Expected small gains in meat markets could help farmers, Tyson Foods

The 2016 market outlook bodes well for everyone from small cattle and poultry farmers to large multinational companies like Tyson Foods. Cattle markets improved in 2015 and 2016 could be slightly better for beef processors, feed lots and cattle ranchers, according to Derrell Peel, Oklahoma State University Extension livestock marketing specialist.

He estimates beef production will be up 3% to 4% annually from 2015, which was the lowest since 1993. Peel said increased beef production in 2016 is still a low number historically.

“That increase began with a 2% year-over-year increase in beef production in the fourth quarter of 2015. Beef production will grow more in the second half of 2016 as limited recent feedlot placements will constrain beef production the first few months of the year,” he said.

With annual inventory herd numbers due out on Jan. 29, Peel expects aggressive expansion in the overall cattle herd during the past year. He expects feeder cattle supplies will increase on a projected 1.2% higher 2015 calf crop, but adds that will be tempered by continued heifer retention and lower cattle imports.

“Cattle imports from Canada were down 27% year over year through October,” Peel said. “Mexican cattle imports, though up nearly 5% for the year, dropped an estimated 30% in the fourth quarter of 2015.”

He said active herd rebuilding in Canada and Mexico and lower U.S. cattle prices will likely keep cattle imports down in 2016. The U.S. Department of Agriculture noted in an  October report that U.S. production is expected to rise in 2016 for the first time since 2010 as cattle inventories recover on improved pasture conditions and lower feed costs. The USDA said U.S. beef exports are forecast 6% higher as growing domestic supplies put downward pressure on prices. A reduction in Australian exports will enable the United States to regain market share in Asia which will offset stagnant shipments to Canada and Mexico, the report noted.

This optimistic view on exports comes on the heels of a 14% drop in beef exports in 2015, Peel said. He expects beef export recovery to be slow when all the 2015 numbers come in. He said lower beef prices may boost U.S. consumption, but the high value of the U.S. dollar will likely be a hinderance to export growth.

BEEF BY THE NUMBERS
Cattle feeders began the New Year with black ink in their books, but profits were minimal, according to Sterling Beef Profit Tracker. Average feedlot margins were $8 per head last week, a $14 per head decline from the previous week, according to the Jan. 4 Sterling report. A month ago feeders were earning $45 per head, and a year ago profits were $80 per head. Cash live cattle prices ticked up last week to average $165.63 per hundredweight, according to Sterling. The cost of feeder cattle factored into last week’s Profit Tracker was $9 per head higher, while feed costs declined modestly. Feeder cattle represent nearly 80% of the total cost for finishing a steer. A year ago feeder cattle represented 68% of that total cost. Cash prices for fed cattle are $27 per hundredweight more expensive than a year ago.

The recent uptick in cattle prices is squeezing packer margins to begin 2016. Since the new year began beef packers have seen their margins decline $5 per head, with losses now at nearly $50 per head, Sterling Marketing estimates. Those losses are $26 per head less than last year’s average losses of $76 per head.

At the other end of the supply chain, cow-calf producers are doing better than most. Experts project the average cash profit margins for cow-calf producers this year will rise to $743 per cow, a 33% increase from the average cow-calf margins of $556 per cow in 2015.

If the beef market improves in 2016 that would be positive for Tyson Foods, one of the largest beef processors in the country. Tyson reported a $66 million operating loss in its beef segment for fiscal 2015.

“We expect industry fed cattle supplies to be flat to slightly higher in fiscal 2016 compared to fiscal 2015. Although we generally expect adequate supplies in regions we operate our plants, there may be periods of imbalance of fed cattle supply and demand,” Tyson Foods CEO Donnie Smith said in November.

Smith was not optimistic about the beef markets in 2016. Tyson adjusted its normalized beef segment margins to 1.5% to 3% based on historical performance and future expectations given existing beef fundamentals, tight cattle supplies and an imbalance of processing capacity. For fiscal 2016, Smith said the beef segment’s operating margin should approximate the low end of that new range.

PORK AND POULTRY PREDICTIONS
But there is more to the Tyson bottom line than beef. It also runs a profitable pork business and lucrative chicken operations. Peel said pork production is expected to grow a modest 1% in 2016 on the heels of a 7.4% increase in 2015.

“Most of that growth will be in the first quarter of 2016 as peak market hog inventories move through meat markets. The December Hogs and pigs report confirmed that current hog numbers are a record high but also showed that peak production is on the ground now and sow farrowings are expected to decrease into 2016,” Peel said.

Pork exports are expected to improve in 2016 after a sluggish 1.9% level in 2015. Again, that should be good news for processors like Tyson Foods.

“We expect industry hog supplies to increase around 2% to 3% in fiscal 2016 compared to fiscal 2015. For fiscal 2016, we believe our pork segment’s operating margin will be in its normalized range of 6% to 8%,” Smith said in November.

Broiler chicken production is also expected to grow more modestly in 2015, perhaps 2% to 3% compared to 4% gains in 2015, according to Peel. He said with the absence of avian influenza, broiler exports are projected to increase 7% or more year over year, compared to a 12% drop in 2015. He said domestic broiler consumption is projected to increase 1.5% in 2016 compared to a 6.2% jump in 2015.

Tyson Foods expects its chicken segment will continue to be a shining star in the diversified portfolio. USDA data shows an increase in chicken production around 2% in fiscal 2016 compared to fiscal 2015. However, more recent data indicates a greater increase in supply which could outpace the demand.

“Based on current futures prices, we expect lower feed costs in fiscal 2016 compared to fiscal 2015 of approximately $100 million. Many of our sales contracts are formula based or shorter-term in nature, but there may be a lag time for price changes to take effect. For fiscal 2016, we believe our chicken segment’s operating margin should exceed 10%,” Smith said in November.

Peel said changes in meat production across the three proteins will result in a total increase of less than 2% during 2016, down from a 2.7% increase in 2015 meat production. More importantly, meat production combined with trade variables indicate total meat consumption will only increase fractionally in 2016 following a 4.5% year over year increase in 2015, Peel said.