Packer/processor profits high-and accusations fly-as competition heated up in 1995
A Wild and Crazy Year
by Bryan Salvage, Editor
What a roller-coaster year (maybe roller-derby year is more appropriate) it has been for the U.S. red meat industry. Although insiders claim packer/processor profits are healthy and that all red meat segments are working together in a joint effort to increase meat sales and per capita consumption, each segment (beef, pork, lamb and veal) is trying to elbow the other over the rail and off the track in the intensifying race to capture more consumer dollars.
While the plentiful amount of beef and pork supplies have benefited packers and processors during most of the past year, this trend remains unkind to producers-and it is fraying business relationships between producers and packers.
In late October, farm-state lawmakers led by Sen. Tom Daschle (D-S.D.) introduced legislation calling for President Clinton to appoint a commission to determine if U.S. meatpackers are holding too much power over livestock prices and to see if antitrust laws should be revised. (This request comes before the release of a three-year USDA Packers & Stockyards Administration review of the meat packing industry which is expected before the year's end.)
Among other things, the bill calls for analyzing the effects that slaughter cattle procurement practices and concentration in the procurement of slaughter cattle have on purchasing and pricing of slaughter cattle by beef packers. It also requests examining the economics of vertical integration and of coordination arrangements in the hog slaughtering and processing industry.
Coming into this year, analysts and other industry insiders were confident that continuing high supplies of beef and pork would benefit packers and processors. There were surprises as the year unfolded.
"It has been more mixed than I would have expected a year ago," says John McMillan, food industry analyst for New York-based Prudential Securities. "On one hand, my prediction for the beef side or cattle processing side of the industry has been too conservative. IBP inc. and ConAgra Inc. on the beef side have knocked the cover off the ball.
"On the pork processing side, the fun didn't last as long as I thought," he adds. "Industry capacity is increasing and the supply of available hogs is decreasing, and that results in lower capacity utilization rates and lower earnings."
Beef report
AMI President J. Patrick Boyle tells Meat Marketing & Technology: "On the beef side, the packers continue to do well. Cattle numbers are at very high levels. Because of the nature of the cattle life cycle, most people believe those relatively high numbers will probably remain in effect through 1996 and 1997-some are particularly bullish even into 1998.
"On the processing side, there continues to be an opportunity for processors to add value to the raw commodities to make a profit," he adds. "Although it will be more difficult to derive that profit where we have record amounts of animal protein [beef, pork, chicken and turkey] for the second year in a row."
Jim Holzer, managing director of the agricultural markets group for Chicago-based Frontier Risk Management, says: "We're seeing good demand growth in beef and pork. But in pork, we're going into constricting supplies which is going to severely pinch pork packing and processing margins."
Analysts are divided on how much longer the good times will last for beef. David Nelson, agribusiness analyst for New York-based NatWest Securities Corp., says the glowing picture for the beef industry may soon start to fade.
"We're starting to see a slowing in cattle herd expansion," he says. "In fact, we think the cattle herd is likely to start liquidating [within the next six to nine months]. We're starting to see signs especially in the breeding herd that the expansion phase is ending. That will have implications for IBP and several of the other large red meat players, such as ConAgra and Cargill Inc.'s Meat Sector."
But Dain Bosworth Inc. reported to Knight-Ridder that it believed "cattle herd liquidation is not expected to begin until fall 1997," and that an earlier start probably would not significantly affect earnings until months later.
Pork report
Steve Meyer, director of economics for the National Pork Producers Council, says the first half of 1995 was not good for producers. Since June, it has been a different story.
"We have had much better hog prices than what anyone expected with profits generally throughout the industry," he says. "But this fall, some of those profits are drying up in the form of higher corn prices. However, we still had a very good price performance on hogs this year [compared to what was originally anticipated] because of outstanding foreign export demand.
"It looks like we will be a net exporter of pork this year for the first time since 1952," he adds.
The U.S. Meat Export Federation forecasts that pork and pork variety meat exports would hit 249,161 metric tons this year; however, this may be offset because of Mexico's continuing economic slump.
Pork packing margins were well above normal ranges the first half of 1995, Meyer says, but not as high as they were last fall when hogs were at record-low prices. Since July, packer margins have returned to the bottom side of the normal range.
