8 June 2023

14 minute read

By: Jim Wyckoff

Cargill Inc. to sell its poultry farming and processing business in China

The food giant will sell the largest meat market globally, due to decreasing demand and escalating costs affecting profit margins. Bloomberg reports the company has agreed to sell Cargill Protein China operations to the private equity firm DCP Capital, with the terms of the agreement remaining undisclosed. Subject to regulatory approval, the sale is anticipated to close in 2023. The sale occurs as meatpackers like Cargill grapple with dwindling margins, alongside inflation which is undermining demand. High grain prices are also increasing animal feed costs, posing significant challenges for the new CEO, Brian Sikes.

Poultry farming in China experiencing difficulties making profits. That’s due to weaker than expected consumer demand amidst Covid recovery, coupled with persistent high animal feed costs. Government data indicates that broiler chicken farmers are still unable to make profits.

The deal encompasses all Protein China entities in Chuzhou in Anhui province, which includes both farm locations and manufacturing sites. This decision comes less than a year after the Minneapolis-based trader finalized its $4.5-billion acquisition of US chicken producer Sanderson Farms Inc., in partnership with Continental Grain Co. DCP Capital, led by former KKR & Co. partners, has previously invested in companies like China Mengniu Dairy Co. and COFCO Joycome Foods Ltd. The company's executive chairman, David Liu, was involved in KKR's $400 million investment in chicken meat producer Fujian Sunner Development Co. in 2015.

Cargill's plants in Anhui, with an annual output of almost 65 million broiler chickens, also include feed production, hatching, breeding, and processing facilities. The facilities were established in 2011 to meet growing consumer demand for safe and high-quality protein products. In 2020, Cargill launched plant-based meat products under the PlantEver brand, manufactured by its operations in Anhui.

Eggs are going on sale just months after their prices hit records

Industry officials and farmers say egg supplies have bounced back after the deadliest avian influenza outbreak in U.S. history helped push prices above $4 a dozen in January. Now, after shoppers have cut back on eggs, tested substitutes and in some cases raised their own chickens, some supermarket chains are discounting eggs for the first time in more than a year, the Wall Street Journal reports.

Egg price surged in 2022, where costs rose more than 30%, led to consumers exploring egg substitutes and even raising their own chickens. The price increase was attributed to the avian flu, which killed about 59 million birds since February 2022 and reduced U.S. egg inventories by 29% by the end of the year. USDA reported that new bird flu cases have decreased significantly in recent months, with egg-laying hen populations recovering. The average retail price of eggs was $2.70 a dozen at the end of April, compared to a five-year high of more than $4 in January. Despite the recovery, the rapid price drop has affected egg farmers' profits, and the egg market remains vulnerable to a potential resurgence of bird flu.

Weekly U.S. beef, pork export sales

U.S. Beef: Net sales of 12,800 MT for 2023 were down 29 percent from the previous week and 27 percent from the prior 4-week average. Increases primarily for Japan (3,900 MT, including decreases of 400 MT), South Korea (3,900 MT, including decreases of 400 MT), Mexico (1,900 MT), Taiwan (1,000 MT, including decreases of 200 MT), and Canada (900 MT), were offset by reductions for China (100 MT). Exports of 15,400 MT were down 3 percent from the previous week and 6 percent from the prior 4-week average. The destinations were primarily to Japan (4,000 MT), South Korea (3,700 MT), China (2,500 MT), Mexico (1,200 MT), and Canada (1,200 MT).

U.S. Pork: Net sales of 25,500 MT for 2023 were up 13 percent from the previous week, but down 11 percent from the prior 4-week average. Increases primarily for Mexico (9,100 MT, including decreases of 800 MT), China (8,100 MT, including decreases of 300 MT), Japan (3,200 MT, including decreases of 300 MT), South Korea (2,000 MT, including decreases of 800 MT), and Colombia (1,500 MT, including decreases of 100 MT), were offset by reductions for Nicaragua (500 MT), Australia (500 MT), and Taiwan (100 MT). Exports of 25,100 MT were down 26 percent from the previous week and 31 percent from the prior 4-week average. The destinations were primarily to Mexico (7,400 MT), Japan (4,000 MT), China (3,900 MT), South Korea (2,600 MT), and Canada (1,500 MT).

