The Van Trump Report

Rabobank Forecasts Another Tumultuous Year for the Animal Protein Industry

Higher input costs for animal protein supply chains, including animal feed, labor, energy and freight, will be top-of-mind change drivers for the animal protein industry in 2022 according to RaboBank’s Global Animal Protein Outlook 2022. Although markets are expected to settle somewhat in 2022, many drivers of recent change will remain.

Higher input costs for animal protein supply chains, including animal feed, labor, energy, and freight, will be top-of-mind change drivers. Global shipping prices, which have been an issue for the agricultural industry all year, are expected to continue into 2022. The report said fixing global shipping problems was dependent on a slow-down on consumer spending, which increased dramatically after COVID lockdowns. It said there had been investment into more shipping capacity, but it was not expected to come online until 2023. Meanwhile, energy prices, including diesel, are expected to remain elevated until 2022. These will be accompanied by ongoing change, driven by the transition to more sustainable animal protein, biosecurity challenges, and Covid-19.

The pork, poultry, and aquaculture sectors are expected to drive production growth, according to Rabobank. Pork will expand more slowly, due to the ongoing recovery of China’s swine herd in the wake of a massive African swine fever outbreak. Beef and wild-caught seafood production will contract slightly but remain mostly stable. Alternative protein will continue its trend of rapid growth with more product diversification expected. Alternative protein product sales were well supported during 2021 and Rabobank expects sales to keep growing strongly in 2022. The full report is HERE. Below are some of the other highlights.
Beef – In North America, the U.S. beef cattle herd is expected to shrink -1.8% year-over-year to around 30.6 million head in January 2022. The report notes that the estimated fed cattle supply averaged 15 percent above operational packing capacity in 2020 and 2021. Cattle numbers and packing capacity are expected to find relative balance by the second quarter in 2022, though. Overall, 2022 annual fed slaughter is expected to fall by -2.5% year over year. Even as domestic beef demand falls slightly from its pandemic highs, continued export growth, declining beef production (down -2.7% year-over-year), and general economic inflation will provide price support. Despite the production decline, Rabobank sees China spurring a +2.8% year over year total U.S. beef export growth in 2022, following 2021’s expected 17% year over year growth.

Canada’s cattle herd is predicted to decline similarly to the U.S., with Rabobank forecasting a -2% year-over-year drop in production. Major drought conditions could also push Canada’s beef cow inventory down more than -2%. Likewise, drought in Mexico will slow down any beef cattle growth in that nation.

The biggest beef news out of Brazil and Argentina is that the U.S. markets will bring export opportunities. Rabobank expects Brazil beef exports to set a new record in 2022 with a +1% year-over-year increase. China’s demand for beef imports is expected to grow, with Brazil well-placed as the main supplier. A lack of Labor in other producing countries could improve the competitiveness of Brazil and Argentina in trade markets.

In Australia, Rabobank says that while seasonal conditions have been favorable, they do not believe the cattle herd has seen a strong rebuilding through 2020 and 2021. Instead, many producers have taken advantage of good feed availability and high livestock prices to trade rather than rebuild breeding numbers. Rabobank forecasts beef production will see a slight lift (around +5%) in 2022 – driven largely by a lift in slaughter numbers – with a larger increase occurring in 2023. Higher production in 2022 will also support an increase in exports of about the same magnitude.

Pork – Rabobank says pork production growth is more uncertain in the U.S., where hog farmers are facing many regulatory uncertainties and rising costs. The bank forecasts hog supplies will remain tight through early 2022 but will be higher compared with prior-year levels. Even so, rising costs and added regulatory constraints are expected to moderate expansion plans, as are packing constraints made worse by labor availability. U.S. pork prices are expected to remain strong to the start of the year, then will trail near-record 2021 levels as production increases and markets adjust to the implementation of California’s Proposition 12 sow housing mandates. Export growth is expected to act as a “welcome buffer.”

North American pork production is expected to see a +0.8% increase in 2022 versus year-ago levels, as a -1.4% drop in the first half of 2022 US production is expected to be offset by a stronger back-half and a recovery in Mexico and Canada. U.S. pork prices are expected to remain strong on limited growth in production but will trend lower as domestic consumption normalizes.

Supply chain disruptions and tight grain stocks around the globe are raising the cost of production at the same time a growing hog supply is driving down prices. “The most severe impact is being felt in markets that were slow to recover from COVID-19 or that have struggled with trade disruption or disease,” says Christine McCracken, Senior Analyst for Animal Protein at Rabobank. Limited pricing power and higher costs are also putting pressure on hog production returns, resulting in scaled-back growth plans in many markets.  

In Europe, pork production is stabilizing but domestic consumption needs to rise to balance markets, say the analysts. EU hog prices are -24% below the five-year average, on larger slaughter and weaker demand in both domestic and export markets. Pig prices are expected to remain pressured for much of 2022, as EU27+UK pork exports will likely decline on lower shipments to China. Producers in Germany and the Netherlands are liquidating the herd and are expected to reduce production in the coming months. Labor challenges are also an issue at some plants, though the impacts are not widespread.

Pork production recovery in China is expected to continue, but the path is uncertain. ASF continues to affect China’s pork industry, particularly among smaller producers, although improved biosecurity has been helping larger producers to limit disease outbreaks. Rabobank says the impact will decline in 2022 but will not disappear. China imports are likely to remain weak given ongoing pandemic restrictions that have boosted pork supplies. However, supplies could fall short of needs if China’s economic trends improve. Meanwhile, pork production in Southeast Asia will also recover from impacts of ASF and Covid-19, but more slowly.

Poultry – Rabobank analysts are forecasting another strong year with +2.4% year-over-year growth for U.S. broiler productivity in 2022. Tight supplies and more export growth will support continued price increases in the sector. Supply growth in the second half of 2021 has been restricted by high costs, avian influenza and other disease concerns, reduced capacity, and limited availability of inputs like genetics and feed additives. Unfortunately, costs are expected to stay high in 2022, with ongoing elevated and volatile feed prices and high labor, logistics, energy, and construction costs. U.S. producers will maintain a solid position in export markets, however, Rabobank expects lower trade with China.

Rabobank expects global poultry demand growth to reach +2% as general economic conditions improve throughout the world. However, supplies of poultry are expected to remain tight in 2022 on high input prices, and labor and logistics challenges, the report said.

China will continue to grapple with ongoing oversupply of poultry and producers face pressure to reduce supplies, according to Rabobank. COVID-19 has hit poultry demand strongly in China, and the industry is performing below breakeven. In Southeast Asia, poultry production is expected to recover after two challenging years.

Stronger prices and tight supplies of poultry is the outlook for Europe, according to Rabobank. EU member countries should see strong demand for poultry. However, Rabobank expects supply growth to remain restricted in the European Union and the United Kingdom. Headwinds include avian influenza outbreaks in the EU and UK, labor challenges and high costs.

Sustainability – Environmental sustainability and climate change have been dominating the news agenda in recent months, with the COP26 summit in Glasgow and political discussion around that meeting. The Rabobank report said for producers to be able to capitalize on sustainability-linked markets, incentives will be needed. “Consumers are often cited as a driver behind sustainability. However, outside of niche markets, most consumers have not yet demonstrated a willingness to pay higher prices for food with ‘more sustainable’ attributes,” the report said. “Ultimately, premiums from consumers may be moot. Improved production efficiency, brand reputation, capital access, and regulatory pressure will likely provide more powerful motivation for animal protein supply chains to scale up sustainability enhancements.”

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