MEAT - OUTLOOK FOR THE DECADE 2010-2019

The annual Agricultural Outlook is prepared jointly by the Organisation for Economic Co-operation and Development (OECD) and the Food and Agriculture Organization (FAO) of the United Nations. The projections and assessments provided in this report are the result of close co-operation with national experts in OECD countries, but also in  several countries that are not members of the OECD, reflecting the combined  knowledge and expertise of this wide group of collaborators. A jointly developed modelling system, based on the OECD’s Aglink and FAO’s Cosimo models, facilitates consistency in the projections. 

Outlook in Brief

Agriculture has experienced a number of severe shocks in recent years with record high oil prices, commodity price spikes, food security fears and resultant trade restrictions, not to mention the most serious global economic recession since the 1930s. The greatest impact has been on the poor, especially in developing countries, with the world’s hungry now estimated at over 1 billion people. Agriculture has shown remarkable resilience, Particularly in the OECD area, with strong supply response to high prices and with continuing, albeit dampened, demand growth during the crisis. In 2010, a degree of normalcy has returned to many markets with production closer to historical levels and Demand recovering. Still, many governments remain concerned about the potential for a repetition of significant shocks to such key factors as energy prices, exchange rates, and/or the macroeconomic performance of key countries and regions, and about the consequences that such shocks have on market volatility.

For livestock products, average meat prices in real terms, other than for pig meat, are expected to surpass the 1997-2006 average over the coming decade initially due to lower supplies, higher feed costs and rising demand. Pig meat real prices should stay relatively subdued due to an anticipated increase in supply from Brazil and China. Economic recovery will strengthen consumption of meats relative to cereals, particularly in developing countries, with most growth favouring cheaper meat – poultry and pig meat – relative to beef. Average dairy prices in real terms are expected to be 16-45% higher in 2010-19 relative to 1997-2006, with butter prices showing most gains, supported by higher energy and vegetable oil prices.

MEAT

Market situation

The economic downturn triggered by the financial crisis severely impacted the meat sector. Falling purchasing power and difficult access to credit affected both demand and supply. All meats were affected, although beef suffered the most compared to others, as consumers preferred cheap beef cuts and cheaper alternative sources of animal proteins. The economic crisis also accelerated structural changes in the meat industry, as evidenced by the numerous mergers and acquisitions recorded last year, of which the most notable was Perdigao and Sadia that formed the world’s largest poultry processor by market value. The structure that results from this crisis, characterised by increasing economies of scale, is expected to speed the globalisation of meat trade, as large scale operations both in production and marketing are better suited to exploit global agribusiness growth opportunities, through a larger portfolio of meat origins and meat types. In addition, economies of scale are anticipated to increase the ability of the industry to manage risk through spatial and meat product diversification, as well as through hedging on futures markets. Key meat markets are set to recover quickly in the first years of the projection period, and an understanding of this phenomenon requires a review of recent markets events. Over the past two years, meat market prices failed to show the exceptional developments of many other agricultural commodity prices. Their relative stability can be partially explained by the fact that meat plays a more limited role as a staple food, which combined with limited storage capacities makes panic buying for stockpiling unlikely. In addition, price movements were also buffered by changes in meat trade. On the supply side, falling profit margins resulting from inflated feed costs pushed beef farmers to liquidate herds, increasing meat supplies and putting a downward pressure on world market prices at the time when other agricultural commodity prices were increasing. Feed is a key input cost of production systems, not only in pig and poultry sectors but also in the bovine meat sectors in certain OECD countries where animals are finished to higher weights for slaughtering with a heavy use of processed feed concentrates: faced with sudden increases in feed costs producers responded as usual, through herd liquidation. After this episode of herd liquidation, supply became tighter but prices failed to increase because of the contraction in demand induced by falling incomes/purchasing power around the world. All meat sectors were affected, as consumers, confronted with declining budgets, opted for reducing their intake. Indeed, preliminary data for OECD countries in 2009 suggests that aggregate meat production was lower after decades of continuous growth. The global meat market grew by 1% in 2009, i.e. a lower rate than the 2.4% observed in 2008. Animal health and sanitation issues (excluding A-H1N1) did not affect the meat market in 2009 as much as in recent years and should this continue, prospects for the meat sector in 2010 appear brighter as major economies return to a positive growth path, especially in the Southern Hemisphere.

