Should people expect shortages or price increases for certain meats in
the weeks ahead? Several beef factories have been forced to shut
down. Nearly two dozen plants are functioning under capacity.
There is going to be a shortage.
It's been a volatile and crushing few months for the meat industry.
In March, the shelter in place, orders and shutdowns caused a
complete shift in purchasing behavior.
Panicked consumers moved from spending more than half their food
expenditure outside the home to mostly eating at home.
On top of that, an entire market was cut off when restaurants and
schools were shuttered.
By April, the coronavirus started wreaking havoc on workers and
processing plants. These are very different causes that created
different sorts of disruptions in the sector, both of them really
unprecedented in terms of any other events that we've ever seen.
Sick workers meant a broken supply chain.
Dozens of plants shut their doors and producers had to keep their
live animals on hold.
For the month of April, production of beef and pork dropped by 21
percent and 11 percent, respectively.
Some farmers resorted to euthanasia.
You can't just stop pigs from being born and continuing to grow.
And so when you have a group that gets stuck in the finisher and
can't move on to the packer, you then have the group behind them
that's knocking on the door.
Despite President Trump's use of the Defense Production Act, many meat
packers struggled to stay open.
Live cattle and pork prices dropped by 25 to 40 percent, while
wholesale prices more than doubled.
Near the end of April, meat prices at the grocery store had spiked 8
percent. We saw the largest daily increase and the largest daily
decrease in the past 20 years.
Within just the past couple of months.
Recent studies estimate 2020 losses to be 13.6 billion dollars for the
beef industry and nearly 5 billion for hog farmers.
But the supply chains, fragility and the repercussions that have
followed could last for months, if not years.
So how did this happen?
Meat is a huge business in the U.S..
It's no coincidence that a burger is the quintessential American
food. We had a big backyard barbecue.
We had dogs, hamburgers.
Americans consume more meat and poultry than any other country in the
world. About 220 pounds per year.
The meat industry is as complex as it is diverse.
While the basics of the supply chain is pretty much the same across
the board, the nuances within each animal type or each phase are
manifold. Poultry, it's almost entirely a completely vertically
integrated industry, which means that the integrator think Tyson or
Sanderson Farm owns the chicken from the day it's born until it's
sold to a grocery store.
You have farmers who contract with those integrators to grow out the
animals, but they never own the animals.
They provide a barn.
But even the feed is provided by the integrator in about 40 percent
of hog producers operate on this kind of production contract.
There are still independent hog producers and how they sell those
hogs depends on their relationships with the packers.
Hogs are sort of in the middle of chicken and cattle or cattle is a
much less vertically integrated sector.
It takes a cow anywhere from 21 to 30 months from the time it's
conceived until it's ready for processing.
During that time, the animals can go through multiple owners, leaving
producers with small margins and little room for sudden shocks.
In 2019, the average price of live cattle was a dollar and 20 pounds,
while the average wholesale price was 2 dollars and 23 pounds.
That precise price gap has led to long standing conflict between
producers and processors.
Ranchers and packers have always not liked each other, particularly
the ranchers, basically not trusting and assuming that the packers
are manipulating market.
There is very little research evidence that supports that.
While the live side of the supply chain involves thousands of small
and medium sized businesses, the packers and processors are dominated
by four key players.
J.B.S. Tyson Foods, Cargill and Smithfield Foods.
They control 50 to 83 percent of supply depending on the animal.
In 2019 the industry revenue was 230 billion dollars, nearly twice
that of the live side.
It's a high cost capital business and also working capital as you're
buying livestock every day.
And so it's a very difficult thing just to start and be successful.
And that's just partly led to this, you know, high degree of
concentration because of how critical it is for the economies of
scale. And consequently, that's why we've got fewer and larger
clients. The meat industry has experienced two crises during the
coronavirus pandemic.
While dramatic the first was short lived.
Supply chains adjusted to restaurant and school closures and shifts
in consumer behavior within the first month.
More meat plants shutting down tonight as workers get sick
The second wave has exposed the meat processing plants vulnerability
to the virus in unimaginable ways.
To put in place guidance that these plants were taking to protect
their workers that haven't been done soon enough.
And so now we have the current problem.
The CDC states that nearly 5000 workers have contracted the virus and
20 have died. But according to the Midwest Center for Investigative
Reporting, who used news reports, press releases, state data and
original reporting, the numbers are much more grim.
