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Kay’s Cuts: The dynamic state of the US meat industry

Steve Kay, 09/05/2014

A monthly column by US Cattle Buyer’s Weekly publisher, Steve Kay

steve-kay-2013-conferenceWHOEVER thought a so-called mature industry like meat and livestock could be so dynamic.

I’ve written about the industry worldwide since 1973, firstly in New Zealand, then in Europe and now in the US. Covering the American industry is right now the most exciting period I have experienced.

Price records are made almost weekly, drought continues to impact the cattle supply, the industry frets about consumers’ buying habits and the pork sector is in the midst of a disease crisis.

Throw in the ongoing legal and World Trade Organisation battles to get mandatory Country of Origin Labelling (COOL) rescinded, producers’ efforts to keep Brazilian fresh beef out of the US, and a myriad of other trade issues, and you can see there is no lack of drama Stateside.

Drought and demand remain the top two dynamics for the beef industry. Most of the nation’s key cow-calf producing states are still recovering from the drought ravages of 2010 through 2012.

Drought has never gone away in some states. For example, it’s desperately dry in Kansas, whose 1.41 million beef cows make it the sixth-largest cow-calf state. Number one state, Texas, lost 105,000 beef cows last year and its cow total has fallen below four million head for the first time in many years.

My home state of California remains in the grip of an historic drought, threatening its US$45 billion agricultural sector. Worst-hit might be the livestock sector, whose products brought in US$12.2 billion in 2012. More than 94 percent of California’s agricultural sector is experiencing severe, extreme or exceptional drought, with the livestock sector more directly exposed to exceptional drought than the crop sector.

California ranks first in dairy cow inventory and fourth in total US cattle inventory. California’s 5.25 million cattle (on Jan 1 this year) equalled 6pc of all US cattle supplies and 8pc of US calves.

California leads the nation in dairy production, producing 21pc of the nation’s milk. The state is also the leading producer of butter and non-fat dry milk. Now that California’s rainy season is over, beef producers will have an even tougher time keeping their cow herds together. Latest estimates are that state might still lose 50,000 of its 600,000 beef cows this year.

 

National herd lowest since 1951

Drought caused the national cattle herd to decline in 2013 for the seventh straight year. The 87.7 million head total on January 1 was the lowest since 1951. Cow-calf producers told the USDA in a recent survey that they intended to hold back 90,200 more heifers for herd re-building than in 2012.

But these intentions are unlikely to become reality, because of drought. Not only are some producers still battling drought, others are fearful of expanding their herds only to face drought conditions again.

Producers’ other thinking is: Why would I want to expand and possibly weaken a market that is giving me record prices for my cattle? No one can fault them for this logic. Calves are fetching US$2.25 per pound (about A$5.30/kg) and yearlings are bringing US$1.75 per pound (about $4.14/kg). As for keeping those heifers, fall bred heifers are fetching US $2500 each. It seems likely that the US beef herd will shrink again this year.

The consequence is that more feedlots will go out of business, especially on the Southern Plains (Kansas/Texas/Oklahoma), the region that has seen the biggest decline in beef cow numbers.

Conversely, the last few years has seen more beef cows in the northern states. So more cattle are being finished there. Nebraska earlier this year surpassed Texas as the state with the most cattle on feed in feedlots 1000 head of capacity and over.

Iowa is also seeing a resurgence in cattle finishing. Its cattle on feed numbers on April 1 were up 6pc on a year earlier. So both cow numbers and cattle on feed numbers continue to move north, mainly because that is where the grass and the cheapest corn are.

Drought has already forced one large beef processing plant to close in Texas. Cargill shuttered its Plainview plant in February last year, taking out 4650 head of daily slaughter capacity. Fourth largest beef processor National Beef Packing will close its Brawley plant in southern California later this month. This plant is only 12 years old and can process 2000 head per day.

It’s extremely unlikely that either plant will reopen, and there are several other plants that might close this year or next.

 

Demand equation

Demand is the other side of the equation. It has proved to be dynamic in terms of consumers’ willingness to keep paying more for beef and pork. It is also daunting in that in the face of record high retail beef and pork prices, Americans are now turning more to chicken.

That’s no surprise. USDA’s All Beef retail price for March was US$5.72 per pound and its pork price was US$3.83 per pound. These were up 8.9pc and 8.8pc, respectively, from a year earlier. Chicken’s average price was a mere US$1.95 per pound, up 2.6pc from a year earlier.

Tyson Foods, which is heavily involved in all three proteins, sees the changing consumption trend and is benefitting from it.

It reported record large earnings for its fiscal 2014 second quarter on Monday. Tyson president and CEO Donnie Smith says chicken is enjoying a ‘halo effect’ at the expense of beef and pork and he sees no evidence of any chicken “fatigue” on the part of consumers.

Last weekend marked the unofficial start of the grilling season in the US, but beef sales were disappointing. May is the strongest beef demand month of the year and the Memorial Day (May 26) holiday weekend normally sees the largest three-day beef sales of the year.

All in the beef business are hoping this occurs again this year.

 

I plan to outline some more of the dynamic changes taking place in the US beef industry in next month’s column.

 

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