Traffic Jam Ahead: COVID-19 and Livestock Market Risks

U.S. livestock sector backed by domestic, global demand. ( Farm Journal )

Pork, beef and poultry production continue to run significantly higher than a year ago, in part because packer margins are in excellent shape as retail demand has been strong, says Len Steiner in his Daily Livestock Report.  

“It is important to remember that there are a lot of animals on the ground and that supply cannot simply be turned off,” Steiner noted.

In January, U.S. beef, pork and poultry producers were hoping to capitalize on the global protein shortfall and fulfilling China’s needs because of the Phase 1 deal. The inventory of market hogs on Dec. 1 was estimated at 70.9 million head, 3.1% higher than the previous year and 5.8% higher than two years ago, Steiner said. 

“Given the number of hogs that have come to market during the last three months, that estimate was on the lower end,” he added.

Meanwhile, cattle inventories on Jan. 1 were estimated at 94.413 million head, slightly lower than a year ago but still about 5.2 million head larger than in 2015. Broiler producers also expanded the size of the broiler hatchery flock, currently pegged at 61.124 million, 3.2% higher than a year ago and the highest broiler hatchery supply on record.  

“Hog and cattle futures have collapsed in the last two weeks. Part of that may be money flow,” Steiner said. “The other part could be the extreme risk that demand/supply fundamentals that were quite robust in the first two months of the year may/could/will change quite rapidly in the next few weeks.”

He said the April hog contract will expire a month from now and futures are trading potential prices for that time. The fed cattle contract will also expire at the end of April. 

How will demand change?
Demand remains a critical risk. With restaurants being closed down throughout the country and more people working from home due to the novel coronavirus pandemic (COVID-19), demand is changing quickly. 

“It is difficult to know if even more drastic measures will be needed in order to slow down the progress of the virus. One thing to also remember is that we have yet to see the effect of the changes that are just now taking place,” he said. 

Although many restaurant distributors have yet to see the order flows drop, he said that will likely change in the next two weeks. Once that happens, the order flows from distributors to the processors and then back to the packers will also be impacted.  

“Just like in a traffic jam, some cars may be going at speed as they approach the accident but eventually it will all slow down. The bigger risk is the damage this all will do to the economy,” Steiner said. “Economic data has yet to catch up with what’s happening, but the crash in the equity market is a clear indicator that markets think we are heading for a major contraction in output.”

The demand risk is big but there is also a supply flow risk that is impossible to predict. The U.S. workforce in the plants, on the road and at the farms are as vulnerable as anyone to COVID-19.  

“There are significant risks that we face in the coming weeks and months. While eventually we will persevere, it will not be easy and it will not be cheap,” Steiner said.    

For more coronavirus coverage, check out our landing page on the topic here
 

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