Projection highlights

● Major meat prices expressed in nominal terms are anticipated to be firm the first years of the projection. Nominal prices for beef and pork increase by 22% by 2019 relative to the base 2007-09, whereas poultry prices are expected to be on average 34% higher while lamb prices will rise by 68%.

● World meat consumption continues to experience one of the highest rates of growth among the major agricultural commodities, and mostly in the faster growing non-OECD countries. Virtually all of the world growth in meat consumption is projected to occur in developing countries, notably for poultry that grows at 2.8% p.a., and pig meat at 2.3% p.a. Beef consumption may grow the least at 2.0% p.a. Per capita annual consumption growth in the developed area remains low throughout the projection period.

● While demand pressure builds, the meat sector is increasingly constrained by higher feed prices and the availability of natural resources. World meat production growth is projected at 1.9% p.a. This growth is expected to originate predominantly outside the OECD area, which will account for 89% of additional sectoral output. Driven mostly by an expansion of poultry and beef shipments, world meat exports by 2019 are projected to increase by 22% relative to 2007-09 base period. OECD country exports increase by 7%, while those of non-OECD countries increase by 40% by 2019 relative to the base period.

Market trends and prospects


Prices


Most prices to increase at the beginning of the Outlook 


Real prices for meat are projected to be higher than those observed during the previous decade, as higher costs constrain the expansion of output in the face of increasing demand. Beef prices are anticipated to be firm for the first half of the projections, mainly due to a tight supply following reduced cattle herds. However, an expansion of output in the second half, coupled with a reduction of import demand by the Russian Federation, are anticipated to exert a downward pressure on prices. Pig meat prices in both the Atlantic and Pacific area are not anticipated to increase much beyond 2015 due to an increase in supply from Brazil, USA and China, which are experiencing high productivity gains. Sheep meat prices are anticipated to be weak during the early years, but a reduction of sheep flocks in New Zealand may exert upward pressure on world sheep and lamb prices later in the projection period. Poultry prices expressed in nominal terms are to remain relatively firm throughout, largely reflecting higher feed costs and increased demand. Higher producer prices are anticipated to boost global meat output. In the short term pig and poultry sectors with shorter production cycle, may respond more rapidly to renewed demand after the recession, while reduced cattle inventories will constrain beef production in the short term. As import demand in all the different meats recover, global meat trade is also set to rebound over the projection period. Accordingly, per capita meat consumption will rise following its marginal decrease of 2009, consistent with improved income prospects.

Production


Growth in production originates mostly from the non-OECD area


On average, annual world meat production growth is projected to slow down to 1.9% during the Outlook period from 2.1% in the previous decade, as the sector is increasingly constrained by higher feed costs and the availability of natural resources. This growth is expected to originate predominantly outside the OECD area, which will be responsible for about 89% of the additional output, while a more stable path of  development is observed in OECD countries. Meat production growth in non-OECD countries is anticipated to be dominated by Brazil and China, although the Russian Federation is also anticipated to play an increasing role. The Russian Federation, a major meat importer, is implementing strategy to support public and private investments in the meat sector to bring meat self-sufficiency more than 80% by the end of the projection period.
Following an initial recovery phase, the meat outlook is characterised by moderate increases in production. In the emerging economies, renewed investment, improved infrastructures and the introduction of modern, intensive and integrated production, processing and transport technologies, are the main factors that may spur higher productivity growth. This is especially true for Brazil, China, India and the Russian Federation, and to some extent in the CIS group of countries. Meat production in other non-OECD countries and regions of the world are also anticipated to grow, including sub-Saharan Africa where the inflow of foreign private investments is on the increase from the so called “land grab” phenomenon, i.e. increased animal feed production. However, the global economic crisis might have had somehow impinged on the investment capacity of developing countries. Meat production in the OECD area is anticipated to expand less than 1% p.a., as most farmers already benefit from existing technological advances, and face increasingly stringent animal welfare and food safety regulations.
Except for sub-Saharan Africa, productivity gains of non-ruminants animals are anticipated to be high in all countries and regions, while for ruminants, OECD countries are expected to have higher productivity gains. The contribution of technical change and efficiency to total productivity growth is expected to vary according to the labour/land ratio of the prevailing production systems, with higher land productivity gains in China, and  higher labour productivity gains in Brazil.


