A Look Toward 2017 for the Meat Industry

With 2016 already in the books, we are looking ahead at the New Year and pondering some of the factors that could drive livestock markets for the next 12 months. Any such list is inherently flawed because the real market movers tend to blindside the market.

As Rumsfeld would probably say, it’s the unknown unknowns that really get you.

With this in mind, below are few items to consider.

Meat demand and consumer preferences

When we look at meat demand and consumer preferences, this is one of those topics we have been highlighting in our year-end review for a number of years. It is always important.

We think there has been a shift in the way in which U.S. consumers approach meat protein. Fat is no longer taboo. The industry is no longer trying to eliminate all traces of fat from its products at the detriment of flavor.

Recently, we noticed some marketing materials from the National Pork Board informing consumers that “marbling can improve pork’s flavor and moisture.” Too bad we need to remind consumers of this, but good for the Pork Board for doing so. It’s about time we bring the focus back on flavor.

What is important to the consumer today above else appears to be authenticity. And a well-marbled, juicy steak speaks for itself. Some new dietary work done also is raising doubts about long held beliefs about the dangers of fat.

Economy and incomes

The state of the economy directly impacts consumer meat demand. While we saw somewhat softer consumer demand during the first half of 2016, the situation shows signs of improving.

Consumer incomes are increasing at a faster pace, unemployment is down to pre-recession levels, and consumers feel more wealthy, thanks to higher home values and equity markets.

With a hard fought election battle behind us, we think the consumer also feels a bit more relaxed and willing to return to their normal daily routine. Prices at retail have been slowly adjusting lower, and in time, this should expand protein availability and accessibility for U.S. consumers.

International trade and the U.S. dollar

Everyone involved in the U.S. meat industry knows that we are heavily dependent on export markets. The United States is a low-cost meat producer, with significant natural resources, and is a very reliable supplier. These are all important considerations for global buyers.

As incomes in a number of large, populous nations rise, they opt to upgrade their diet to include more protein. Over 20 percent of all U.S. pork, 16 percent of all U.S. chicken and 10 percent of all U.S. beef currently goes to export markets. As U.S. meat supplies are expected to expand further in 2017, we will need all this export demand to remain in place and grow further, which is why markets tend to react negatively to any indication of export disruptions.

The strong U.S. dollar generally is negative for exports, but by far the most significant negative impact is from non-tariff trade barriers. This is a fancy way of saying some nations will look to raise barriers in order to protect special interests within their borders.

Drought

Grain production in the U.S. in the last couple of years has exceeded all expectations. The last USDA projections pegged U.S. corn yields at an all-time record 175 bushels per acre and corn production at over 15 billion bushels.

Ending stocks are some of the largest of the past decade. There is a lot of corn available for livestock and poultry and feed costs for producers are some of the lowest in years.

But Mother Nature holds the cards on this one. The drought monitor currently shows areas in the Southeast are experiencing exceptional drought. So far, the Corn Belt has been spared, but this is a real risk.

Pasture conditions for livestock producers also have been above average the last two years. This has provided the opportunity to retain more heifers and bulk up hay supplies for the winter. It’s all been good and helped bolster cattle supplies.

Expanding drought conditions could quickly reverse that, initially pushing more calves onto feedlots, with a short-term bearish outlook, but setting the stage for a more bullish beef market in 2018-19.