The meat supply shortage caused by the pandemic in America

 

Several beef factories have been forced to shut down. Nearly two dozen plants are functioning under capacity.

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 corona virus 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 had ever occurred.

 

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. USA witnessed 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.  Americans consume more meat and poultry than any other country in the world. That amounts to about 220 pounds per year. The meat industry is as complex as it is diverse. While the basics of the supply chain are 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.

 

The farmers contract with the 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. 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. Cattle are 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 there are a few and large players. The meat industry has experienced two crises during the corona virus 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. With more meat plants shutting down 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. 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.

 

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.

 

 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.

 

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.

 

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.

 

In the meantime, alternative meats are having a surge despite their higher price point.

Sales of fresh meat alternatives grew by more than 250 percent for the 11 week period, ending May 16th.

 

The meat industry in the U.S is a pretty fragile supply chain, mainly because it’s focused on giving consumers what they want, high quality food at the cheapest price possible. If they were to back away from that and make it a little bit, maybe more robust supply chain, it's going to cost consumers a little bit more. So there's a trade off there.