"Generally, I think it has been a pretty good year for packers," Meyer says.
The pork industry not only experienced fighting between producers and packers, but also between its small and large producers on perceptions of unfair treatment.
"We have more hogs traded under contractual agreements and there are a lot of perceptions out there about what the effect of that is," Meyer says. "We have producers who perceive that if you bring hogs to a packer in a big truck, you get a big price; and if you bring them in a little truck, you get a little price.
"The anecdotal evidence that we have seen does not support that [assumption]," he adds. "We know there are differences in transaction costs based on volume of business. We don't think the price difference should reflect any more than the economical difference in those costs.
"But what is actually happening is not known," Meyer says. "This prompted us to send a letter to USDA Secretary Dan Glickman in August asking for a task force to gather some facts about what the market was doing and why."
NatWest Securities' Nelson is not as upbeat on the year for pork processors.
"The hog processors are kind of suffering right now," he says. "For two quarters in a row, we have seen some very weak margins from pork processors. The big problem is costs. Input costs and hog prices are rising, and that's hurting them. Pork prices coming out the other end haven't been strong enough to offset that."
AMI's Boyle agrees.
"The pork processors are not nearly as profitable as they were a year ago," Boyle says. "Hog prices have come back to a very healthy level. The producers are making a reasonable return on their production investment. The cutout value on the hogs today is not very good. Consequently, on the pork slaughtering side, it probably will not be as good a year in 1995 as it was during the last half of 1994."
Lamb report
Things have been tough for the lamb and mutton industry. In October 1993, the Wool Act was voted out on a three-year phase-out; this is the last year a wool payment will be made to producers.
"It has been estimated that [the death of the Wool Act] will affect between 15 percent and 30 percent of a producer's income," says Steve Meyer, market analyst for the American Sheep Industry Association. "It is estimated that upwards of 30 percent of the sheep population will be lost as a direct affect of the phase out of the Wool Act.
"The marginal producers have probably gone out of business, and that has reduced the number of sheep," he adds. "With fewer sheep available, there is fewer throughput available for packers and processors."
During the year, Monfort's lamb packing plant in San Angelo, Texas, closed its doors.
"That was the major lamb packing plant in Texas," Meyer says. "Texas, which has our largest sheep population, now has to ship lambs to either Colorado or California. This puts pressure on the producer to pay that shipping cost. Typically, a Texas lamb that would have gone straight to kill in Texas will now spend an extra week or so in a feedlot trying to recover [from shipping]."
Exports are also hurting. The largest market for slaughter ewes from the United States was Mexico, but when the peso crashed last December the market was drastically affected.
"Current exports to Mexico are running between 70 percent and 90 percent below last year's figure," Meyer says. "As of [the third week of October], there were 199,478 ewes exported to Mexico year-to-date compared to 527,850 year-to-date a year ago."
There is, however, some good news to report. More packers are adding value to their products.
"We're seeing more specialty lamb cuts," Meyer says. "We're seeing packers produce items like pre-seasoned legs and smaller portions."
And packers are starting to cater more to ethnic demand. One packer in California is working with the Hispanic trade in that state.
"He realizes that these consumers will not be buying high-priced items like loins and racks," Meyer says. "So he's putting together a specially mixed box of lower-priced cuts and one mid-price cut thrown in at a flat rate."
Although the U.S. mutton market is very limited, it is picking up among ethnic populations (Middle Eastern, Asian, South American and European), particularly in the Northeast and Southeast.
Per capita consumption of lamb has hovered between 1.3 pounds to 1.5 pounds during the past decade. But there's an up side to this low figure.
"It has been estimated that 30 percent of the population will eat lamb once a year; 30 percent will not eat lamb because of a bad experience or they just don't like it; and 40 percent have never tried lamb," Meyer says. "This signals to me there is a lot of opportunity for lamb to grow-if we can get the right product mix and people to try it."
Veal report
This year started out favorably for veal producers. Supplies were relatively tight and demand was up. The annual number of special fed calves is around 875,000, and there is another 175,000 in bob calves. Most recently, however, profitability has been waning because the summer months were difficult for veal.
"Veal is a specialty item that is not well accepted among consumers relative to summer-type activities," says Dave Ivan, administrative coordinator for the American Veal Association. "We're addressing the marketing activities carried on by the Veal Committee in trying to position veal as a summer grilling item."
