U.S. Protein Market Supply
by Marcus Brix, Analyst, CattleFax
The U.S. protein market is a dynamic series of transactions linking all protein sources: beef, pork, poultry, as well as smaller markets like lamb and seafood. This is obvious even from our transactions at a grocery store meat counter. We enter the store with a set of preferences regarding what meat we wish to buy, compare quality and price levels of the meat options, and ultimately make a purchase. While choices vary by consumer, we generally accept that beef, pork and poultry are substitutable protein sources. So the amount of one protein we purchase in the store is somewhat dependent not only on that protein’s price, but also the relative price of a competing protein. Price is clearly not the only decision factor when choosing between competing proteins, but it is very relevant today to beef marketers as tight supplies lead to record prices. Many expected higher beef prices to weaken demand, but so far demand has remained strong and 2014 has proven to be an interesting example of the complex relationship between competing protein markets. We will explore this system further by examining supply and demand for beef, pork and poultry.
Cattle inventory is currently at its lowest level since 1952. An ongoing drought cycle and several years of negative feedlot returns drove producers to drastically reduce herds in 2011 and 2012. The re-expansion phase is progressing but drought is still heavily affecting the Great Plains and the Pacific Coast. The total cattle inventory declined 1.8 percent from 2013, and is not estimated to see a year over year increase until 2016. Year to date, the number of cattle placed on feed is down 4 percent. Also important to note is the shifting of where these cattle are being produced, a disproportionate amount of the decline in herds has taken place in the south. Since 2011, the U.S. beef cow herd declined by roughly 1.8 million head – 62 percent of those, or 1.1 million head were located in Texas.
Beef production is estimated to be down 3.5 percent compared to last year, with a total supply of 24.8 billion pounds. As a testament to modern production efficiency, it’s worth noting that although inventories are at nearly the same level as the 1950s, we will produce more than 2.6 times the volume of beef from the same size herd. Per capita net beef supply is forecast to be down two pounds (-3.6 percent) for the year and total 54.4 pounds per person.
So far in 2014, the tighter beef supply has led to higher prices. Boxed beef values are moving steadily higher and will likely be supported through the grilling season. The composite beef cutout is trending at record high levels, averaging $226.38/cwt. for the month of April. This is compared to an average of $190.03/cwt. in April, and a yearly max of $206/cwt in 2013. Prices at the retail counter are higher as well, averaging $5.50/lb. in April versus $4.86/lb. in April of last year. Higher prices have not done much to reduce consumers demand for beef, in fact through April retail beef demand is estimated to be even with last year.
Beef isn’t the only protein in a tight supply situation. The pork industry is still pinned down trying to combat the Porcine Epidemic Diarrhea virus, or PEDv. Although CattleFax analysis suggests barrow and gilt slaughter response to PEDv has so far been less than previously expected, it is still an issue weighing on the hog market as slaughter levels are trending lower into the summer. With above average hog prices, producers have chosen to keep pigs on feed for a longer period of time and increase weight gain. Average carcass weights in April were nearly 10 lbs. higher than the previous five year average. Pork supply per capita is forecast to be down about two pounds (-4 percent) for the year and total 45 pounds per person.
Wholesale pork prices have moved sharply higher, coming to a peak of more than $130/cwt in March, and have settled back to the low to mid-$110s. This price level is testing the previous highs set back in 2011 and is potentially liable to go higher seasonally into the mid-summer. Retail prices are higher, averaging $3.95/lb. in April versus $3.51/lb. in April of last year. Despite higher prices, retail pork demand is estimated to be up 4 percent through April compared to 2013.
Tight supplies for competing proteins have been supportive of poultry prices, otherwise poultry markets have been operating normally. So far in 2014, the number of broiler-type egg sets is only about 1 percent higher than 2013 levels and right in line with the five year average. The number of broiler chicks placed is also very much in line with 2013, only 0.2 percent higher. Broiler slaughter in 2014 has been erratic from week to week, but on average is just slightly below 2013, down 1.8 percent. For the year, per capita net broiler supply is expected to be up about one pound (+1 percent) and total 83.1 pounds per person.
Behaving much like the current production trends, broiler prices have remained near their five year average. Wholesale broiler prices averaged $0.859/lb. for the month of April. This is compared to an average of $0.907 in 2013. At the same time, 2014 retail broiler prices are up to $1.93/lb. from $1.91 in 2013. And as a result, retail broiler demand is estimated to be up 1 percent through April compared to last year.
Lower feed costs and steady demand for all protein segments should be supportive of supply growth for beef, pork and poultry producers. The growing potential for an El Nino weather year and a chance to bring more rain to drought stricken areas is creating optimism among cattle producers in those regions. Reported cases of PEDv are continuing to drop, a favorable trend for the pork industry. High prices of competing proteins will encourage poultry producers to meet constant demand from their customers. Using today’s historic price levels as a signal to move, expect protein supplies to increase over the next two years.
Tags: Beef Issues Quarterly, Summer 2014, Trends Analyses
June 19, 2014