As of June 4th, at least 20,400 workers had tested positive and 74
had died. I think there are some legitimate issues relative to the
worker situation, particularly on the front end of this thing.
I'm not sure anybody really understood sort of how to be prepared.
These meatpacking plants, by their very nature, are extremely
difficult to manage a human disease like this.
Since early April, at least 48 processing plants have closed down
temporarily or indefinitely.
Compared to last year, production dropped by 34 percent for the week
ending May 2nd.
For some hog and chicken farmers, euthanasia was the last resort.
Many didn't have the space and putting on more fat decreases their
value. Cattle is more flexible when it comes to weight gain.
But for all animal producers, it boils down to economics.
They can only stand this for so long.
So they might they might go out of business or they may just get into
a sort of a financial hole that will take them perhaps years to
recover from. By May 1st, beef wholesale prices were up 67 percent
and live cattle was down 24 percent.
Pork wholesale prices increased by 100 percent.
There was a number of cattle that were coming through the system and
hogs to that were scheduled to be marketed at whatever price.
And then all of a sudden there's just basically no demand for some of
those cattle because the packing plants simply cannot process them.
And of course, at the same time, the cattle prices were going down
because the packers simply couldn't demand all the cattle that were
out there. That's what's got producers so upset right now.
They see their price going down at the same time, the meat prices
going up, and they think that means that something nefarious is going
on. And it's absolutely not it's because those marketing costs have
gone up dramatically.
And the supply and demand in the two markets are quite different
right now. On April 26, Tyson Foods CEO John Tyson took out a full
page ad in multiple newspapers warning the nation of a meat supply
shortage. He wrote, "The government bodies at the national state,
country and city levels must unite in a comprehensive, thoughtful and
productive way to allow our team members to work in safety without
fear, panic or worry." Two days later, President Trump signed an
executive order to invoke the Defense Production Act.
Now, the plants were deemed essential infrastructure and had to
remain open. More importantly, the order protected companies from
legal liability if workers got sick.
The industry praised him while the workers unions condemned his
decision. By the second week of May, prices started to bounce back as
more and more plants opened up.
As of June 4th, wholesale prices for cattle were 272 dollars and 26
cents per 100 pounds of cattle.
That's down 43 percent from May 12th.
Live cattle prices were 105 dollars, while live hog prices were still
lagging. These workers have to stay more spaced out in the plants.
That basically means you can't process as many cattle.
So the capacity, full capacity now is probably going to be maybe 90
percent of what it was before.
At least until this fall.
It's unclear if the worst is over for the meat supply chain or that
the coronavirus pandemic has exposed a fragile supply chain that will
require some serious adjustments.
One thing is for sure.
Having so much hinge on a few companies ability to get meat into
consumer's hands leaves the supply chain vulnerable in times like
these. It remains to be seen whether it's the right decision to open
many of the plants. Whenever you have a big labor challenge and it
drives up the costs of maintaining a labor force or it causes supply
chain, just disruptions.
You see automation.
If you go to McDonald's now, you can order from a person or you can
order from a board. Could you see the same thing in large scale
processing? Absolutely.
In the meantime, alternative meats are having a surgeon's despite
their higher price point.
Between mid-March and the end of May, the beyond meat stock price
increased by more than 130 percent.
Sales of fresh meat alternatives grew by more than 250 percent for
the 11 week period, ending May 16th.
Even before the pandemic, experts recognized huge potential in the
alternative meat industry.
Ultimately, it all depends on how our lives and the economy recovers.
If unemployment continues to rise or even lags for years, people will
trade down from more expensive to cheaper cuts of meat, perhaps less
meat altogether. Is this a once in a century event?
Should we respond accordingly?
Or is this something that we need to adapt to going forward because
it's going to be with us if we think it's going to be with us.
And yeah, it's a pretty fragile supply chain, mainly because we've
we've focused on giving consumers what they want, high quality food
at the cheapest price possible.
If we were to back away from that and make it a little bit, maybe
more robust supply chain, maybe a little bit smaller processors, it's
going to cost consumers a little bit more.
So there's a tradeoff there.
Hopefully that, you know, the stress that was on the sector, at least
we've got some release valve now that processing facilities are
moving again. There have been a number of large packing plants that
haven't had to close during this time.
There's no guarantee that their workers won't become ill.
But hopefully we've learned through this process and been able to get
us on a more positive path.