U.S. Proteins: Poised For Export-Led Growth

Demand for U.S. meat exports has never been stronger and reaching new heights, even with the various trade obstacles across the world. According to year-end statistics released by USDA and compiled by the U.S. Meat Export Federation

• Beef exports finished the year at 1.287 mn metric tons (MT) valued at $5.42 bn. This broke the 2003 volume record of 1.274 mn mt and easily surpassed the 2010 value record of $4.08 bn. Export volume was 21% larger than in 2010, with value up 33%.
• Pork exports totaled 2.255 mn mt valued at $6.11 bn, breaking the previous volume record of 2.052 mn mt and shattering the value record of $4.88 bn, which were both established in 2008. Year over year, pork exports were up 18% in volume and 28% in value.
• Lamb exports totaled 18,343 mt valued at $30.08 mn. This topped the previous record performance of 2006, when exports totaled 13,934 mt valued at $27.8 mn. Compared to 2010, lamb export volume was up 72% and value increased 46%.

The fundamentals are ripe for an export-led meat industry driven by the growth of the middle class in emerging markets. Weak profit margins have left producers with little incentive to significantly increase herds and could lead to sharply higher U.S. pork and beef prices over the next five years.

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According to a research report by Credit Suisse analyst Robert Moskow, the U.S. protein industry has come to a turning point as

Brazil needs to spend another five years rebuilding its cattle herd, thus giving U.S. beef a more open playing field in the export markets;

China faces serious disease issues domestically with its pork supply and will need to increasingly rely on exports to feed its people;

Middle East has emerged as a growing market for U.S. protein due to strong economic growth.

We will now look into the major reasons that support their thesis.

Reason # 1: U.S is the low cost producer

• Crop profitability greater than livestock: The spurt in grain prices over the past 5 years has led Brazil to convert significant chunks of its pastureland to farmlands given the higher profit potential of crops. This has culminated in Brazil ranchers reducing their cattle herds, leading beef prices to double in the last 4 years.
• Geographic proximity: U.S. can send fresh and frozen pork products from the West Coast to Asia (especially China) in 2.5 weeks, which is about half the time it takes for its European competitors. The high freight cost owing to high energy prices is a significant competitive advantage.
• The U.S. has built a highly efficient meat processing and transportation infrastructure, which could help overcome its high cost of labor.

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• Transportation costs for farmers in Brazil are 4x those of U.S. farmers

Reason # 2: U.S. producers have access to large and growing grain supplies

• The U.S. grows more corn with higher productivity levels than any other country
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Source: USDA

• The U.S. has one of the best soil conditions
• The agriculture science and machinery companies in the U.S. have invested heavily in technologies that focus on improving yields.

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Source: Monsanto

Reason # 3: Weakening U.S. Dollar

The U.S. dollar is to remain weak driven by low interest rates, the large U.S. account deficit, and weak economic growth. An added benefit is if China lets its currency float, U.S. meat exports would be even more attractive to Chinese importers.

Reason # 4: China Factor

China could become the biggest opportunity for U.S. meat exports over the next 10 years. According to Brett Stuart of Global AgriTrends, "The incentive to import pork remains huge in China. The bottom line is their fundamental structure is keeping their prices significantly higher than the equivalent U.S. prices here, which tells me they're going to continue to be significant buyers of all imported pork, and specifically U.S. pork." Pork prices in China are currently up 45% over last year as rapid demand growth has outpaced domestic production growth. China's objective of being self-sufficient in pork will be harder than realized. Imports only account for about 1% of consumption in China, but a doubling in exports would mean a 25% increase in exports to the U.S. pork industry. US beef exports to China have more than quadrupled in the last five years. This is with a ban on U.S. from entering China directly and instead having to rely on shipping beef mostly through Hong Kong to reach the Chinese market.

Investment Options

There are numerous investment options available to take exposure of this trend along the protein value chain.

• Feed Input: Feed accounts for the single largest production cost. (Includes agricultural processors and machinery, seed companies, crop protection, agricultural supply chain management and fertilizer companies)
• Production: Raises animal from birth to slaughter
• Processing and distribution: Final processors and wholesalers
• Marketing: Retail trade and restaurants

Feed Inputs
Fertilizer, seed and crop protection		Agricultural processors and machinery
Dow Chemical's (DOW)		AGCO Corp (AGCO)
Bayer (BAYRY.PK)		Bucher (BCHHF.PK)
DuPont (DD)		Archer Daniels Midland (ADM)
Monsanto (MON)		Bunge (BG)
CF Industries (CF)		Commodity ETF
Agrium (AGU)		The Teucrium Corn ETF (CORN)
Deere (DE)		Teucrium Soybean Fund (SOYB)
United Tractors (PUTKF.PK)		Agricultural Integrated SCM Companies
Yara (YARIY.PK)		Adecoagro (AGRO)
Acron (AKRN)		SLC Agricola (SLCJF.PK)
Potash Corp (POT)		Cosan (CZZ)
PhosAgro (P6SG)		Cresud (CRESY)
Uralkali (URALL.PK)		Olam International (OLMIY.PK)
Incitec Pivot (ICPVY.PK)		Union Agriculture Group (UAGR)
ICL Israel Chemicals (ISCHF.PK)		Wilmar International (WLMIY.PK)
Production, Processing and Distribution		Marketing (Super Markets and Restaurants)
Tyson Foods (TSN)		YUM Brands (YUM)
Smithfield Foods (SFD)		McDonald's (MCD)
Pilgrims Pride (PPC)		Buffalo Wild Wings (BWLD)
Hormel Foods (HRL)		Chipotle (CMG)
Sanderson Farms (SAFM)		Brinker (EAT)
Seaboard (SEB)		Red Robin (RRGB)
Cagle's (CAGAQ)		Texas Roadhouse (TXRH)
Zhongpin (HOGS)		Carrols Restaurant (TAST)
Brasil Foods (BRFS)		Arcos Dorados (ARCO)
JBS (JBSAY.PK)		Jack in the Box (JACK)
Marfrig (MRRTY.PK)		AFC Enterprises (AFCE)
iPath DJ-UBS Livestock Total Return Sub-Index ETN (COW)		Ruby Tuesday (RT)

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.