On the radar: external factors impacting the U.S. animal protein sector

INTERVIEW WITH URNER BARRY

On the radar: external factors impacting the U.S. animal protein sector

Abusiness can’t operate on its own. Be it an animal protein provider or any company in the agribusiness value chain or in another industry, there are multiple factors that can dictate business performance. These are called external factors — those outside of a business’s control.

There is no shortage of acronyms that attempt to sum up the various types of external forces that impact businesses. One of the most common is called PEST, which stands for Political, Economic, Social, and Technological. And for an obvious reason it’s also an easy acronym to remember.

We turned to our focus to the US meat market and asked colleagues at Feedinfo sister company Urner Barry (UB) — a price reporting agency providing exclusive data for the red meat, poultry, eggs, seafood and plant protein markets — to share their opinions on the political, economic, social and technological influences to bear in mind when it comes to US animal protein sector input costs as we enter 2023.

Looking first at economics, Andrei Rjedkin from UB’s Consulting division, highlighted that producers are still dealing with increased costs due to the long-term effects of the economic shutdown stemming from the pandemic, as well as outside geopolitical factors like the Russia-Ukraine conflict.

“Typically, higher costs are passed from producer to consumer in the long run if these influences are persistent. Businesses are now testing how much of the increased cost they can pass on to consumers. We don’t believe the market has settled yet,” he said.

According to Rjedkin, consumers built up their excess savings during the pandemic and have been better prepared to face upward price pressures with these excess savings and increased wages.

“Since early 2021, we have seen increasing wage growth — especially for the bottom income quartile,” he commented, illustrating his point by saying that the 12-month moving average of median wage growth for each group grew: by 7.4% for the first quartile, 7.2% for the second quartile, and by 6.2% overall (hourly data, November 2022).

“This year, inflation has outpaced wage growth but seems to be tempering,” Rjedkin added. “Many have argued that inflation has caused the price of inferior goods to jump as demand increases — such as the case with eggs relative to other proteins. However, the case for eggs is blurred with the re-emergence of HPAI which is causing upward price pressures.” Rjedkin also referred to higher-priced beef cuts and trimmings which have hovered near or at seasonal all-time highs this year — implying that demand has remained relatively strong for these products and that consumers are still willing and able to buy. “We believe increased buying power during the pandemic expanded the palates of consumers. And, overall, consumers may be less likely to move away from the enhanced eating habits they developed. However, there must be a breaking point. Could we see the prices for these low-cost Andrei Rjedkin proteins rise even more compared to higherpriced alternatives, holding all else equal, if

Consumers may be less inflation remains?” he said. Sharing his thoughts on some of the likely to move away from other key external political, legal and the enhanced eating habits social influences which will impact the US animal protein sector in 2023, they developed [during the Rjedkin argued that many sectors pandemic]. However, there are impacted by monetary policy, such as housing (i.e., must be a breaking point. quantitative tightening and

ANDREI RJEDKIN interest rates). “It is unclear how this will impact the way we eat proteins or how it will impact businesses,” he commented. “How the Federal Reserve handles the inflation issue will be imperative for any business to understand. Currently, the US is not in a recession. At the last FOMC (Federal Open Market Committee) meeting in December 2022, the Fed raised rates by an additional 50 basis points. In previous meetings, they hiked rates by 75 basis points. Although it may be necessary to cool the economy, if the Fed increases rates too aggressively, it is possible that we

INTERVIEW WITH URNER BARRY

could enter a recessionary period sometime in late 2023,” the UB consultant added.

“For the animal protein sector and many other businesses, on the surface, this means the cost to borrow money would increase and expansion of operations may slow. But beneath the surface, this means the entire economy would slow.”

Russ Whitman, Senior VP, Urner Barry, also argues that at times it can be difficult to extricate political and social influences from each other.

“We live in an environment where it is a popular trend to point the finger at the food industry as if, indeed, the root of some of the world’s nutritional challenges and current high prices is a result of industry greed,” he stated.

However, there are also signs of what are, in his words, a less antagonistic and more cooperative approach between industry and traditional societal influencers beginning to emerge, as can be seen in the works of organizations such as the International Poultry Welfare Alliance and the U.S. Roundtable for Sustainable Poultry and Eggs.

Whitman also highlighted some external technological influences that he sees playing an increased role in 2023, particularly on labour in the US meat sector.

“Agribusiness, and the animal protein sector specifically, have been the benefactors of tremendous advancements in the technological and mechanical fields. Although computerised sizing, sorting, packaging, and distribution of animal proteins, both raw and further processed, has been in place for some time, increasingly, it is replacing humans and the human hand that is a common motivation in the business,” he said. “Although at this very moment investing in new plants is limited for some of the reasons mentioned above, today’s conventional wisdom is that labour as we know it is about as good as it is going to get in this era, with or without Covid. In other words, it is a long-term challenge as opposed to short blips, as was most often the case in previous decades when ICE raids were more likely to curtail output than employment ‘disinterest’ or alternatives,” Whitman added. “That means in order to produce the same output, the food industry must introduce mechanical alternatives.” Whitman illustrated this point by saying that in the US poultry sector, where tens of thousands of chickens and turkeys are harvested daily, it is now possible to run almost an entire operation with about half of the labour that was historically necessary. “Improvements in infrastructure from the farm to the consumers’ plate will aid in efficient deliveries and do so in an environment with increasingly diminished Russ Whitman exposure to airborne contaminants and similar impurities. Furthermore,

I don’t think it can be mechanisation will allow for producers to continue to supply wholesome emphasised enough the protein at an affordable price,” he said. need to develop a long-term Adding his own thoughts on the labour market pressures in the US solution to highly pathogenic animal protein sector, Rjedkin noted avian influenza, as its that in 2022, the US labour market was strong, and unemployment remained current global and historical in line with pre-pandemic norms. On proportions are simply not a year-to-date basis, the economy sustainable moving forward averaged nearly 6.4 million new hires and 11.1 million jobs opening a month. RUSS WHITMAN Wage growth has been at record levels, especially for the bottom quartile compared to the others. “According to macroeconomic theory, as the Fed pushes to control inflation to lower rates, unemployment figures should rise, holding all else equal,” Rjedkin said. The UB consultant added: “We believe there may be a combination of short-term and long-term challenges for the US animal protein sector. If demand destruction comes with an economic downturn, how can businesses handle the increased cost of labour? Adjustments in the workforce would be needed. It appears labour pressures have eased somewhat with increased wages.” For Rjedkin, other external forces influencing agribusinesses worth keeping an eye on are shocks to the market such as supply, oil, feed, etc., as well as policy issues like Proposition 12 (which establishes minimum requirements for confining certain farm animals and prohibits sales of meat and egg products from animals confined in a non-complying manner which, if upheld by the U.S. Supreme Court, will have implications for the pork market going far beyond California, the state which passed the ballot measure). Whitman also stressed that how markets react to the spread of highly pathogenic avian influenza will be critical. “I don’t think it can be emphasised enough the need to develop a long-term solution to highly pathogenic avian influenza, as its current global and historical proportions are simply not sustainable moving forward,” he stressed.

By Simon Duke, editor in chief