Environmental constraints as well as higher standards slow production growth


In many OECD countries, animal production systems are already highly intensive, leaving little scope for growth through additional input supply. Changes in feed costs have a significant effect on farm performance, but in addition to these, increasingly stringent public and private food safety and animal health regulation and standards, including animal welfare, and environmental constraints are anticipated to contribute to higher production costs. Nutrition and its impact on health has become a major concern of the meat industries in OECD economies. Consumer conscious on food safety has left governments with an enormous objective of regulating food quality in every step of the food chain. For example major changes are being applied to guidelines for the prevention, inspection and control of outbreaks of pests and diseases, including traceability standards which are already a priority in major meat producing and trading countries. In the US, the recent FCE Farm Act of 2008, the Country of Origin Labeling (COOL) initiative is expected to increase costs on different segments of the supply chain. A similar labelling policy is also envisaged by the EU.
Output in the European Union will also be affected by the decoupling of production premiums, following the path that was already established last decade as intervention prices were lowered. Moreover, increased market access granted by the application of new TRQ’s following the enlargement of the European Union as well as the Memorandum on beef hormones dispute signed with the United States, should also intensify competition in the domestic market, with an impact on domestic production.

Consumption


Non-OECD consumers renew their appetite for meats


A renewed expansion of the meat sector is expected for non-OECD countries during the projection period, where most of the growth in world consumption originates. Meat products are among the most sensitive to economic and demographic change growth. Combined with greater urbanisation, they represent the main drivers of per capita consumption growth. Conversely, the meat sector of OECD countries is expected to grow at a much slower pace due to escalating production costs and a combination of dietary changes and population demographics leading to a slowing down of growth of animal protein consumption.
Worldwide, the economic recovery will strengthen the intake of animal proteins at the expense of foods of vegetal origin. Non-OECD countries are expected to consume around 86% of the projected global growth in meat production. Much of this expansion will take place in Asia and the Pacific region, especially in China, although some growth is also seen in Latin America, which has traditionally been consuming meat, led by Brazil. Such growth will reflect in particular the rise in consumption of cheaper sources of animal protein, mainly poultry and pig meat. Import dependency in meat products is likewise expected to grow in many dynamic developing countries, as demand surpasses the domestic capacity for meat production throughout the duration of the Outlook.
It is already two decades since the volume of total meat consumed in developing countries overtook that of developed countries, and the gap between them has not ceased to expand. Today, 60% of the meat onsumed worldwide is eaten in the developing world, and the projection for this decade is that its increasing share hows no signs of relenting. Meat maintains one of the fastest rates of growth in consumption among all agricultural commodities. Virtually all of the world growth in meat consumption projected takes place in developing countries, notably in Asia. World poultry consumption increased by an additional 26 Mt r.t.c. by 2019 compared to the base period, increasing per capita consumption by nearly 2 kg per capita r.t.c. by 2019. Developing countries will consume nearly 83% of this increase, i.e. of which more than 70% originate from Asian countries. Interestingly, poultry consumption will surpass pig meat consumption in the second half of the projection in the OECD countries. World pig meat consumption grows from 103 Mt c.w.e. in the base period to 126 Mt c.w.e. in 2019. Again, developing countries will consume the bulk of the increase, or 22 Mt c.w.e., virtually all from Asian countries. Conversely, beef consumption grows at a more moderate rate, 1.5% p.a., and the vast majority of these additional 9.3 Mt c.w.e. will be more evenly distributed among the various developing regions of the world. Although the patterns of consumption are anticipated to be slightly different across countries depending on habit, there seems to be a universal preference for poultry over the other meats  Even in OECD countries, where the growth of per capita meat consumption is marginal, the share of poultry increases through the years at the expense of other meats. This trend is expected to continue this decade across the world, although in countries where beef meat production is important and international prices have little impact on domestic production, such as East Africa and Asia (Uzbekistan, Tajikistan, Kyrgyzstan, etc.), beef and sheep meat will remain the preferred types of meat consumed.

