First Year in the Bag, but are Challenges Ahead?

By Gerald (J.J.) Smith, Chairman, National Renderers Association

Editor’s note – The following is a speech given by Gerald (J.J.) Smith, Valley Proteins, at the National Renderers Association 79th Annual Convention in October in Laguna Niguel, CA.

It has now been one year since I assumed the office of chairman of our great organization. Last year when folks asked me what is involved with being the chairman of the National Renderers Association (NRA), I told them that it was impossible to know what my two-year chairmanship would be like since all administrations are shaped by the events and circumstances that occur during the years in office.

Overall, I am very happy to report that it has been a fairly uneventful first year and I have high hopes that this coming year will be just as smooth.

I am also pleased to report that NRA membership and dues are stable. Even better, I am delighted to welcome back Smithfield Foods as both a maximum dues paying member and a board member. Another positive is that there have been no major company acquisitions during the past 12 months so NRA has not lost any significant members due to consolidations.

The NRA staff is also stable and very experienced. We have lost no staff members in the past year and have added Jessica Meisinger as the director of Education and Communications. Meisinger will be helping take some of the load off Dr. David Meeker now that he is wearing three hats with NRA, the Animal Protein Producers Industry, and the Fats and Proteins Research Foundation.

The rendering industry’s main challenge these past 12 months relates to the discovery of a fourth case of bovine spongiform encephalopathy in the United States (US) that resulted in a suspension of ruminant meat and bone meal imports into Indonesia. As most of you know, Indonesia was one of only two countries that were importing US ruminant meat and bone meal and certainly was by far our largest international outlet. Although the Indonesian government earlier this summer indicated that it would resume imports from rendering plants that solely process material from US Department of Agriculture inspected slaughter facilities, to date we know of no product that has made it into Indonesia since April of this year. The NRA staff and Hong Kong regional office continue to work with both the US and Indonesian governments; however, we still cannot provide a definitive date on when to expect this market to reopen.

This year, US renderers have seen the highest protein prices and second highest fat prices in history. The downside of these high prices has been a reduction in exports – over 25 percent for fats and about 10 percent for proteins.

The US corn production has experienced a significant drought – one that only occurs about twice each century. This has brought record high corn prices, but due to the suspension of the biodiesel and alternative fuel mixture credits, renderers have not experienced any lift in fat prices from these elevated corn prices. In fact, rendered fats are currently selling at their lowest multiples to corn prices in over 10 years. I believe this is mainly due both to the loss of biofuel subsidies and to significant increases in palm oil production and the reported record stocks of palm oil.

A great offset for US renderers, however, has been very low natural gas prices, especially in comparison to the prices for both petroleum and rendered fats. In many cases, US renderers are now paying more to fuel trucks than to operate boilers. It is very unusual to have low boiler fuel prices at a time when the industry is enjoying near record fat prices.

Looking ahead to the next 12 months, I see the following issues that will most likely affect the US rendering industry and NRA in some way.

• The results of the presidential and congressional elections have the potential to significantly change the balance of power in Washington, DC, and along with it, US federal income tax policies. There could also be very different regulatory policies based on the outcome of the presidential election, especially at the Department of Labor, Department of Energy, and Environmental Protection Agency.

• The upcoming farm bill, other budget-related debates, and, possibly, sequestration could have significant outcomes regarding the NRA’s Foreign Agriculture Service funding and with regard to the extension of biofuel-related tax credits.

• Due to record high commodity costs, animal and poultry processors will continue to find it difficult to earn a profit. The majority of these businesses will eliminate most of their marginally valued production in order to reduce losses. This will cause renderer’s supplies to decline in many cases and to grow very little in others. Cattle slaughter will be declining for the next several years and is projected to decline three to four percent in the coming year. Poultry production is not expected to increase and may possibly decline by one to two percent. Hog production will be the exception since it is projected to increase around three percent.

• Exports will continue to be under pressure due to record high commodity prices, but will continue to be supported by a fairly weak US dollar since the Federal Reserve continues to print money and hold down interest rates at near zero.

• Animal protein exports may be helped by reduced competition from the European Union (EU) since the EU has a target to reintroduce processed animal proteins back into aquaculture feeds on June 1, 2013. But don’t hold your breath on this one since this was being discussed when I made my first trip to the European Fat Processors and Renderers Association congress in June 2008!

• The biggest wild card for the US rendering industry is the Renewable Fuel Standard (RFS). The RFS 2013 obligation has been set at 1.28 billion gallons for biodiesel that will continue to support rendered fat markets. But, and this is a big but, the very elevated corn prices and projections for extremely tight corn supplies next summer have greatly amplified the debate regarding the RFS with regard to corn ethanol. I would argue that renderers have enjoyed much more lift in fat prices from elevated corn prices over the past six years than we have from increased disappearance of fats into biofuels.

These increased corn prices have resulted from increased corn demand mostly driven by the RFS. If the opponents are successful in getting the government to suspend or eliminate the standard, then renderers could see significant declines in the price for fats. Just as I remind my employees when they talk with exuberance about high fat prices resulting from high corn prices, be careful what you wish for because you just might get it. This year’s corn prices have the potential to break the RFS camel’s back.

December 2012 RENDER | back