Pay attention to drop credit trends, values | TSLN.com

Pay attention to drop credit trends, values

Loretta Sorensen
for Tri-State Livestock News

By products from U.S. beef cattle are in demand world-wide. The value of a slaughter animal can be affected by supply and demand for these "drop credits." Photo by Cyndi Van Newkirk

Why should beef producers keep an eye on drop credit market trends and values? Since foreign markets like Asia are huge beef byproduct consumers, less restrictive import laws and restrictions that could be implemented in the near future could drive up demand – and potentially the value – of drop credits or hides and offal.

Currently, beef hides bring in $2.6 billion of the annual $5 billion dollar drop credit sales, or about 48 percent of the market. Variety meats (liver, tongue, etc.) make up 33 percent of sales and rendered products account for 19 percent of annual drop credit sales. Altogether, byproducts tend to fetch around $150-$200 per head.

Hides are used for footwear, clothing, furniture and more. Variety meats are in high demand in Asian countries and pet food companies, bio-diesel plants and soap companies use rendered products such as tallow.

Because drop credit values are related to so many different industries, keeping your finger on the pulse of drop credit trends and cycles is no easy task.

“The U.S. Department of Agriculture produces a daily By Product Drop Value report. The report puts a value on several byproducts marketed. Prices are derived from a survey of packers based on yield per animal.” Paul Clayton, senior vice president of U.S. Meat Export Federation Export Services

"The U.S. Department of Agriculture produces a daily By Product Drop Value report," Paul Clayton, Sr. VP of U.S. Meat Export Federation (USMEF) Export Services, says. "The report puts a value on several byproducts marketed. Prices are derived from a survey of packers based on yield per animal."

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China, Hong Kong, South Korea, Taiwan, Italy, Vietnam, Mexico, Thailand and Japan purchase most of the byproducts from U.S. beef production. In addition to following demand and pricing trends in the related byproduct industries, drop credit values are subject to global political and cultural influences.

"One of the reasons for a 2015 decrease in drop credit rendered product values is the lower price of fuel," Kent Swisher, National Renderers Association Vice President of International Programs, says. "Biodiesel fuels use some beef carcass rendered products. Since fossil fuels are lower, biodiesel fuel production has slowed, which means they need less rendered product."

On the flip side of the price trend coin, variety meat revenue is 14 percent higher than 2014 because buyers are paying more for the products. About 337,000 metric tons of beef variety meats were exported in 2014. This, in spite of the fact that the 2015 beef export volume is lower.

U.S. beef producers aren't likely to wield strong influence on the value of most drop credit products. Beef hides are the exception to that rule. Stephen Sothmann, President of the U.S. Hide, Skin and Leather Association, says a few precautions taken to protect beef hides during production could add value to U.S. hides, which are currently in high demand in China.

"Most U.S. beef hides are exported to and tanned in China," Sothmann says. "Manufacturing and environmental trends have largely pushed these operations overseas. Other Asian markets consume the tanned hides and Italy and Mexico also purchase American beef hides."

The high cost of beef animals has caused many footwear companies to shy away from using leather, causing beef hide values to sink in the first half of 2015. West Coast port issues which stalled beef hides in the transport stream added to this year's sluggish sales. However, new demand for leather coming from auto makers and a renewed interest in lower-priced hides by major shoe manufacturers is expected to cause the price pendulum to swing back toward higher values in the near future.

"Beef producers should know that any kind of scarring or marking on a beef hide takes away from its overall value," Sothmann says. "Branding located on the side or back area will be very prominent after the tanning process. That means that portion of the hide has to be cut out and thrown away during the tanning process. If cattle are cut in fencing or get scarred from injuries or treatments, that piece of the hide isn't usable. If several pieces or a significant portion of a hide has to be cut away, it reduces the number of products that can be produced from it."

Effective pest management can also reduce the number of scars on beef hides. Because U.S. beef hides bring premium prices in world markets, producers can help maintain the quality and demand for them.

"We want to maintain that quality image and keep U.S. hides as pristine as possible to maintain our world market share," Sothmann says.

Meat and bone meal rendered product prices follow the demand for feed in the poultry, aquaculture and pet food industries and the availability and commodity price for soybeans. Abundant soybean crops mean adequate meal for livestock feed and usually result in lower prices for soybeans and meat and bone meal. Dropping oil prices have also affected meat and bone meal prices, which trended lower since the beginning of 2015.

"Tallow prices are about half of what they were a couple of years ago," Swisher says. "At one point, 95 percent of the tallow price correlated with crude oil prices. Now about 60 percent of the tallow price is related to crude oil. The tallow price followed the crude oil price down before the correlation broke."

Approximately 35 to 45 percent of every U.S. animal slaughtered for food is rendered, resulting in 11 billion pounds of protein meals used as an animal feed ingredient. The rendering process destroys any bacteria in the rendered products and sequesters at least five times as much greenhouse gas as it emits.

The United States is second to the European Union in exporting processed animal protein meals. Indonesia was the largest importer of processed animal protein (2013) used for consumption by poultry, fish and pets. In tallow exports, the United States leads and Australia is second. The largest tallow importer has been Singapore where tallow from Australia was used at Neste's renewable fuel plant. Since Neste switched from using tallow to palm oil, tallow imports were significantly reduced.

Swisher believes elimination of some current trade restrictions could greatly improve rendered product markets. Prior to the 2000 bovine spongiform encephalopathy (BSE) scare, meat and bone meal export volumes were much greater than current levels.

Rendered products could see a significant boost in the future if developing nations continue to grow their livestock industries, creating added demand for freed ingredients like meat and bone meal.

"Some things that were rendered in the past are now exported to China as a food item," Swisher says. "Most of the U.S. population is now second, third or even fourth generation from the farm and see these products as very unappealing. That hasn't always been the case in America's history."

Pet food companies have also played down the use of animal byproducts in their wares. However, significant portions of many canned and dry pet food products are derived from rendered products.

An emerging new user of rendered products is aquaculture. Fish meal has traditionally been a desirable aquaculture feed source but shrinking fish resources are making it economically unfeasible.

"Producers should be very proud of the meat byproducts they produce," Swisher says. "Most people don't think about rendering or byproducts, which make use of every part of the U.S. beef animal. We hear the word sustainable used over and over. Rendered products have been well ahead of their time in recycling and creating a sustainable food industry. What might have gone to the landfill is widely-used product."

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