Trade


Brazil to dominate non-OECD meat trade


Driven mostly by an expansion of poultry shipments, world meat exports by 2019 are projected to increase by 22% relative to the 2007-09 base period. OECD country exports increase by 7%, while those of non-OECD countries increase by 40%. The bulk of growth in meat trade is expected to originate largely from outside the OECD area, in particular from Brazil which will single-handedly account for over 63% of all the meat exported from non-OECD countries in 2019, and for one-third of world meat exports.
Alongside Brazil, a handful of major exporters will continue to govern the supply of world meat markets, including the United States, Canada, Argentina and Australia. Trade prospects are favourable in Southeast Asia, as the creation of a free trade area between China and the ASEAN in January 2010 is anticipated to result in lower mutual trade barriers between countries in the region. This event should stimulate production and trade, as intra-trade duties are below those applied to countries outside the Free Trade Area.
Nevertheless, the structure of trade in the region (small scale operations), and its limited infrastructure (limited cold-storage facilities), are unlikely to challenge in the medium term the leading role of traditional suppliers of meat and their by-products, such as the United States, the European Union and Brazil.
In the OECD area, beef exports from North America are expected to increase, as import restrictions imposed on the grounds of bovine spongiform encephalopathy (BSE) are progressively eased. Meat exports from the EU are anticipated to decline over the decade due to reduced domestic output following policy reforms, coupled with a growing domestic consumption. The US continue to lead as the largest meat importing country by 2019 with 2.2 Mt, closely followed by the EU import with nearly 2.2 Mt, and by Japan with 2.1 Mt. On a net import basis, Japan, Mexico, Korea remains the major importing countries. The Russian Federation, until recently the largest net meat importer, is expected to decrease its imports for the Outlook period by more than 1 Mt c.w.e., subject to its strategy to expand domestic production to achieve higher self sufficiency by the end of the decade. Agricultural policies, in particular product and process standards, are to become an important driver shaping not only production but also trade. Climate change and the environmental impact of livestock production are rapidly moving up the political agenda.
Environmental and animal welfare legislation, and standards at large, add to production costs and constrain the expansion of the sector despite efforts made by the industry to respond to these concerns via research and development. The impact of standards, including those related to production processes, will be increasingly felt in international trade, as OECD countries progressively request these very same standards from imported
products. Their impact will likely take the form of increased market segmentation, which will add complexity to the future analysis of global meat markets. 


