Beef industry faces higher prices, lower margins and shrinking demand

The cattle markets are set to ring up another record year for producers and packers even with tightening supplies expected to continue through 2019.

Derrell Peel, Oklahoma State University Extension Livestock Marketing Specialist, said retail beef prices are up 15% to 20%, following a 5%-to 6% gain in 2013. Boxed beef wholesale values are up about 25% from one year ago, over the 4-to 8% increase in 2013.  

Fed cattle prices are up 28% after a 5% increase in 2013. Feeder cattle (750-800 lb. steer) prices are roughly 43% higher than one year ago after climbing 13% in 2013.  Most dramatic of all, (450-500 lb. steer) calf prices are up 53% this year on top of a 30% increase in 2013.

“Market conditions will be generally the same in 2015 with tight supplies continuing to be the major driver of cattle and beef markets. Beef production will decrease again in 2015 but considerably less than the 6% year over year decrease in 2014,” Peel said.

He said beef trade conditions are negative as high U.S. prices and a strong U.S. dollar will likely mean less U.S. beef is exported in 2015 following what turned out to be a strong year in 2014.

TYSON SENTIMENT
Peel said with prices moving higher there are demand concerns for packers and the U.S. industry at large. Despite a sharp increase in retail beef prices in 2014, not all the wholesale beef price pressure is reflected in retail prices and consumers have already began shifting away from beef to chicken and lower-priced meats, according to Tyson Foods CEO Donnie Smith. 

Smith recently said Tyson had predicted this shift many months ago, and it’s now being seen. He said the price barrier, coupled with the fact that Millennials tend to favor chicken indicate there will be less demand for beef among U.S. consumers in 2015 and beyond.

He does not believe consumers will buy more beef at the grocery store with savings from lower fuel prices. Smith said consumers are likely to eat out more, and white tablecloth restaurants could fare better while gas prices are lower. Longer term, Smith said more consumers are likely to chose chicken over beef.

While Tyson expects its chicken segment to benefit, its beef business will bear brunt of the switch. Tyson’s beef operation is a “spread” business model as it does not raise cattle, but acquires cattle for processing from feed lots and cattle marketers.

Peel said packers will feel added pressures in 2015 from higher fixed cattle prices and an inability to raise prices because of added supplies in chicken and pork, the competing proteins.

Analysts recently asked Tyson if they expected plant closures among packers in 2015. Tyson execs said they had no plans to shutter production because their facilities are located in the areas where there is the most available cattle. However, Tyson admitted that production levels in 2015 will be less than those in 2014 given the shrinking herd numbers overall.

ANALYSTS INSIGHT
Cattle and beef markets will start 2015 with record or near record prices and carry them through the year. Peel sees little risk of any major market break and annual average cattle and beef prices will be higher than 2014. That said, it may be hard to extend the impressive market gains in 2014 for cattle farmers and feedlots. Seasonal price peaks for live cattle that exceed 2014 records are possible, perhaps even likely, but may be harder to sustain, Peel said. 

He expects 2015 to be more of a sideways market, albeit with prices at times higher than record levels in 2014.

Brett Hundley, meat analyst with BB&T Capital Markets, said meat packers hoping to boost margins could be in the market to acquire a further-processor as way to diversify their meat business, much like Tyson Foods did with the recent purchase of Hillshire Farms.

Hundley said Oscar Mayer, owned by Kraft Foods, offers a well-known cold cuts line, including a "Selects" offering that plays off the removal of artificial ingredients. It also produces bacon, hot dogs and its Lunchables line, the latter of which is believed to be over $700 million in annual sales. Hundley said some estimates put Oscar Mayer’s margins at 15% to 20%. The company has also moved into adult protein snacking.

“Kraft certainly has cold chain sales into the back of the store, however we think that Oscar Mayer may prove more leverageable by a more integrated protein player,” he wrote.

Hundley also believes that Bob Evans’ BEF Foods segment that makes packaged meats and homestyle food products under the Bob Evans, Owens and Country Creek brands could be targeted for acquisition by Pilgrim’s Pride, which is owned by beef giant JBS and a large competitor to Tyson Foods. He estimates annual revenues near $370 million with margins around 10%.

“We think that a larger player could improve margins considerably. That said, we question brand strength,” Hundley wrote.
Lastly, Hundley said Smithfield’s packaged food business which is owned by WH Group, could be a good fit for Tyson Foods or Pilgrim’s and JBS.

Smithfield's packaged meats business is estimated to have annual revenues around $6.5 billion with roughly 8% margins. There are a number of brands under this umbrella that could be sectioned off, including Farmland (over $1.3 billion in annual revenues), Smithfield (over $1 billion), Armour-Eckrich (over $930 million), John Morrell (over $400 million), Cook's (over 330 million) and Gwaltney (over $290 million), according to Hundley.

“We think that WH Group may be open to this, given stated desires to work down debt,” he wrote, noting most of these brands are produced in the Midwest, making them leverageable for Tyson Foods or Pilgrim’s Pride.