Rabobank, Media Release, 7 December 2022
Animal protein producers and processors face an “inflection point” with a need to respond to structural changes in the market even with production levels and prices likely to remain elevated next year, according to a new report by agribusiness banking specialist Rabobank.
In its Global Animal Protein Outlook 2023 – Deciding How to Grow Amid Challenges and Opportunities Rabobank says producers and processors of meat, poultry and seafood approach 2023 after a year marked by a host of obstacles.
“It has been a year like no other for the animal protein industry. Companies have grappled with rising input prices, supply chain disruption and geopolitical strife, many of which are unresolved as we head into 2023. These factors have increased costs across the market, but while prices rise quickly, they tend to fall more slowly,” report lead-author Justin Sherrard, Global Strategist for Animal Protein at Rabobank said.
“We therefore expect prices to remain high next year, even as the market enjoys steady production growth on the back of a growing supply of aquaculture and poultry. This masks reductions in the supply of beef, due to contraction in the US after years of drought, and the weakening pork market in Europe.”
The report says animal protein production levels are expected to increase, with Rabobank’s analysts forecasting year-on-year growth in major markets of five million tonnes – or one per cent – to a total of 430 million tonnes next year, driven by demand for poultry, fish and seafood offsetting the weaker performance of beef and pork. However, the production growth rate will be lower than the two per cent recorded in 2022.
Salmon is set to continue to enjoy strong demand, with weak supply growth supporting prices, Rabobank predicts. Chicken will benefit from its value proposition against the tough economic backdrop, with the bank forecasting global economic growth of just two per cent in 2023. By contrast, consumers are likely to cut back on more expensive cuts of meats, such as fillet steaks.
Structural and cyclical headwinds
At a structural level, the report says, industry participants face the need to adapt to sustainability challenges and ongoing biosecurity risks if they are to remain competitive in the market over the longer-term.
To prosper in the future, the report says, animal protein companies must pivot to become more sustainable businesses. Rabobank expects producers and processors to intensify their emissions commitments next year, but this will require greater investment in areas such as smart data to make their operations and supply chains more sustainable.
The most successful businesses are also moving on to a more proactive footing to manage disease risks, such as African Swine Fever and Avian Influenza, Rabobank says. This includes sensors that can recognise unusual animal movements and predictive technology to limit herd loss.
The report says producers and processors must also factor in consumer behaviour changes in a recessionary environment, such as the move towards convenience products, like fish fingers and hot dogs and trading down.
High prices for feed and other input costs are additional headwinds which have the potential to impact the animal protein industry in 2023 and beyond, it says.
Report co-author, Rabobank senior animal protein analyst Angus Gidley-Baird said for Australia, supply and demand will be on different trajectories in 2023 – as livestock numbers increase and producer demand drops, with livestock prices expected to ease as a consequence.
Mr Gidley-Baird said favourable seasonal conditions in Australia are continuing to support an increase in livestock numbers.
“With La Nina persisting and the Indian Ocean Dipole remaining negative, most areas of Australia are expected to have average to above average rainfall into 2023,” he said.
“Such favourable conditions will support the upward growth in livestock inventory numbers.
“Sheep numbers are expected to recover from drought-impacted years. This higher inventory will support increased lamb production in 2023 – up between four and six per cent.”
On the other hand, Mr Gidley-Baird said, Rabobank believes cattle numbers have not recovered as quickly as sheep numbers, and with good pasture availability in northern areas, cattle producers will still be looking to grow their herds.
“However, despite increased inventory, labour constraints and tight margins likely mean beef production will show no further growth in 2022 before lifting by five per cent in 2023.”
The report says while favourable seasonal conditions and low livestock numbers are supporting consumer demand and keeping livestock prices elevated – noting lamb prices returned to five-year average levels in late 2022 – demand is softening.
Import prices for Australian beef into key markets, Mr Gidley-Baird said, while still historically high, have declined since early 2022 and order volumes appear to be dropping on softer consumer demand.
“This is cutting margins for the post-farmgate operators in the supply chain. In addition to the challenges of accessing labour, thin margins provide no incentive to increase volumes or pay higher prices for cattle,” he said.
“At some point, these two markets – the production market and the consumption market will collide – most likely driven by a change in season or oversupply of livestock – and livestock prices will correct downwards,” he said.
Mr Gidley-Baird expects livestock prices to remain historically high in 2023, but with some softening.
“Good availability of lambs and softer economic conditions are expected to result in lamb prices remaining relatively stable through 2023, although softer economic conditions pose a downside risk.
“Cattle prices are expected to ease in light of increased cattle numbers and softer producer demand.”