US meat supply disruption

By April 2020 the beef and pork production in us plummeted by 20 %. Even after the imposing of defense production act by president the shortage was being faced by the economy. US witnessed a 25%-40% drop in price of live cattle and pork and a double price for the meat in whole sale market.

End of April was marked by a price hike in the grocery stores.

US consume a lot of meat which can be seen by their love for burger. The large economy consumes almost 220 pounds of meat per year.

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. The poultry industry is almost entirely a completely vertically integrated industry, which means that the integrator say Tyson or Sanderson farms owns the chicken from the day its born until it’s sold to the grocery store. The farmers who contract with those integrators to grow out the animals, but they never own the animals.

They provide the barn. But even the feed is provided by the integrator in about 40% of hog producers operate on this kind of production contract. There are still independent hog producers and how they sell the hog depends on their relationship with the packers.

It takes a cow anywhere from 21 months 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 oflive cattle was a dollar and 20 pounds, while the average wholesale price was 2 dollars and 23 cents per pounds. The precise price gap has led to long standing conflict between producers and processors.

Ranchers and packers have frictional relationship between them. Ranchers refrain from trusting the packers as they assume that the packers are manipulating the market. But there is very little research evidence that backs their claim. 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 namely Tyson, JBS, Cargil and Smithfield foods. They control 5o to 83 per cent of supply depending on the animal. In 2019, the industry revenue was 230 billion dollars, nearly twice that of the live side. The business is a high cost, high capital business which involves a lot of working capital as you are buying livestock every day. So it’s a very difficult thing just to start and be successful. This makes the business highly difficult to thrive in. This has led to high degree of concentration because of how critical it is for the economies of scale.

The meat industry faced two crisis during the Coronavirus crisis. The first was short lived. Supply chains adjusted to restaurant and school closures and shifts in consumer behaviour within the first month. Second one was the shutting down of meat plants amidst the crisis. 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 have not been done soon enough. So now they have the current problem The CDC states that nearly 5000 workers were infected by the virus and 20 workers died. But according to the Midwest centre for investigative reporting, who used news, articles, state data and original report , the numbers are much more grim. As of June 4^th at least 20,400 workers were tested positive and 74 died. The meat packing plants by its very nature are extremely hard to manage a disease like this.

At least 48 plants have closed temporarily or indefinitely. When compared to last year the production dropped by 34 per cent for the week ending may 2^nd.Many of the farmers did euthanasia as the last resort. Many did not have enough space and putting on more fat decreased their value. Cattle are more flexible when it comes to weight gain. Most of them if remained closed for long might either go out of business or may enter a financial hole that will take them perhaps years to recover. By May 1^st, beef wholesale prices were up 6.7%  and live cattle was down by 24%.Pork wholesale prices increased by 100 per cent. There were a number of cattle that were coming through the system and hogs too that were prepared to be marketed at whatever price. But the packers never wanted the cattle that were produced out there which got the producers upset. They saw their prices going down and the meat prices going up that meant something nefarious is going on. But the fact was that the marketing costs have gone up dramatically gone up and the supply and demand in the two markets are quite different.

On April 26^th , CEO of Tyson food wrote an article in the newspaper stating about the meat shortage in US. Two days later which president trump ordered to invoke the defence production act which forced the plant to remain open. More importantly the order protected companies from legal liability if workers got sick. The industry praised him while the worker unions condemned this. By second week of may the prices began to bounce back to normal as more and more plants opened up.

As of June 4^th, wholesale price for cattle were 272 dollars and 26 cents per 100 pounds of cattle. That’s down 43 per cent from May 12^th. Live cattle prices were 105 dollars while live hog prices were still lagging.

The workers have to stay more spaced out in the plants. That basically means you can’t process as many cattle. So the capacity of the plant would become 90% of the pre covid capacity level. The coronavirus has exposed some fragile aspects of the meat supply chains that require some serious adjustments. Having so much hinge on a few company’s ability to get meat into the consumer’s hands leaves the supply chain vulnerable in the times like these. It remains to be seen whether its right decision to open many of the plants. Whenever you have a big labour challenge and it drives up the cost of maintaining a labour force or it causes supply chain disruptions then you get to see automation. For instance if you go to McDonald’s you could order from a board or you could from a person. But you could not do that on a large scale industry.

Between mid-march and may the meat price increased by more than 130%.sales of the fresh meat alternatives grew by more than 250 per cent for the 11 week period ending on May 16^th.even before the pandemic experts recognize the huge potential in the alternative meat industry. Alternatively 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. The supply chain here is definitely fragile mainly because the companies concentrated on giving the consumers what they want. But if companies make it more robust supply chain with smaller processes, it will cost consumers a bit more. So there is a trade-off there.