Over the last few years, the valuation of hog and animal carcasses has shifted from prime cuts to processing cuts and fifth quarter products.
This trend is driven by changing consumer preference for processed products, fast rising economic welfare and preference for animal byproducts in Asia, new applications for animal byproducts and lower availability of sow meat. According to Rabobank, this trend will be permanent and will impact the business models of almost all players in the global meat industry.
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 and processing cuts and fifth quarter products may differ from country-to-country depending on traditions, culture, religion and wealth creating trading arbitrage opportunities.
Despite prime meat cuts typically having the highest sales prices and value, the rising price of processing cuts and byproducts of cattle and hogs show that the 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. The growth of convenience products with more women entering the workforce, consumers having less time to cook, and increased grazing;
4. The growing number of applications for animal byproducts in the pharmaceutical and cosmetic industries;
5. The decline in the sow herd in both the United States and the EU has resulted in processed meat producers increasingly sourcing their raw material from market hogs.
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 byproducts competition will increase, which might urge these players to strengthen their positions in the value chain.