and Brazil.
“The amount of land being devoted to beef pasture around the world is shrinking. It’s not that complicated. And that means we’re not getting any more beef production,” Nelson told delegates attending the DTN/The Progressive Farmer Ag Summit 2012.
World beef production is forecast to fall again next year. The U.S. is projected to lead the way down with an eight percent drop to 10.5 million tonnes.
“It all depends on rain. If it rains I think we’re going to get a lot of heifer retention and U.S. beef production could be down high single digits or maybe even 10 percent,” said Nelson in his Dec. 11 presentation.
The economics favour herd rebuilding but not if there’s another feed shortage.
Another factor to consider is that more than 10 percent of U.S. cattle on feed are Mexican imports. Mexican ranchers have been liquidating their herds due to drought but that is coming to an end, which will likely shrink U.S. cattle numbers by two to three percent over the next two to three years.
Rabobank expects U.S. cattle prices will rise 10 percent year-over-year through the first six months of 2013.
Nelson noted the U.S. has become a cost competitive place to produce beef. Wage costs have barely budged in the last decade compared to a 70 percent rise in Brazil and a 350 percent hike in China.
His hog outlook was also bullish due to changes occurring in Europe. The economics of raising hogs in the European Union have been poor for four years and are about to get worse.
Come Jan. 1, the EU will finally implement animal welfare regulations that have been on the books for 10 years, forcing producers to abandon crate gestation stalls in favour of pen or group housing.
There are also other costs, such as being forced to feed non-GM soybeans to their animals.
The extra costs are leading to a liquidation of the EU’s herd. Rabobank believes the EU’s sow herd is down four to five percent. The EU is the second biggest pork producer in the world next to China, producing 22 million tonnes of hog meat annually.
A five percent reduction in the sow herd would remove a little over one million tonnes of pork in a world that trades seven million tonnes of the product annually.
“There’s going to be a lot less pork exported out of Europe. It creates an opportunity for the U.S. pork industry,” said Nelson.
Rabobank had expected some liquidation in China’s hog herd but that is not happening. Profitability has lagged in the industry but subsidies are propping up what it sees as a strategic commodity.
“We’re not seeing the liquidation that we thought we might see that would lead to big exports to China this year,” he said.
Nelson still believes world pork production will fall in 2013 because of the big drop in EU output. That should be supportive for prices.
The long-term outlook is good as well because eventually China will need to import protein.
China’s government wants to keep farmers producing corn by artificially inflating its price. That expensive feed leads to pork prices that are twice as high as in the U.S.
“That’s a pretty staggering observation. Economically it makes all the sense in the world for China to import more pork,” said Nelson.
If a country that produced 50 million tonnes of pork annually decided to import two percent of that volume from the U.S. it would amount to 10 percent of total U.S. pork production.
“So it doesn’t take much movement in the Chinese market to move the needle on world markets.”
Nelson noted that U.S. hog producers have become more adept at risk management, which is why there hasn’t been a big liquidation of the U.S. herd despite sky-high feed costs.
“The hog farmers of today are doing a lot better job of risk management and locking in profits when the futures market provides that opportunity,” he said.