US consumers are facing a wall of meat, and all meat prices over the next couple years are expected to fall with beef taking the largest hit, say analysts at Rabobank.
A new report from the Rabobank Food & Agribusiness Research and Advisory group called "Chickens, Cows, and Pigs … Oh My!" said protein production in the US is projected to grow at a rate of 2.5% annually and then decline to about 1.5% per year.
In fact, those analysts say much of this protein production will have to be consumed here at home, ultimately driving prices so much lower by 2018 there could be some industry restructuring, or at least opportunities for some wily producers and meat companies.
They wrote: "We expect U.S. protein production growth of 2.5% per annum through 2018 -- down from 3% in 2015 -- with beef being the largest contributor relative to pork and poultry. Trade appears to have stabilized in 2016 thus far; however, we don't foresee international markets absorbing all of this production growth, thus requiring further increases in domestic consumption toward the all-time peak of the mid-2000s, which will ask a lot of US consumers and will come at the cost of lower prices.
"By the end of this expansion cycle in late 2018, we expect a more challenging profit environment across the US meat industry, providing strategic opportunities for those producers with the capital and foresight to take advantage of them."
Report author and Rabobank senior analyst Will Sawyer added, “While we don’t foresee margins falling to the lows of 2008 and 2009 as prices decline through 2018, any producer considering a possible sale or divestiture should move quickly, as the outlook for margins and valuation multiples isn’t moving in their favor.”
The report also said the next couple years will be difficult for all protein markets due to the strengthening of the dollar. In particular, they expect the US dollar to strengthen against currencies such as the Canadian dollar, Japanese yen, and Mexican peso, which are the currencies of major trading partners.
The report noted exports continue to be important, though, and offered the example of high-path avian influenza (HPAI) and losses to the poultry industry.
"According to our math, after a state is found to have a case of HPAI, that state loses as much as 75% of its export potential as a result," the report says.
The report also noted sagging energy prices in oil exporting countries have in many cases hurt US poultry exports, citing the example of Angola in West Africa, which has cut poultry imports by 40%.
Rabobank analysts called the overall market situation for beef "a real mixed bag.
Australian beef imports are bound to slow as the country's drought abates, so that will decrease the US supply. In addition, Australian herd rebuilding has helped US exports to Vietnam, South Korea, Taiwan and Hong Kong rise into double digits. Brazil and Argentina could become significant exporters to the US, but are still facing some regulatory problems, the report said, adding that could change in the future. Further, beef is likely to continue in the next few years as the largest driver of the big three in US protein production.
Overall, the need to consume much of the increases in animal protein at home is problematic, Rabobank analysts said.
"The US is a mature market, with high levels of historically stable protein consumption. In fact, 1.5 percent average annual meat consumption growth would be the highest three-year growth rate in the US in a decade," they said. "And if you take into account the growth seen in 2015, it would be the highest four-year growth rate since the 1970s."
The analysts noted that changing consumer preferences, an extremely weak economy, high feed costs, plus drought and related beef-herd liquidation all contributed to a large decline in US protein consumption in the past decade. In fact, from 2005 to 2015, US per capital meat consumption fell by 9% overall, with beef declining by 18% and even chicken losing 1.4%.
"One could argue that the expected increase in US protein consumption is a result of lower prices competing to bring consumption back to historic levels," the analysts wrote. "However, the rate of industry expansion may very well be too much too fast, as it is unclear as to whether consumers are willing to exceed the historical high point in consumption seen in 2005."
The report concludes with the prediction US retail meat prices will decline by 14% by 2018, from 2015 on a consumption-weighted basis, and that beef prices will be the major driver of that downtrend.
The prediction is based on modeling work done by Rabobank, which analyses historical consumption, income growth, and retail food-price trends to develop what the analysts call an "equilibrium level" for US animal protein demand.
"Of the three major proteins, we expect beef to have the largest amount of deflation at retail, to the tune of 22%, followed by pork at 7% and chicken at 5%," analysts said. "Relative to historic levels of US retail meat prices, this cycle of US protein deflation will bring prices back to near-2012 levels, which is not the worst thing, as feed costs have generally halved since then."