Moody’s Investor Services says lower beef prices at the start of 2016 owing to weak exports, slowing emerging market demand and competition from lower-cost proteins such as chicken and pork will cause profit margins to decline for U.S. beef packers
Dec 21 - The strong U.S. dollar is one of the primary challenges weighing on profit margins, according to the report "U.S. Protein Industry: Beef Packer 2016 Profit Margins Will Fall As Processors Face Continuing Challenges." It has made beef more expensive globally, increasing competition from countries such as Australia, Mexico and Canada, with the higher domestic supply in turn pushing down beef prices in the US.
Another challenge discussed in the report is that U.S. beef consumption has remained weak in spite of recent price declines, primarily because beef prices are still high relative to competing proteins like chicken and pork.
"Beef prices in the U.S. have been steadily rising since 2010 as drought conditions restricted cattle supply," said Brian Weddington, a Moody's Vice President and Senior Credit Officer. "At the same time, low chicken prices and falling pork prices have caused more people to shift from eating beef, further pushing down retail prices."
Moody's notes that beef volumes sold will begin to improve later in 2016 as heavier cattle released to the market boost packers' per-head profit yield. This will help major packers such as Tyson Foods, JBS USA and National Beef Packing Company Inc. remain profitable, but their margins will still be lower owing to the challenging conditions in the first half of the year.
"We don't believe this short-term relief will last beyond late 2016 because sustained herd retention is still years away. Low feed costs have spurred feedlots to retain cattle that will be released at heavier weight in 2016, but beyond this short-term supply boost late next year, we expect that cattle supply will remain tight for the next two to three years," said Weddington. "The timing of these challenging conditions could favor beef packers as the strong dollar and weak demand from key developing-market buyers such as China could persist over the next two years."
