NEW YORK--()--Rabobank has published a new research report on the increased demand for animal by-products in the global meat industry, and predicts that the resulting shift in carcass valuation will be permanent.
“For slaughterhouses, the focus will increasingly move towards capturing the value of fifth quarter products, which might lead to forward integration in these activities.”
In the report authored by Rabobank’s global Food & Agribusiness Research and Advisory department, the bank looks at how the valuation of the animal carcass has shifted over the last few years from prime cuts to processing cuts and fifth quarter products, driven by changing consumer preference for processed products, fast rising economic welfare and preference for animal by-products in Asia, new applications for animal by-products, and lower availability of sow meat. Rabobank suggests that this trend will be permanent and will impact the business models of almost all players in the global meat industry.
“The impact of this shift in carcass valuation will be different for slaughterhouses, the further processing industry, and dedicated companies active in the different parts of the by-product industry,” says Rabobank analyst Albert Vernooij. “For slaughterhouses, the focus will increasingly move towards capturing the value of fifth quarter products, which might lead to forward integration in these activities.”
The value of the animal carcass is the combined sales price of all meat cuts and fifth quarter products, most of which have different markets with their own characteristics. The challenge for a slaughterhouse is to optimize the value of all different products while the importance of the prime cuts (e.g., loin, ham, belly and rib), processing cuts (e.g., shoulder, picnics, chuck and plate), and fifth quarter products may differ between countries depending on traditions, culture, religion, and wealth, creating trading arbitrage opportunities.
Despite the fact that prime meat cuts typically have the highest sales prices and value, the rising price of processing cuts and by-products of cattle and hogs show that animal carcass valuation has been shifting since 2009. This is due to five main developments:
1. Growing economies in developing countries including the opening of the Chinese market for imports;
2. The economic crisis which has caused consumers to trade down to cheaper products;
3. Growth of convenience products with more women entering the workforce, consumers having less time to cook, and increased grazing;
4. Growing number of applications for animal by-products in the pharmaceutical and cosmetic industries; and
5. Decline in the sow herd in both the U.S. and the EU, which resulted in processed meat producers increasingly sourcing their raw material from market hogs.
Rabobank says that the further processing industry could be forced to change their raw material sourcing to other products or enter into long-term supplier contracts to safeguard supply. For the dedicated processors of by-products, the bank says that competition will increase, which might urge these players to strengthen their positions in the value chain.
Historically, the direct consumption of animal by-products has declined in line with increasing wealth due to consumer ability to afford higher priced prime meat cuts. Based on this general theory, Rabobank analysts predict that consumption of animal by-products in Asia should start to slow somewhere in the coming decade.
However, most animal by-products are considered a delicacy in Asia, which will support continued strong demand for these products in the long term. Coupled with the growing number of applications for fifth quarter products, Rabobank believes this will result in continued strong demand and a permanent shift in carcass valuation.
The Rabobank report on shifts in the meat industry’s carcass valuation is available to media upon request.
Rabobank Group is a global financial services leader providing wholesale and retail banking, asset management, leasing, real estate services, and renewable energy project financing. Founded over a century ago, Rabobank is one of the largest banks in the world, with nearly $1 trillion in assets and operations in more than 40 countries. In North America, Rabobank is a premier bank to the food, beverage and agribusiness industry. Rabobank’s Food & Agribusiness Research and Advisory team is comprised of more than 80 analysts around the world who provide expert analysis, insight and counsel to Rabobank clients about trends, issues and developments in all sectors of agriculture. wwww.rabobank.com/f&a
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