Meat producers prepare to fight back in 2020

Forget plant-based burgers – 2020 looks like it will be the year that meat fought back.

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  1. Garry White

The continuing toll of African Swine Fever (ASF) in China has resulted in a global shortage of animal protein, benefitting farmers in Brazil and Australia. Now, with China agreeing to step-up agricultural purchases from the US, there is a fantastic opportunity for America’s ‘Big Meat’ corporations. This could provide a fair wind behind Donald Trump as he seeks re-election, as this will be seen as a significant ‘win’ by his agricultural base. But, will China really play ball?

A form of veganmania has swept financial markets, as plant-based burgers crashed their way into mainstream investing. The success of the flotation of Beyond Meat – astounding the expectations of investors, advisors and observers alike – has led to the world’s largest meat companies to try and leap on the bandwagon and produce animal-free alternatives themselves as a new threat emerged.

‘Big Meat’ enters the fray

Traditional US meat groups Tyson, Smithfield, Perdue and Hormel have all rolled out protein alternatives, filling supermarket shelves with a multitude of plant-based burgers, meatballs and chicken nuggets. However, Beyond Meat shares were blown up into a bubble following their IPO in May and they are down almost 70pc from their July peak. Gains next year are likely to be limited. In 2020, a bigger opportunity for investors is likely to be seen in good, old-fashioned animal flesh.

As part of a ‘phase-one’ trade deal struck between Beijing and Washington, China has agreed to step up its agricultural purchases. According to the US trade representative Robert Lighthizer, China will buy an additional $16bn (£12.2bn) worth of US farm products a year, on top of the $24bn baseline purchases of 2017. However, the Chinese side has offered no details on its purchase commitments, so there is a degree of scepticism about whether these targets will be achieved.

A quarter of the world’s pigs have died in 2019 due to African swine fever. Half of China’s pigs have succumbed to the disease. This means it has already been a fantastic year for meat producers in places such as Brazil. The country’s largest beef exporter, Minerva, is the best-performing meat equity this year, up around 160pc, with rival JBS up 125pc. US companies, however, are up a more modest amount after being caught up in Donald Trump’s trade war.

Meat gains to continue?

Tyson Foods shares have gained an impressive 67% so far in 2019, but there are likely to be further opportunities should China meet its commitments. Tyson received approval this week from US and Chinese authorities to export American poultry to the Asian nation from all 36 of its American processing plants, as Chinese consumers seek alternative protein sources following a jump in the price of pork. Mr Lighthizer has predicted that more than $1bn in annual poultry shipments to China could be expected.

China is regarded as an important country for poultry exporters, not only because of the size of its market but because Chinese consumers eat parts of the animal that Western consumers will not eat. Processing plants run by other businesses such as Sanderson and Pilgrim’s Pride have also been cleared to ship American birds to China.

It’s not only China that presents an opportunity for US ranchers, farmers and meat processors. At the end of November, the European Parliament approved a trade agreement with the US in a long-running dispute of hormone-treated beef. As a result, the US will be able to almost triple its annual exports of non-hormone beef to the EU over the next seven years.  US beef now has greater access to European markets. Annual duty-free US beef exports to the EU are expected to grow from $150m to $420m when the agreement is fully implemented, according to the North American Meat Institute.

Protein demand rises

All of this implies a banner year could be in prospect for US protein producers in 2020 – provided China lives up to its assurances. This is the biggest uncertainty hanging over the US meat industry at the moment, as Beijing has been extremely quiet over the deal. The government has remained particularly sketchy about what items it will purchase and when. The Asian nation could, for example, route some purchases through mainland China instead of Hong Kong to artificially boost this amount.

Adding to the lack of clarity, Mr Lighthizer has said that, although the targets would be broken down by individual product, at least some of these would remain classified to avoid distorting market prices. Tom Kehoe, an adviser to the US Department of Agriculture and the US Trade Representative, said the purchases will be decided by market rates, so US producers will also have to remain competitive in order to make the sales.

So, US farmers are once again dependent on the goodwill of Beijing, hoping it will follow through on commitments it has given to Washington. If they do, and there is a substantial uplift in US farm purchases, it could be a real lifeline for rural Americans hit by the trade war. It will also help Donald Trump in his bid for a second term in the Oval Office.

But all of this relies on the Chinese being good to their word. This will determine whether US ‘Big Meat’ will have an even better 2020 than 2019. However, protein shipments would represent an easy win for both sides of the dispute. China has a meat shortage and the US is seeing near-record meat supplies. On this specific front, it makes sense for China to stick to what it has agreed. It would be a mutual win-win.

A version of this article was first published in the Daily Telegraph.

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