KANSAS CITY – The Gold Rush era of the 1800s produced riches few could have dreamed of. So have U.S. beef processors over the past four years, especially in 2021. Both fed and unfed processors have made more money than they could have imagined. The irony was that earnings records were made and broken because of and despite the COVID-19 pandemic.
The COVID virus, its omicron variant, and perhaps another variant, will continue to be the most important factor in 2022 in determining the profitability of the U.S. meat and poultry industry. The extent to which the new variant spreads in the United States and around the world will determine whether restaurant sectors in key countries continue their recovery or experience further setbacks.
If 2021 is any guide, demand for red meat and poultry in the United States should remain strong at home and abroad. Consumers will continue to spend most of their food budget in retail unless restaurants and other food outlets begin a strong recovery. But red meat, especially beef, faces retail headwinds that cannot be ignored.
Significant inflation in retail meat prices last year began to impact what consumers could afford to buy. The end of additional financial assistance for many Americans removed one of the main reasons these consumers were able to trade in their meat purchases last year.
The US Department of Agriculture expects domestic protein production (beef, pork, chicken and turkey) to increase slightly this year compared to last year. Beef production could decline by 2% or more; pork production could fall by 2%; and chicken production could increase by 1%. But as market analyst Andrew Gottschalk of HedgesEdge.com points out, supply is only half of any price equation. Reports of rising wages are being eroded by inflation, he noted in late November.
“So real incomes are down,” he said. “The people who suffer the most damage are those in the lowest income groups. These groups have the greatest impact on the demand for beef, as they spend to move up the protein ladder when their real wages rise.
Once the extra income payments stop, the impact of falling real wages will be felt, Gottschalk said.
“How long it will take for wage gains to outpace the rate of inflation again is a trillion-dollar question,” he said. “In the meantime, the risk is growing that the continued decline in real wages could limit the demand for beef.
“The absolute price difference between competing meats will become a priority for consumers and beef demand will likely suffer. Relative value will become secondary to consumers in determining their meat purchases, slowing some price increases even in the face of lower supply.
Rise in profits
All of this suggests that beef processors won’t see the kind of astronomical margins they enjoyed in 2021. Fed beef processors have seen their profit margins exceed $900 per head at times, while cow processors have seen margins $400 per head. Fed beef processors in 2021 made a profit of $562 per head in the first nine months of the year, according to HedgersEdge.com. The first quarter saw average margins of $301.38 per head, the second quarter of $698 per head and the third quarter of $688 per head. October saw profits of $580 per lead and November saw profits of $452 per lead.
As if those profits weren’t big enough, the amount of money made by the Beef business unit of Tyson Foods Inc. was mind-boggling. Tyson is one of the world’s largest producers of high-quality grain-fed beef, so it was in an excellent position to capitalize on the growing global demand for this type of beef. His results bear this out. Tyson’s fiscal 2021 fourth quarter segment ended Oct. 2 reported operating profit of $1.15 billion, beating its previous quarterly record of $1.12 billion set in the previous quarter. Operating profit for the year hit a record $3.24 billion, double the previous record of $1.58 billion set in fiscal 2020.
The results meant that Tyson Beef had four straight years with an operating profit above $1 billion. Beef’s results significantly boosted Tyson’s overall results for the year. Tyson Beef contributed 74% to Tyson’s overall operating profit of $4.4 billion. Its beef operating margin (sales to revenue) for the year was 18%. But margins on beef this year for Tyson and other fed beef processors will likely be half that. Tyson expects its margin to be 9% to 11% in fiscal 2022, which began Oct. 3.
Tyson Beef’s remarkable results reflect how much domestic and foreign demand has exceeded available beef supply since the onset of the COVID-19 pandemic. Tyson, in fiscal year 2021, operated its beef plants at just 78% capacity. This meant its slaughter total was 6.287 million head, which meant its operating income was $515 per head. The utilization rate reflects continued labor shortages at Tyson plants and those of most other major companies in the U.S. meat and poultry industry. Tyson’s chicken and prepared food plants operated at 79% during the year. But his pork plants were running at 88%.
The worst impacts of the COVID-19 pandemic are now behind the meat and poultry industry. But the biggest processors are still struggling to find workers to fully staff the factories. The shortage is most acute in slaughterhouses because they are much more labor intensive.
The shortage eased only slightly despite companies’ efforts to address it. Meat packers spent hundreds of millions of dollars in multiple ways early on in the pandemic to protect workers. They dramatically raised starting wages (to around $22 an hour) and spent money on everything from free vaccinations and bonuses for getting shots to free community college for workers’ children. They will continue to spend hundreds of millions of dollars this year.
Tyson’s poultry plants are now fully staffed for the first time in two years, Donnie King, chairman and chief executive, said last November on a media call. To attract workers, Tyson strives to be a desirable place to work. He has raised wages, experimented with childcare facilities and given more flexibility to working hours and shifts, he said.
A closer look at the results of the Tyson’s Beef unit showed its volume in the fourth quarter was down 15.4% from the same quarter last year. But its operating profit improved significantly as its average selling price was 32.7% higher than last year. Over the year, the volume increased by 0.3% and the average selling price by 14%.
By contrast, Tyson’s pork business posted lower profits in 2021 than in 2020 and its chicken business, plagued by several high-profile issues, posted a loss. Hog posted an operating profit of $328 million for the year (compared to $565 million in 2020). Its chicken segment posted a loss of $625 million for the year on a negative margin of 4.6%. But Tyson expects its chicken business to recover this year and have a low-end operating margin of 5% to 7% for fiscal 2022. That would be more in line with what others major chicken processors have achieved in 2021.
The red meat industry hopes exports will continue to rise after a bumper year in 2021. Among notable achievements last year, South Korea became a $2 billion destination for the first time for US beef exports. Exports were fueled by increased sales of chilled beef. Another achievement was an increase in exports of various meats which began in September. This has helped beef and pork exports stay on track for record years.
The big story, however, was the continued emergence of China as a major source of growth for US beef exports. Exports through September soared 672% year-on-year to 138,041 tonnes, while export value rose 761% to $1.12 billion. Combined exports to China and Hong Kong rose 131% through September to 176,694 tonnes, valued at $1.49 billion, beating the previous annual record of $1.15 billion set in 2014.
In the face of significant logistical headwinds and higher costs, these results are a testament to the loyalty and strong demand from U.S. international customers and the innovation and determination of U.S. industry, said said Dan Halstrom, president and CEO of the US Meat Export Federation, in November.
“A rebound in pork and beef exports, which fell in 2020 amid COVID-related production headwinds, was a strong source of momentum in 2021, reflecting exceptional global demand for high-value protein. “, did he declare. “The increased catch rate of variety meat and the resulting increase in exports are particularly encouraging, as labor and transportation issues have certainly not gone away. But these items are highly valued overseas, which facilitates their introduction into international trade.
“Exports of varied meats are an excellent complement to strong domestic and international demand for muscle cuts, helping to maximize carcass value.”
Maximizing the value of every animal, chicken and turkey processed will no doubt be central to the US meat and poultry industry again this year.