Although veal is consumed year-round, it is a seasonal product. "It's consumption is spiked a little bit relative to certain ethnic [primarily Italian and Jewish] holidays," Ivan says.
The veal industry is putting together a comprehensive quality assurance program. "We [state veal associations] have been working hard in putting together the elements of that program that essentially guarantees to the consumer that we have a safe and wholesome product," Ivan says.
When asked about criticisms relative to raising veal, Ivan answers: "We have to be able to explain our production practices because there are a lot of misconceptions."
The association has prepared materials addressing production, and it is considering conducting barn tours for food editors and other key influencers.
"We have nothing to hide," he says. "The only way you can correct a misconception is to address it head on."
As is the case with lamb, veal per capita consumption is relatively low-between 1.8 pounds and 2 pounds a person annually. But Ivan is upbeat that veal packers can increase consumption.
"The packers and processors in our industry are privately owned and have the ability to take some chances a little easier than a publicly owned company," he explains. "We already have pre-cooked, pre-seasoned and further-processed products that address the need for convenience and taste appeal."
More veal tonnage is sold through retail vs. foodservice. But in terms of a dollar amount, the mark-up is on the foodservice side. This trend, in turn, is affecting veal production. "Restaurants like to serve an 8-ounce to 10-ounce veal chop," Ivan says. "As a result, these veal calves are being marketed at a heavier weight.
"We have come a long way in five years," Ivan says. "And we're excited about where we're going to be in five more years. Some of our larger packers are just starting to get involved in exports."
The future of processed meats:
quality, convenience and variety
No doubt about it: Consumers will continue to demand a variety of high-quality, processed meat products that are convenient and top-notch in taste-both in low-fat, no-fat and traditional forms.
In a new study, "The Market for Packaged and Canned Processed Meats" by New York-based Packaged Facts, it is estimated that 1994 sales of retail packaged processed meats (cold cuts, sausage, frankfurters and bacon) jumped 4 percent to $15.9 billion when compared to 1993 totals. (This total does not include fresh and processed meats sold at in-store deli counters or foodservice, which are major processed meat segments that also continue to grow).
In 1994, Packaged Facts estimates cold cuts sales to have grown less than 1 percent to more than $6 billion; sales of sausage climbed 8 percent to more than $5 billion; sales of frankfurters dropped by 0.8 percent from 1990 to 1994 to $2.6 billion; and bacon sales climbed 6 percent to $2.2 billion.
Sales are expected to increase in all processed meat segments throughout the rest of this decade. Key factors driving packaged processed meat sales will include: convenience; variety and value; the need for more low-and no-fat items, as well as full-fat products; a demand for new taste experiences; a growing desire for freshness in products; and a need for on-the-go products
Beef, pork, lamb producers experienced different years
by Larry Aylward, managing editor
The pork industry has been up and down. The beef industry has been steady. The lamb industry needs a push.
In the fall of 1994, the unpredictable ride began for the pork industry. Hog prices plummeted, 29 percent from January 1994 to below $30, according to reports.
Packers and processors suffered the consequences of pork prices that dipped below the cost of production. Princeton, Mo.-based Premium Standard Farms was forced to table a $250 million expansion of a Texas hog farm in May.
"We are not exactly sure what's going to happen," says company spokesman Charlie Arnot. "It is going to be a matter of trying to establish some confidence in the market before any expansion takes place."
The roller coaster ride may be slowing. Hog prices have steadied, rising 20 percent from June through August because of increased supplier demand, according to Barron's, a financial publication.
With new packers coming on line, including Smithfield Foods Inc., IBP inc. and Seaboard Corp., experts expect demand to exceed supply. That will increase prices.
Still, "volatile" is the best word to describe the market, Arnot admits, adding that Premium Standard Farms is "cautiously optimistic." "Another big [helpful] factor is that pork exports have increased astronomically over the last year," Arnott says. "Anytime you take the domestic supply and reduce it through exports, you have raised the price. That should be positive for producers."
Pork production in 1994 totaled 17.66 billion pounds (carcass weight) compared to 17.03 billion pounds in 1993, according to USDA.
