Meat Commodities refer, in general, to commodities in the form of or directly derived from livestock. This includes partially processed or slaughtered meat products, such as pork bellies, as well as live, whole animals such as live cattle. This also includes livestock derivative products such as milk.
Cattle (beef), pigs (pork), and chickens (poultry) are the three major categories of livestock raised for human food consumption. Each exhibit unique characteristics, such as different feed conversion ratios – for example, chickens convert feed mass into body mass 4 times more efficiently than cows. However, prices for all three of these types of livestock are dependent on similar global trends and forces. Not only do increasing corn prices and other feedgrains like soybean meal, barley, and sorghum drive livestock expenses higher, it also increases incentive to use land to grow crops rather than raise animals for meat production, driving prices up even further. Rising input costs hurts companies like Pilgrim’s Pride (PPC), Tyson Foods (TSN), and Smithfield Foods (SFD). On the flip side, strong global demand for meat boosts prices, which helps operating margins. Increasing wealth worldwide has driven meat consumption higher, especially in emerging markets. In 1985, the average Chinese person consumed 20kg (44lbs) of meat annually. In 2008, the figure is 50kg (110lbs).
Another factor impacting this industry is global demand for corn-based ethanol, which we talked about is used as a fuel source. This demand has driven up corn prices and soybean prices, but comes at the expense of the livestock industry. Ranchers and hog producers have opted to liquidate herds rather than have to pay for another mouth to feed. This, in turn, has caused a supply spike and forced meat prices lower. So as futures prices of feedgrains rise, it does not translate to higher cattle and hog futures contract prices or help companies raising livestock. However, in the long-run, as producers switch from raising livestock to growing grains, livestock operating margins improve as more crops lowers costs of feed and less meat production supports prices.
Which Companies Benefit From Higher Livestock Prices?
- Companies that raise and process livestock benefit most from rising livestock prices. Included in this category are Tyson Foods (TSN), Sanderson Farms (SAFM), Smithfield Foods (SFD), and Pilgrim’s Pride (PPC). Rising meat prices, with feed costs constant, means these companies are able to generate a higher profit margin per pound of meat sold. Pilgrim’s Pride is the largest chicken processor by volume. Tyson sells pork, beef, and chicken, while Sanderson mainly markets chicken. Smithfield is the largest processor of hogs.
- Businesses that have oilseed crush plants like Archer-Daniels-Midland Company (ADM) benefit from rising livestock prices. Approximately 82% of the soybean crush yields soybean meal, which is a protein rich livestock feed. Rising livestock margins promote building livestock stocks, which increases demand for meal.
- Antimicrobial manufacturers benefit when livestock prices increase. Factory meat farms, especially poultry ones, account for 70% of all antimicrobial consumption. Livestock is fed antibiotics in order to prevent disease from spreading and sickening/killing an entire flock or herd. Good margins support more livestock and increase demand for antimicrobials. Companies that produce antimicrobials include Sanofi-Aventis SA (SNY) and Merck (MRK), which own a joint venture, Merial, that sells animal health products.
Which Companies Suffer From Higher Livestock Prices?
- Firms like Monsanto Company (MON), Potash Corporation of Saskatchewan (POT), DuPont (DD), and Agrium (AGU) lose when livestock prices rise, but grain prices remain unchanged. These fertilizer and seed marketers benefit when crop acreage increases; better livestock margins keep ranching lands from transitioning into crop production.
- Restaurants, such as Texas Roadhouse (TXRH), Darden Restaurants (DRI), and Ruby Tuesday (RT) suffer from higher livestock prices. Their food costs rise and squeeze operating margins, because restaurants are not able to pass on all the higher costs to consumers.
Five Main Impacts On The Price Of Livestock
First, Corn Prices
Corn accounts for the largest portion of livestock feed in the United States. Domestic livestock owners compete with ethanol producers and the export business for corn. As a result, higher ethanol prices resulting from increasing crude prices drive demand for corn higher. Also, a weakening dollar supports foreign demand for corn as foreign currencies purchasing power rises. These dynamics in turn drive livestock margins down as input costs rise. Rather than feed cows, pigs, and chickens at flat to negative operating margins, livestock owners opt to slaughter more of their herd. This liquidation supplies the market with excess meat and drives prices lower in the short-term. Equilibrium is restored in operating margins by either greater supply of feedgrains driving input prices lower or decreased livestock production increasing market prices.
Second, Corn-Hog Ratio
With corn being such an important component of livestock feed rations, traders use the hog ratio as a quick tool for determining hog margins and predicting future price. The corn-hog ratio is the price relationship between one bushel of corn and 100 lbs (1 cwt) of live market hog. The benchmark is 1:12. If the ratio is less than 1:12, it is estimated that hog production is unprofitable; above 1:12, it is.
Third, Substitution between Beef, Poultry, and Pork
Consumers have the option of substituting away from meat completely and into cereals and vegetables if prices are too high, but they also can shift consumption between the three main meat categories. In general, beef is the more expensive relative to chicken and pork. The variation in prices is largely due to variation in feed conversion ratios. Since chicken and hogs convert 1 kg of feed into 2-4 times as much body mass than a cow, it makes producing poultry and pork less expensive than beef. Therefore, in a time of rising feedgrain prices, one would expect that beef consumption/production would not grow as much as poultry or pork. The USDA forecasts this in its meat production projections through 2017.
Fourth, Disease Scares
Outbreaks of livestock diseases temporarily shift consumption habits. Breakouts of Mad Cow Disease shift demand away from beef; thus, negatively impacting prices for cattle. Similar, scares of bird-flu or E. Coli decreases poultry demand and prices.
Fifth, Increasing Standard Of Living Supports Demand For Meat
Increasing wealth drives meat demand higher. In the developing world, an average person consumes 30kg (66lbs) of meat per year, but in industrial nations, a typical person eats more than 80kg (176lbs) of meat annually. Rising demand supports meat prices, but also, crop prices as well; more cattle, hogs, and poultry will put pressure on feed stocks.