Dive Brief:
- High operating costs and droughts will lead to a rocky year for meat producers, according to a new report from S&P Global. The nation’s most popular credit rating agency said it’s very likely beef producers, including JBS, will see lower margins into 2024 based on tight livestock supply and less power to control prices.
- Poultry producers including Tyson and Pilgrim’s Pride will also be pressured based on high feed costs and limited cold storage inventories, but margins could improve ahead of the summer grilling season, S&P said. While profits of poultry and pork processors will likely decrease, their expanded product portfolios could reduce their negative impact of an economic downturn, according to the report.
- Entering a fourth consecutive year of supply chain calamity, factors like costs and weather could continue to strain the margins of meat producers, as shifting demand dynamics among the different meats creates further uncertainty.
Dive Insight:
Meat companies face an uncertain year ahead based on a variety of factors, according to S&P Global Ratings Credit Analyst Chris Johnson.
“Other risks, such as growing recession odds, an increased regulatory burden, litigation risk, and the recent outbreak of avian flu appear well contained, but heightened credit surveillance of the sector is required,” Johnson said in a statement.
After years of strong beef processing margins, last year’s droughts created issues for cattle ranchers because it made grazing difficult, Johnson told Food Dive. S&P Global cited USDA’s projection that cattle production will decline 7.5% this year.
The price of beef and veal products decreased 3.1% between December 2021 and December 2022, according to the Bureau of Labor Statistics’ most recent Consumer Price Index.
Johnson said the factors making profitability difficult for processors will limit investment capacity and drive cautious decisions throughout 2023.
“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 really generate higher levels of cash flow for further investment,” Johnson said.
Meat giant Tyson’s most recent quarterly earnings missed expectations, signaling the bind companies find themselves in when navigating supply and demand dynamics. The company expected chicken demand to offset losses in beef, which did not materialize.
Johnson said typically when one protein gets more expensive compared to another, consumers trade down to the less expensive option. But as producers were incentivized to keep capacity utilization high at their processing plants because of supply chain issues, he said, there became an excess of meat available.
“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,” Johnson 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.”
