2024 Industry Outlook: Beef dealing with two-year decline

The US beef industry is in the midst of one of its largest two-year declines in beef production. This will have significant ramifications for everyone from consumers to cattle producers. Consumers will face higher retail prices than they did in 2023. Beef processors will struggle to make money unless they get a lot more for their beef than they did at the end of last year. Cattle feeders will see sharply higher live cattle prices because of the reduction in cattle supplies due to ongoing beef cow herd liquidation. This will make it even harder for packers to make money this year.

This year could be even more challenging for packers than 2023 because US cow-calf producers continue to reduce their herds. Packers and analysts had expected to see signs of a rebuild of the beef cow herd early last year as prices for all classes of cattle began to move higher. But those signs did not materialize, as Donnie King, Tyson Foods’ president and chief executive officer, told analysts last November. His remarks came after Tyson reported that its beef segment had an operating loss of $323 million in its fourth quarter ended Sept. 30, against income of $375 million in the fourth quarter of 2022. This meant an operating loss for fiscal 2023 of $91 million, versus income of $2.502 billion. This was Tyson beef’s first annual loss since 2015, when it reported an operating loss of $66 million. Its previous biggest loss was $244 million in 2006.

JBS Beef North America in contrast reported a healthy profit in its 2023 third quarter. But for the US beef division, a shortage of cattle for slaughtering will remain a challenge in the fourth quarter and in 2024, director Wesley Batista Filho told analysts. The unit’s adjusted EBITDA in the quarter was $103 million, with an adjusted EBITDA margin of 1.7%. EBITDA in the 2022 third quarter was $481.1 million for an 8.7% margin. Beef margins in North America during the quarter suffered a material impact compared to the previous year, as a result of changes in market conditions due to the turn of the cattle cycle in that region, said JBS. This reduced the availability of animals for processing and therefore increased costs, the company said.

Other proteins get a boost

The US Department of Agriculture’s forecasts at the end of last November were for 2024 US beef production to total 25.810 billion lbs. This would be down 1.122 billion lbs or 4.2% from an estimated 26.932 billion lbs in 2023. It would be down 2.481 billion lbs or 8.8% from 2022’s 28.291 billion lbs. In contrast, pork and broiler production this year will both increase slightly from 2023, said USDA’s Economic Research Service (ERS). It forecasts pork production at 27.730 billion lbs, up 513 million lbs or 1.9% from 2023. It forecasts broiler production at 46.65 billion lbs, up 441 million lbs or 1.0% from 2023.

Beef’s sharp decline means that red meat and poultry production this year will be an estimated 106.529 billion lbs, down 76 million lbs or 0.1% from 2023, according to ERS. It also means that disappearance (consumption) of red meat and poultry will be 224.1 lbs per person this year, versus 225.2 lbs in 2023. Beef will see a big decline to 55.6 lbs per person from 57.9 lbs last year and 59.1 lbs in 2022. Beef and veal exports will decline this year by 190 million lbs from 2023, while imports will increase by only 37 million lbs. Any increase in imports in the next two years will fall far short of filling the decline in beef production and exports, said analysts.

The sharp reduction in beef production will be due to reduced cattle numbers again this year. The Jan. 1, 2023, total of 89.274 million head was down 2.803 million head or 3.0% from the prior year. This year’s Jan. 1 total might be down another 1.5 million head and would likely represent the low in total inventories in the current cattle cycle. But analysts said any rebuilding of the beef cow herd will not begin until 2025 at the earliest. The reasons for this are numerous but key factors are continuing drought and economic drivers such as high input costs, interest rates and financial recovery.

Yet no less than 10 entities or individuals have announced plans to build new beef processing plants in the United States. One hopes they are looking at the current and future size of the US beef herd and how much processing capacity the industry currently has. Should they do so with an open mind, they might decide to shelve their plans and save their investors a lot of money. For the industry has an over-capacity issue which will only worsen in the next two or three years.

The catastrophic drought from 2010 through 2012 led to the closure of nine beef processing plants. Industry-wide capacity by 2016 declined to 125,500 head per day from 139,000 head per day in 2010, according to Cattle Buyer’s Weekly data. But the capacity total has now increased considerably from that low. The largest 71 beef processing plants in the United States currently have capacity to process 134,705 head per day. Even using a more conservative estimate of maximum daily capacity of 128,000 head, it is clear the industry is saddled with excess capacity. The 128,000 head total would mean a maximum slaughter total of 640,000 head over five days or 704,000 head over 5.5 days.

The current over-capacity in beef processing and little likelihood of any meaningful increase in beef cattle numbers for two years cast a shadow over the proposed new plants. They have an avowed capacity of 18,190 head per day, which includes a plan to build an 8,000 per day mega-plant in South Dakota. It seems likely this plant will not get to the ground-breaking stage. The wider question is how many others will meet the same fate, according to analysts.

Poultry rules

On the regulatory front, poultry processors will be required this year to disclose more information to poultry growers. USDA published final rules on Nov. 28 last year that amend regulations under the Packers and Stockyards Act and add disclosures and information that live poultry dealers, usually large processing companies, must provide to poultry growers. The rule will take effect on Feb. 12.

The rule also establishes additional disclosure requirements for live poultry dealers engaged in the production of broilers who use poultry grower ranking systems to determine settlement payments for broiler growers, said USDA’s Agricultural Marketing Service. These requirements add targeted transparency to the market for grower services that will inhibit deceptive practices related to broiler contracting and performance.

Other parts of the rule include live poultry dealers providing a “Live Poultry Dealer Disclosure Document” that presents poultry growers information needed to see outcomes they can expect before making financial decisions such as capital-intensive facility improvements or taking out loans. The rule would also require dealers to disclose earnings for growers by quintile, establish minimum flock placements and explain variable costs that growers might incur and how companies handle occurrences such as sick flocks and natural disasters. This year will be a test of how onerous these new requirements are for poultry processors.