National Milk Producers Federation (NMPF) announces new chief

Gregg Doud is the new President and CEO, succeeding Jim Mulhern, who will retire at the end of the year. Doud will begin his tenure in September as Chief Operating Officer and take on the President and CEO role upon Mulhern's retirement. Doud's background includes serving as the vice president of global situational awareness and chief economist at Aimpoint Research, a global intelligence firm specializing in agriculture and food. Additionally, he has held multiple roles within the agriculture industry, such as chief agricultural negotiator in the Office of the U.S. Trade Representative under President Donald Trump and president of the Commodity Markets Council.

First ASF vaccine nearing approval in Vietnam

Vaccines against African swine fever (ASF) being tested in Vietnam are close to approval, global and U.S. veterinary officials said. Two vaccines co-developed by U.S. scientists being tested in large pilot program by Vietnamese companies are showing “very promising” results, Gregorio Torres, head of the science department at the World Organization for Animal Health (WOAH), told Reuters. The next step will be nationwide authorization in Vietnam, the first ever for an African swine fever vaccine, and possible sales overseas. USDA researchers have reviewed the results of one of the vaccines, NAVET-ASFVAC, and reported “no safety issues.” USDA has not yet reviewed the data for the second vaccine, AVAC ASF LIVE.

USDA: Spanish cattle production may decline due to reduction of exports and drought

Spanish cattle production may continue to decrease in 2023 due to high production costs, expected reduction of Spanish live cattle exports to non-EU markets, and the severe drought experienced in Spain since fall 2022 that has impacted cattle feed. In the last years, Spanish cattle exports were the major driver to cattle production. However, new geopolitical situations, strong cattle price competition, and an upcoming EU regulation on live cattle transport may continue to impact Spanish cattle shipments outside the EU. Despite the decrease in domestic beef consumption in Spanish households, beef consumption may continue to trend upward in 2023 due to recovering HRI and tourism, resulting in a continued increase in Spanish beef imports.

US dairy policy changes always take time

Since the 1930s, the USDA has implemented a minimum pricing system for dairy farmers through the Federal Milk Marketing Orders (FMMO) program. However, the pricing formulas have not been updated since 2000, causing dairy farmers to face increasing costs for fuel, feed, and medicine. Processors are also experiencing increased expenses.

The Covid-19 pandemic has prompted an examination of the FMMO program, as proposed by the National Milk Producers Federation (NMPF), which has conducted research and dialogues with its 28,000 members. The NMPF's petition seeks to update the program by increasing the prices dairy farmers are guaranteed through changes to transportation and other cost formulas.

Meanwhile, dairy processors represented by the International Dairy Foods Association (IDFA) demand updates to the manufacturing cost allowances last revised in 2006. Although both parties want to modernize the FMMO, they disagree on the details.

In response, USDA announced an action plan on June 1, which includes a pre-hearing on June 16 focusing on the NMPF's petition. USDA will then decide whether to hold a formal hearing and propose changes to the regulatory scheme, which would ultimately require a vote from dairy farmers.

IDFA wants USDA to hold a hearing on their proposed updates to the FMMO program, suggesting a four-year implementation period for their changes. Though both groups agree that prices for processors should increase, the IDFA has not taken a position on other NMPF-proposed revisions.

USDA considering lifting the ban on imports of fresh beef from Paraguay

The ban has been in place due to concerns about the country's cattle herds being affected by Foot and Mouth Disease (FMD). This decision comes after a request from the Paraguayan government and follows previous site visits by USDA in 2008 and 2014, which found a low risk of FMD spreading from Paraguayan beef. However, U.S. beef groups are urging USDA to maintain the ban, citing concerns about outdated assessments and unresolved issues with Brazil. USDA estimates that the costs of an FMD outbreak in the U.S., even if limited to one state, could exceed $6 billion.

Hormel Foods has invested significantly in transitioning their pig farms to comply with California's Proposition 12 standards

The aim is to eliminate sow gestation stalls from the state's pork supply chains. While the exact cost of the endeavor has not been disclosed, Hormel CEO Jim Snee expects the company to start recuperating those costs soon. They have already been Prop 12-compliant for part of their pork supply since January 2022.