Production in 1995 was ahead of 1994's pace through July. "Production in 1995 will probably break 1994 levels," says Glenn Grimes, a market consultant for the National Pork Producers Council. However, production has been more evenly distributed throughout the months of 1995 than in 1994.
"Last year was not a good year," Grimes adds. "We are reducing production as a result of what happened last year. So, there will be less pork from here through 1996."
Here's the beef
Beef production in 1994 totaled 24.28 billion pounds (carcass weight) compared to 22.94 billion pounds in 1993, according to USDA. Production in 1995 was ahead of 1994's pace through July.
"Up until recently, supplies have been incredible," says Jim Holzer, managing director of the agricultural markets group for Chicago-based Frontier Risk Management. "And we have seen an incredible demand to clear these supplies."
Some forecasters attribute this year's increased demand to export, but most of it occurred domestically, Holzer says.
Last year, retailers were trying to sell a large supply of beef at high prices, Holzer says. It created a backlog in the system.
Retailers, observing that supplies were at a lower price structure, began to promote it more and lower prices. Reduced prices coupled with an improved economy enabled more consumers to buy.
In October, the National Cattlemen's Association reported the national average retail price of six cuts of beef was the lowest it had been in four years. "Meat purchases are income driven," Holzer says. "With lower prices, there is an increase in consumer capacity to consume."
Ample beef supplies should continue into 1996. Large supplies have meant lower average retail and wholesale beef prices, and lower cattle prices, says Chuck Lambert, NCA economist.
Consumers continue a return to eating beef, Lambert adds. NCA research shows that nutritional concerns about beef peaked in 1990. "Since that time, the number of people who are concerned and the intensity of that concern has diminished," Lambert says.
Lamb slide?
Earlier this year, Howard Wyman, secretary of the National Lamb Feeders Association, told Successful Farming magazine that "there has been little or no brand name promotion and very few aggressive selling efforts on the part of anyone in the [lamb] industry."
Pierce Miller, president of the American Sheep Industry, claims the industry can't promote its products on the same plain as its competitors because of a lack of dollars. With that in mind, Miller says the industry has made strides in the past five years in bringing consumer-friendly cuts of product to the marketplace, including a boneless, pre-seasoned leg of lamb.
Per capita consumption of lamb has slipped through the 1990s, with consumption projected to be about 1.1 pounds a person in 1995, according to USDA. Miller says consumption will continue to decline because of dwindling herds, not dwindling customers.
Is lamb becoming a niche product? Without proper funding and promotion, it could become a niche product, Miller admits. "But if we maintain a national promotional organization and move lamb through the proper marketing channels, we can keep our space in the meat case," Miller adds.
Retailers experience strong year, but it could have been better
by Larry Aylward, managing editor
Let the trumpets blare in honor of an increase in meat consumption and growing retail meat sales. The meat industry has cause for jubilation.
Or does it?
John Story, senior director of meat and deli for Minneapolis-based Fairway Foods, enjoys such jubilees and he doesn't intend to rain on the industry's parade. But Story believes it's a tad early for trumpets.
"[Retailers] have moved more meat, per se, but we haven't moved it very strategically or smartly," Story says. "Nor do I think we made the kind of money on it that we should have."
Statistics say otherwise. According to Supermarket Business magazine, annual retail sales of meat were at $42.12 billion in 1994, compared to $40.79 billion in 1993. In October, the National Cattlemen's Association reported that the national average retail price of six cuts of beef was at the lowest level in almost four years.
Projected consumption of beef in 1995 is at 68.4 pounds a person, nearly a pound more than in 1994. Projected pork consumption is at 53.8 pounds in 1995, compared to 53.1 in 1994.
In its Meat Operations Review, Supermarket Business estimated that 44 percent of supermarkets reported higher 1994 sales when compared to 1993. Eighteen percent reported no change, and 38 percent reported lower sales on an average of 2.9 percent.
Story doesn't doubt the numbers, but he believes more retailers could have been on the winning side with increased sales. The problem is many retailers are missing the boat when it comes to meat merchandising.
"Retail meat departments in most of today's supermarkets are the poorest appearing, the least merchandised, the least innovative and certainly the least imaginative departments in those stores," Story claims. "We have been doing the same things for the past 25 years."
