The self-distancing and quarantine protocols put in place to slow the spread of COVID-19 have reduced economic growth, shuttered consumers in their homes and changed the way Americans purchase and consume food.
At the same time considerably fewer cattle and hogs are being processed, wholesale meat prices are rising and the gap between the value of meat products and the prices that producers receive for their livestock is growing. That widening gap caught the attention of President Trump, who recently voiced his concerns about the situation. President Trump asked the Department of Justice to investigate whether or not meat processing companies participated in price fixing after attorneys general from 11 states issued a letter urging that action.
Strained Processing Capacity
Ranging from a few days to two weeks or even indefinitely, over the past two months, more than two dozen livestock processing plants have closed down due to issues with COVID-19. In some cases, the closures were due to outbreaks among workers at the plants. In other cases, it is a struggle to keep workers, who are afraid of getting sick, coming into the plant. Some of these facilities, such as the JBS facility in Greeley, Colorado, have already reopened. That makes estimating the country’s processing capacity a moving target, but we can estimate that at times over the previous few weeks, pork processing capacity has been reduced by as much as 20% and beef processing capacity has been reduced by as much as 10%.
Without the processing capacity, plants cannot take delivery of animals, driving down prices paid to producers and creating backlogs throughout the system. Figure 2 shows the dramatic decline in live cattle futures and the roller coaster that lean hog futures have been on.
With limited processing capacity also comes lower output of meat and poultry products, which has pushed wholesale prices way up. The choice boxed beef cutout has surged well beyond historical levels, nearly doubling in value in just three weeks. The pork cutout has increased 103% since April 15 but remains (for now) below the highs in 2014, when PEDv decimated the country’s pork industry.
As wholesale prices for meat skyrocket and livestock prices plummet, the live-to-cutout spread for beef is widening to the degree it caught President Trump’s eye. Figure 4 shows the increase in the live-to-cutout spreads for beef and pork. This spread comes from the Livestock Marketing Information Center’s database of calculated gross margins on a 1,000 lbs.-of-steer basis and per head of hog basis. These calculations are essentially the spread between inputs and outputs and do not include processing costs (energy, labor, etc.) and fixed costs.
It is tempting to look at Figure 4 and draw conclusions about packer margins, but while the live-to-cutout spread typically provides a good measure of the overall health of packer margins, the current environment makes that incredibly difficult to gauge. Processing plants’ new COVID-19 safety measures add a cost that is not included in the spread. There is no way to know that cost outside of getting a look at the processing companies’ internal information, but one can infer that the cost of protective gear, increased sick leave, increased bonuses and increased incentive pay are very high for these businesses.
This global pandemic has injected never-before-seen uncertainty into the animal protein markets. As processing plants struggle to remain open amid labor shortages and maintain line speeds while implementing worker protection measures, the wholesale value of meat has surged. At the same time, livestock prices have cratered, leading to very large spreads between the value of a processing facility’s inputs and outputs. However, with the increased costs of doing business in a COVID-19 world, the actual situation on the ground is going to be a bit more complicated than at first glance.