Germany’s pork consumption per capita has plunged in past years

German hog producers and meat processors are withdrawing amid hurdles. Bloomberg reports that the northwest German town of Vörden's meat plant, known for producing the beloved bear-shaped cold cut Bärchenwurst, has announced its closure due to rising production costs and waning pork demand. This reflects the challenges faced by Germany's pork industry, which is grappling with decreased demand following the African Swine Fever outbreak, along with economic constraints and stricter animal welfare provisions.

Consumption figures reveal that the average German ate 40 kilograms (88.2 pounds) of pork per year in 2007, dropping to 29 kilograms (63.9 pounds) in 2022. With changing trends in diet and young Germans favoring other types of food, Germany's pork industry is fighting to stay relevant in the rapidly shifting landscape. A higher percentage of the population is now vegetarian or "flexitarian," while environmental and health concerns are shaping consumers' choices away from meat-intensive diets.

Spain grain production decline to test supply chain logistics resilience in Spain

USDA says Spain is facing a second consecutive year of poor grains crops. While northernmost grain producing areas still hold production potential, yields in the country’s southeast are estimated to have declined significantly. Despite the somewhat sluggish overall grains demand, a large amount of grain imports will be necessary to meet Spain’s consumption needs. Ports are expected to operate at high capacity. Unloading, in-land transport, and grain storage logistics will be particularly key to allow grains to flow towards consumption areas.

Meat markets in the U.S. are in turmoil

The supply of cattle across the country is shrinking as ranchers respond to fast-rising costs and widespread drought conditions by selling off livestock, setting the stage for higher consumer prices. The Wall Street Journal reports the number of cattle in the U.S. is at its lowest level in nearly a decade and beef production is on track to drop by more than 2 billion pounds in 2024, the biggest annual decline since 1979. Shrinking herds is a weighty bet since rebuilding can take years. The impact is reaching across supply chains, from meatpackers to restaurants and burger joints. Live cattle futures have been hitting record highs and Tyson Foods, Cargill, JBS and National Beef are paying more to secure supplies. Restaurants are already bracing for price increases as earlier agreements run out and suppliers strike new, more expensive deals. “We’re spending $1 million to make $4,000.” — Ryan Stromberger, a Nebraska rancher.

California Department of Agriculture (CDFA) increasing education and outreach efforts regarding Proposition 12

Following the U.S. Supreme Court's decision to uphold the program, CDFA states in a Q&A that their priority lies in registering pork distributors as they gear up for full implementation by January 1, 2024. This will involve the introduction of third-party certification to ensure compliance. The CDFA acknowledges that some products procured before July 1, 2023, will still be in circulation and that there will be a transition period throughout the rest of the year. The department intends to focus its limited resources on ensuring all required distributors are registered, crediting third-party certifying agents to offer more options to producers and distributors, and certifying these producers and distributors. So far, the CDFA has released a list of 587 registered distributors under the initiative and currently lists five accredited certifying agents located in Missouri, Arkansas, Iowa, Virginia, and Michigan. To facilitate this process, the agency has announced it will be hosting three webinars this month for various parts of the food system, ahead of the July 1 enforcement date.

Weekly USDA dairy report

CME GROUP CASH MARKETS (6/2) BUTTER: Grade AA closed at $2.4450. The weekly average for Grade AA is $2.4488 (+0.0143). CHEESE: Barrels closed at $1.5125 and 40# blocks at $1.4300 The weekly average for barrels is $1.5038 (-0.0032) and blocks, $1.4456 (-0.1199). NONFAT DRY MILK: Grade A closed at $1.1700. The weekly average for Grade A is $1.1644 (+0.0024). DRY WHEY: Extra grade dry whey closed at $0.2575. The weekly average for dry whey is $0.2650 (-0.0035).

