At the height of the summer, more than 2.5 billion pounds of US beef, pork, and poultry lay in cold storage facilities across the country. That near-record stash may sound like a meat lover’s dream, but it has the industry reeling, and you might say that the “steaks” are high: The meat and poultry industry is the largest segment of U.S. agriculture, and U.S. farm income could drop a worrisome 13 percent in 2018.
The meat stockpiles are a sign of the times, as global trade flows alter drastically in a period of shifting demand and policy uncertainty. Largely responsible for these trade shifts are foreign tariffs – part of a seemingly tit-for-tat trade war spurred on by President Trump – with China and Mexico placing steep levies on meat and poultry (and a slew of other consumer goods), and causing prices of US products to spike in those key export markets.
But is it all bad going forward? As we near the end of 2018, Mizuho Americas Restaurant and Proteins Analyst Jeremy Scott explains the drivers of the recent weakness in the industry, and what to look for heading into the New Year.
High Stakes for Red Meat and Pork
A number of headwinds have been pummeling the meat market lately. As protectionist policies cause meat and poultry prices to rise globally, our principal export markets are diversifying their trade partners, and this could lead to a longer-term loss of market share by US sellers. On top of this, add a stronger dollar and a macroeconomic slowdown in key emerging markets – most notably China – which are putting pressure on global protein demand in a time of abundant supply.
And yet, Jeremy believes a big quarter lies ahead for red meat. The USDA’s $6 billion farmer aid package, intended to help offset trade losses, is expected to temporarily soak up pork supply and support both hog and pork producers at a critical juncture in the market. Furthermore, trade policy is distorting pricing in a way that may be favorable to red meat domestically, as consumers who normally purchase chicken are enticed by the relatively lower-priced beef and pork.
Poultry Returns All Cooped Up
As suggested above, the tariff environment has not impacted meat processors equally. With the bulk supply of unshipped – and now discounted – meat in the US market leading consumers to favor low-priced red meat over chicken, chicken processors are losing out. With profits threatened, some companies have lowered their guidance for the months ahead. (But US consumers can’t complain: in a recent article, Bloomberg declared that it’s “a great time to be a chicken nugget lover,” with chicken breast prices falling nearly 20 percent compared to one year ago.)
Still, Jeremy contends that the protein market is currently close to a bottom and, as a result, sentiment on chicken producers has reached a low point. By 2019, he expects negative trends to subside due to smaller cattle numbers and cleared storage levels supporting prices, particularly chicken. And improving US-Mexico relations following USMCA (US-Mexico-Canada Agreement) negotiations could also breathe new life into chicken import demand from the US, which hasn’t recovered ever since the 2015 Avian flu when more than 40 countries restricted or placed total bans on American poultry imports.
Don’t Count Your Chickens Before They’re Hatched … But Things are Looking up
The good news is we’re approaching the light at the end of the tunnel. Despite the volatility in US policy, Jeremy remains optimistic on the state of global beef and poultry trade in 2019 and expects emerging tailwinds to outweigh the current headwinds.
Notably, the US stands to gain from challenges within other markets, including food safety concerns in Brazil’s protein industry, shortages of pork and poultry in China, and ongoing drought in Australia which is reducing herd sizes. These circumstances create the potential for stronger import demand going forward.
Still, much will depend on how trade policy evolves between the US and major export markets like China. Given the importance of meat as a primary segment of US agriculture, we can’t afford trade negotiations to be, well, ham handed.
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 "U.S. Farm Sector Braces For Protracted Trade Fight," The Wall Street Journal, https://www.wsj.com/articles/pork-giant-smithfield-calls-trade-war-necessary-to-open-chinese-market-1538078415 (September 27, 2018).
 "It’s a Great Time to Be a Chicken Nugget Lover," Bloomberg Markets, https://www.bloomberg.com/news/articles/2018-10-10/record-low-chicken-prices-usher-in-golden-age-for-nuggets-lovers (October 10, 2018).
 "What the worst bird flu outbreak in U.S. history means for farms," Fortune, http://fortune.com/2015/06/25/bird-flu-outbreak-farms/ (June 25, 2015).