Key issues and uncertainties


The Outlook presented in these chapters is conditional on a number of assumptions. Among these are the continuation of agricultural policies and declared policy reforms, and the macroeconomic environment. Changes in any of these assumptions would lead to a different set of projections for the various meat markets.
An important uncertainty always looming in meat trade relates to sanitary and food safety concerns stemming from outbreaks of animal diseases. In the past decade, such outbreaks have considerably impacted the growth in trade for all the meat. The possibility of future animal disease outbreaks, their duration, intensity, potential consumer reactions and new trade restrictions, is an important uncertainty into the present Outlook. However, as trade has grown, and with greater experience in handling disease outbreaks, the impact of certain disease outbreaks has been considerably reduced. For example, the World Organization for Animal Health (OIE) has developed a system of protocols to allow zoning or compartmentalisation of production which, if followed by a country, enables it to assure sanitary safety of exports from an unaffected zone. This practice has helped minimise the impact of foot and mouth disease outbreaks in Brazil. Similarly, Thailand continues to pressure major importing countries to accept the practice, which would allow exports of uncooked chicken regardless of the Avian Influenza country status.The rapid growth of the biofuel sectors, particularly in the United States and Europe, is anticipated to affect the availability of feedstuffs used in livestock production, as ethanol and livestock industries compete for grains. Though cereal prices have come down from the record highs in 2008, they are projected to remain above historic levels. At the same time, however, the increasing availability of co-products from the ethanol and biodiesel production, in particular of DDGs, pulps and oilseeds meals, will help to contain the impact on meat production. The net impact varies by biofuel chain as well as by type of meat, and requires detailed monitoring.
Domestic and trade policies remain an important determinant of meat markets. Some countries still have high tariffs on meat products, often including tariff rate quotas (TRQ’s) or export taxes. At the same time, domestic policies that directly benefit animal husbandry remain in place in some OECD countries. Outcomes of the WTO negotiations that may commit member countries to lower tariffs on meat, or to decrease their support to animal production, are likely to alter the Outlook. The same holds true for agricultural products that are input to the livestock sector like grains, where changes in prices triggered by policy changes would affect animal production. The Outlook has assumed that the implementation of Country of Origin and Labeling Legislation by the US will give an incentive to US processors to switch from importing live animals from Canada to imports of meat, leading to increased trade of meat and a decreased trade of live animals between these two countries. Due to the recent implementation of the regulation, the degree to which this may take place remains uncertain. In the Russian Federation, the rapid growth of domestic production following the government decision to achieve higher self sufficiency is expected to have a strong impact on meat markets in the Outlook. Finally, China’s policy on Strategic Meat Reserves from Frozen Meat (which requested provincial frozen meat level reserves high enough to supply China’s urban residents for seven days) as well as the new market intervention scheme called the National Swine Price Alert System (which is a price monitoring scheme geared to ensuring sufficient farmers returns) may have an impact in stabilising the price volatility domestically and abroad. Production of livestock and feedstuffs is responsible for some 80% of all agricultural greenhouse gas (GHG) emissions from sources that include enteric fermentation, manure management, land use change (deforestation and land clearing and burning), soil and the burning of carbon-based fuel. Emissions are expected to increase substantially in the coming decades, as population and income growth increase global demand for meat, dairy and other high value products. It is projected that much of the increase in agriculture-related emissions will take place in Latin America, Asia and Africa. It remains uncertain, but possible that in the medium to long term, livestock production may be subject to carbon mitigation constraints in some countries. There are large differences between regions and meat type in GHG emissions per unit of output. Pricing emissions from livestock production could potentially result insubstantial shifts in production, consumption and trade. At the global level, shifts in production would change the relative price of meat and promote the consumption of meat with lower associated GHG emissions such as poultry.

US Country of Origin Labelling


The 2002 and 2008 US Farm Bills amended the Agricultural Marketing Act of 1946 to require certain retailersa to notify their customers of the country of origin of covered agricultural commodities (“COOL”).b The COOL legislation went into effect in April 2005 for fish and shellfish and on 30 September 2008 for all other covered commodities with the interim final rule. USDA issued the final rule for mandatory COOL for all covered commodities on 15 January 2009. COOL is a retail labelling law that provides additional information to consumers at the time of purchase for certain covered commodities, including but not limited to, covered  meat products. COOL excludes processed foods, that is, covered commodities that have a change in character resulting from cooking, curing, smoking, or restructuring, or when combined with another food component.
COOL declarations must be specific and accurate. It is ultimately the retailer’s responsibility to provide country of origin information to consumers; however, in order for retailers to accurately label covered commodities for COOL, direct and indirect suppliers to retailers must convey country of origin information. Packers and processors rely upon producers to provide country of origin information to initiate country of origin designations. The legislation and regulations specify the criteria that must be met in order to meet the four different types of labels – product of the United States, product from animals of multiple countries of origin, product from animals imported directly for slaughter, product imported directly from a foreign country. 
For ground meat, all countries from where the meat could reasonably have been derived must be listed. Accurate  labelling for imported animals and meat products could likely increase costs in the animal-meat supply chain. The USDA Agricultural Marketing Service has estimated that total first-year implementation costs for all affected US industries would be USD 2.6 billion (USDA/AMS, 2009).
Canada and Mexico have challenged mandatory COOL at the WTO. At their request, a Dispute Settlement Panel was established at the World Trade Organization in November 2009 to determine if the COOL measure is consistent with the United States’ international trade obligations. The precise extent to which COOL is impacting US, Canadian and Mexican livestock and meat markets is unknown, but in this Outlook it is one of the factors contributing to lower projections of Canadian and Mexican live cattle and Canadian live hog exports to the US.


a) Retailers for which the invoice costs of all purchases of perishable agricultural commodities exceed USD 230 000 during a calendar year.
b) For further information on COOL and covered commodities, please see www.ams.usda.gov/AMSv1.0/Cool.



In:  OECD-FAO Agricultural Outlook 2010-2019 adapted by Leopoldo Costa

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