BUTTER HIGHLIGHTS: Cream is available throughout the country. Some contacts in the West say plant downtime has contributed to more cream loads available on the spot market this week. In the Central region, butter contacts say warmer temperatures and increased Class II processing are expected to contribute to lighter cream availability as summer nears. Butter makers in all regions reported some downtime during the recent holiday weekend, though in the East and Central regions, stakeholders relay operating busy production schedules through the remainder of the week. Demand for butter is steady in the Central region. In the West, contacts note steady retail demand and strong to steady food service sales. Meanwhile in the East, demand is mixed with contacts reporting strong retail demand, but more moderate demand from food service purchasers. Bulk butter overages range from 0 to 10 cents over market value.

CHEESE HIGHLIGHTS: Milk is available for cheesemaking throughout the country. Contacts in the Midwest report spot loads of milk moving from $12 to $4 under Class III. In the Northeast and West, cheesemakers report scheduled downtime for the recent holiday weekend. In the Midwest, cheese production is strong as some manufacturers in the region worked through the holiday weekend. Demand for cheese varies throughout the regions. Northeast stakeholders relay strong retail demand and moderate food service sales, while demand is mixed in the Midwest, and softening in the West. Inventories of cheese are strong in the Northeast, and some contacts report difficulty moving excess inventories of certain varieties. Cheese inventories are available to meet demand in the West, though block inventories are slightly looser. In the Midwest, cheese loads are moving somewhat briskly.

FLUID MILK: Throughout the country milk output is steady. Contacts in the East and Midwest note that milk volumes are ample in the regions, though contacts in the Northeast note that spring flush has passed its peak. In the Midwest contacts note temperatures in the region are reaching into the 80s and 90s, and this heat has started to have a negative impact on component levels. Class I milk sales are steady or lighter, with some contacts noting summer breaks from school having an impact on bottling demand. Ice cream makers are purchasing additional cream in some areas. Volumes of Class III milk are available for cheesemakers to run active production schedules. Contacts in the Midwest report spot prices range from $12 to $4 under Class III pricing. Condensed skim milk is available in the East and West regions. In the Midwest, the holiday weekend contributed to increased cream availability, as some butter makers were turning away spot cream offers. Cream multiples are 1.15 – 1.29 in the East, 1.16 – 1.26 in the Midwest, and 1.00 – 1.21 in the West.

DRY PRODUCTS: Prices for low/medium heat nonfat dry milk (NDM) increased at the bottom of the range, and the mostly price series narrowed in the Central and East regions. In the West, low/ medium heat NDM prices were unchanged amid steady demand. Prices for high heat NDM were unchanged in the Central and East regions, while the bottom of the West high heat price range moved higher. Dry buttermilk prices were steady to lower in all regions this week. Contacts report limited demand from spot purchasers in the Central and East regions. The top of the dry whole milk price range moved lower this week, though contacts say lower prices in recent weeks are contributing to an uptick in spot market activity. Dry whey market tones are bearish, and prices were steady to lower throughout all regions. Whey protein concentrate 34% prices moved lower in most facets. Contacts report light demand and heavy inventories. Lactose prices moved lower at the top of the range and across the mostly price series. Some stakeholders say they are securing Q3 contracts for lactose, and loads remain available for spot purchasing. Rennet and acid casein prices held steady this week, while markets are reportedly quiet to quietly bearish.

ORGANIC DAIRY MARKET NEWS: Federal Milk Market Order 1, in New England, reports utilization of types of organic milk by pool plants. During April 2023, organic whole milk utilization totaled 16.6 million pounds, up from 16.5 million pounds the previous year. Total organic dairy commodity advertisements decreased 21 percent from the previous retail survey ad number. Ads for organic yogurt, milk, and cheese had the largest percentage of organic dairy ads at 32,28, and 22 percent, respectively. Regionally, organic dairy commodity advertisements increased across most areas, except for the Southeast, which saw a 57 percent decline in retail ads.

NATIONAL RETAIL REPORT: Total conventional dairy ads increased 5 percent, but organic dairy ads decreased 21 percent. Conventional cheese was the most advertised dairy commodity. Conventional shredded cheese, sliced cheese, and block cheese in 6–8 ounce packages remained heavily advertised items. The shredded type had a weighted average advertised price of $2.52, up 12 cents. The sliced type had a weighted average advertised price of $2.53, up 14 cents. The block type had a weighted average advertised price of $2.70, up 46 cents.