Animal by-products are returning to centre stage in the global meat industry. Over the last few years, the valuation of the animal carcass has shifted 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. A new report by Rabobank suggests that 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 optimise 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 prime meat cuts typically having the highest sales prices and value, the rising price of processing cuts and by-products of cattle and hogs show that the animal carcass valuation has been shifting since 2009. This is due to five main developments: growing economies in developing countries including the opening of the Chinese market for imports; the economic crisis which has caused consumers to trade down to cheaper products; the growth of convenience products with more women entering the workforce, consumers having less time to cook, and increased grazing; the growing number of applications for animal by-products in the pharmaceutical and cosmetic industries; and the decline in the sow herd in both the US and the EU which resulted in processed meat producers increasingly sourcing their raw material from market hogs.

“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 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 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, 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 the shift in carcass valuation will be permanent.