It's high time retailers adapt modern merchandising techniques, Story suggests. "All the good buzz words include category management and Efficient Consumer Response," he says. "I hear a lot, but I don't see a lot being done."
Interestingly, 61 percent of the retailers surveyed by Supermarket Business claimed that no changes would be implemented in merchandising strategy.
It's an open secret that a supermarket's meat department has changed less than other supermarket departments, notes Jens Knutson, AMI's director of economic and industry relations. At the same time, percent of sales in the meat department has declined when compared to other supermarket departments.
"At some point, that's going to be and has been reflected in some instances in the amount of space devoted to the meat department," Knutson says. "The only way to grow the department is to grow its relative contribution to the store. There are some challenges there."
Much of the work rests on the industry's shoulders, which needs to divert the attention of retailers with resourceful products.
"We have to figure out what we're doing," Knutson says on behalf of the industry. "We keep talking about the consumer.
"Our customer is the retailer, but it ultimately becomes the consumer. So how do we get the retailers excited about our products? And how do we invisibly monitor a retailer's performance to make [products] work for its customers?"
Retailers need to be willing to walk out on a limb. Industry may need to coax them. It's time for retailers to experiment with category management, cross promotion, plan-o-grams and distinctive signage.
As Story says: The situation is good, but it can be much better.
Steaks are high
At the foodservice level, diners are doing steak-in high fashion.
"If we're going to eat steak, we're going to eat it right," says Ron Paul, president of Chicago-based Technomic Consultants, an agency that tracks foodservice trends. Upscale steak houses, such as Lone Star Steakhouse & Saloon and Outback Steakhouse, have led the trend, Paul notes.
"The consumer is going for quality more than price in steak. Consumers are not in a risk-taking mode. Price isn't as important as reliability," Paul adds.
At the same time, mid-scale steak establishments have had less success.
"Industry opportunity in foodservice continues to be at the higher quality levels," Paul says.
He is quick to add that the meat industry's continued movement to develop leaner products is a step in the right direction.
"One should not assume that fat is back because steak is back," Paul says.
The burger remains king, too, Paul claims. McDonald's Corp., Burger King Corp. and Wendy's International have found continued success in value strategies, Paul says. "And [they have found success] in the fact that the product is popular," he adds. "We like burgers. Let's not apologize for it."
Paul says the latest foodservice trend is in bistro-type establishments, which have been popping up in New York, Los Angeles, San Francisco and Chicago.
Perhaps, most importantly, there should be an increased concern for food safety among restaurateurs and foodservice operators.
"The scare is still E. coli," Paul states. "Food safety and handling are still potential ticking time bombs.
"Sanitation isn't at a level it should be around the country," he adds.
All the world seems to enjoy U.S. meat
by Ken Krizner, senior editor
Exports of U.S. beef and pork products continue to shine.
Despite a recession in Mexico that has obstructed the growth of U.S. meat products and the continued hormone ban by the European Union, the value of beef exports are up 20 percent during the first eight months of 1995, compared with the same period in 1994. Pork exports are up 63 percent in value during the first eight months of 1995, compared with the same period in 1994. (See charts on page 24.)
In addition to improving numbers, U.S. meat companies continue to open joint ventures in foreign countries. IBP inc. and Hormel Foods Corp. announced joint ventures in China this year, and Hormel has entered into a joint venture in Mexico.
This continues a decade-long trend that has seen U.S. beef and pork products come to dominate the meat export arena.
"We've become a more export-oriented country and meat products are a part of that," says Philip M. Seng, U.S. Meat Export Federation president.
Here is a capsule look at some world markets for U.S. beef and pork products.
Mexico
The past 12 months have been tumultuous for Mexicans and their economy.
A nationwide recession, triggered last December by the government's devaluation of the peso, has stifled consumer spending. Imports, which doubled in price nearly overnight, have suffered the most, and meat has been no exception.
Enid, Okla.-based Advanced Foods Inc., for example, lost about 40 percent of its investment in Mexico.
"When the peso devalued, [Mexican retailers] took a lot of meat items off the menus," says David McLaughlin, Advance's board chairman.
Through the first eight months of this year, 37,017 metric tons of beef and 43,631 metric tons of pork have been exported to Mexico, compared with 74,501 metric tons of beef and 75,708 metric tons of pork during the same period in 1994. The total loss in value of beef and pork products is $141.5 million.
