USA – The meat industry is headed for uncertain times with players recording lower margins due to factors such as the recent drought and high operating costs, highlights the S&P Global report.
Last year’s drought heavily impacted the entire meat production value chain as it led to a scarcity of feed, which made grazing difficult, which in turn resulted in tight supplies of meat.
The S&P report highlights that with regard to the impact this drought had on meat processing companies, it is very likely that beef producers, such as JBS, will record lower margins into 2024 based on low meat supply.
The report also cites the United States Department of Agriculture (USDA) projection that cattle production will decline by 7.5% in 2023.
The industry has consequently also been plagued by high operating costs which are expected to lead to a rough year for the players in the sector.
Poultry processors like Tyson Foods and Pilgrim’s Pride are projected to be pressured by high feed costs and limited cold storage inventories which will likely lower their profit margins.
These factors that are hindering profitability for processors and producers are anticipated to limit companies’ investment capacities and drive cautious decisions throughout 2023.
Chris Johnson, S&P Global Ratings Credit Analyst, said: “As this industry is facing harder times, we do expect them to be even more prudent and cautious around what their capital spending is going to be because they’re not going to have the liquidity and the profitability to generate higher levels of cash flow for further investment.”
Meat giant Tyson Foods’ most recent quarterly earnings were reported to have missed their expectations, signalling that the company found it difficult to navigate the supply and demand dynamics.
“The way it played out in the second half of the calendar year is that there was more beef out in the market while there was also a growing supply of chicken,” he said.
“All of a sudden both were racing to the bottom of the line in terms of pricing that really hurt the processing margins for both meat.”
According to Johnson, when one protein gets more expensive than another, consumers opt for the less expensive option.
This did work in the company’s favour this time around with an excess supply of beef more than offsetting any extra profits that they could have obtained from chicken.
However, according to the report, their expanded product portfolio might help cushion the negative impact of an economic downturn.