"It's survival of the fittest for Mexican businesses and most small- and medium-sized businesses are in trouble," notes Bruce Cobb, USMEF-Mexico director.
Seng notes that "it will be a long time before we return to export levels we were at prior to the peso devaluation." But he adds what exporters want to see is an end to volatility and a return to some form of semblance in the Mexican economy.
Jim Carmichael, a former executive with Oklahoma City, Okla.-based Foodbrands America, agrees that patience will pay dividends for those who stay in Mexico.
"The Mexican economy will be stronger for going through peso devaluation," he believes.
He also adds that businesses will not be caught off guard again.
"Everybody thought Mexico was the perfect example of a modern economy, and that nothing could go wrong," he says. "Now people say if it can happen in Mexico, it can happen in Brazil, Chili or Argentina."
To help alleviate some of the woes, USMEF has intensified its customer contact, focusing on the larger Mexican businesses with the greatest influence over the purchasing, distribution, marketing and selling of meat in Mexico.
Japan
The United States has passed Australia as the No. 1 exporter of beef to Japan on a volume basis, according to the Japanese Livestock Industry Promotion Corp. It is the first time that U.S. beef has been ahead of Australian beef in Japan.
For the period between April and June, the U.S. share of the market was 46.02 percent, compared with 46.01 for Australia. By comparison, the U.S. share is up from 42.5 percent from a year earlier, compared with 52.6 percent for Australia.
A rise in marketing programs, supported with industry check-off and USDA funds; favorable exchange rates; and U.S. beef quality are the reasons Seng attributes to the increase.
Overall, beef exports rose 32 percent in value and pork exports rose 64 percent in the first eight months of the year.
China
There is one statistic that tells why China is potentially a huge market for meat exports. In 1994, China had 98 percent of the total increase in beef consumption throughout the world.
Disposable income in the world's most populous nation is growing, as is the eagerness of Chinese consumers to try new products. Add to that an economic boom, significant growth in private enterprise and increased local autonomy, a decade's worth of work has begun to pay dividends.
The introduction of lower-priced beef cuts at a recent food show in Shanghai met with success, with more than 40 boxes of U.S. retail packages sold each day.
"Consumers bought all we had to sell each day, and then came back for more," points out Joel Haggard, USMEF vice president-China Pacific. "This type of exposure for U.S. beef is critical at this stage in China's development. It demonstrates a level of commitment to the market that is essential and at the same time yields new distributors and end-users."
More than $2 million in U.S. beef products were sold in China in the first seven months of 1995, according to USDA. In addition, U.S. beef products sold in Hong Kong reached nearly $20 million.
There are still some obstacles to continued growth of the Chinese markets, including high import duties on beef, a lack of adequate distribution facilities, low per capita income, and low consumer awareness of beef.
But China could become the fifth largest market for U.S. beef by the end of the decade, purchasing between $75 million and $100 million of product.
European Union
The EU's continued hormone ban has frustrated U.S. meat exporters.
The EU was scheduled to hold a conference at the end of November to discuss the ban and move toward a settlement of a situation that has festered since 1989 and cost U.S. processors an estimated $100 million. The conference was to review scientific evidence in relation to the use of hormones in animals and make recommendations to a scientific board.
Despite encouragement earlier in the year that there could be a breakthrough in the situation, a spokesman for USDA is not optimistic the issue will be resolved.
Seng, however, is optimistic that the conference is a first step toward resolution. But he adds that under a best-case scenario, U.S. meat processors won't see the benefits of an agreement until at least 1997.
And if no resolution is arrived at, Seng tells Meat Marketing & Technology that he would support the Clinton administration taking the matter to the World Trade Organization.
South Korea
An agreement reached in June between the United States and South Korea is expected to increase beef and pork exports by nearly $1 billion within four years.
The agreement allows for manufacturer-imposed shelf-life dates for vacuum-packed beef and pork and all frozen meat beginning on July 1. Previously, the shelf-life dates were imposed by South Korea.
South Korea's per capita consumption of beef and pork is twice as high as Japan's.
Therefore, U.S. meat executives believe that South Korea could develop into an unparalleled market for those products within a decade