COVID-19 System Shock

COVID-19 System Shock

Editor’s note: The following article appears in the April 2020 print edition of Drovers. The story was written in late March using the information and market data available at the time.

What felt like a season of promise only a few weeks prior was destroyed by the great coronavirus crash in the U.S., which was frightening in its speed. COVID-19 became the second black swan event in seven months to turn the beef industry on its head.

Unlike the Tyson beef plant fire, however, the COVID-19 pandemic became a shared struggle that rippled through the U.S. leaving human and economic destruction. 

Compared to January highs, cattle prices across all classes fell 10% to 15% before a late-March rally. Feedyards saw mid-March closeouts fall from $100-plus per head profits to $100-plus per head losses within a week.

President Donald Trump declared a national emergency March 13, but consumers had already begun panic buying
groceries and other essentials. Meat cases emptied and immediately strained the distribution system. Retailers aggressively placed orders to replenish inventories, driving boxed beef cutout prices as much as $50 per cwt higher within 10 days. The combination of lower fed cattle prices and higher wholesale beef prices delivered an immediate windfall of profits to beef packers, as much as $500 per head the week ending March 20, according to the Sterling Beef Profit Tracker.

Packers responded to the crisis in a variety of ways. Tyson Foods, which processes an average of 155,000 head each week, announced a one-time bonus of $5 per cwt to be added to cattle procured the week of March 23. National Beef Packing Co. announced it would pay $113 per cwt for all cattle procured the week of March 16. 

Cargill and National also added $2 per hour for line workers over a three-week period, and Cargill promised a $500 bonus to employees who worked all of their scheduled shifts through May 3. 

Spiking wholesale beef prices coupled with a rapid decline in fed cattle prices for the second time in a year amplified cattle producers’ frustration with current markets. 

Kansas State University Extension livestock economist Glynn Tonsor says the two events shocked the systems, but in different ways.

“The Tyson fire created a supply shock — the ability of an industry to process cattle,” he says. “Conversely, under COVID-19 we saw a demand shock. During the Tyson shock, we saw primal prices advance pretty uniformly. With the COVID-19 shock, what we saw was a 30% increase week-over-week in the chucks and rounds, and the other primals were not up as much. Hence, we saw a 22% week-over-week increase in the composite cutout.”

In other words, the panic buying of ground beef drove the recent spike in boxed beef cutout prices, and Tonsor says what he saw during this period was a market that was working. 

“Not only do I think the markets worked, you see the USDA beef composite reports confirm that,” Tonsor says. “A higher percentage of the cutout value has been tied to ground beef in the last five to 10 trading days. That may or may not be good in the long term.” 

That refers to demand going forward. If consumers filled freezers with beef, will demand slow in the coming weeks?

“We have a lot of meat in the system, which speaks really well for consumers and food availability,” Tonsor says. “A lot of the retail demand we saw was just pulling forward what we would have bought anyway in two to four weeks. I’m not convinced we have a net improvement in beef demand.”

After the initial wave of retail buying and hoarding, other factors critical to demand are taking shape. The first was a labor department report of 3.28 million people who filed for unemployment insurance the week of March 21. Two weeks earlier the number was 211,000. 

“In six months, I have serious concern that we are either in a recession or recovering from a recession,” Tonsor says. “I think we have worse macroeconomic environments than we had 60 days ago. That’s not good for beef demand. I anticipate multiple measures of beef demand will show declines.”

Searching for positive signs, Tonsor says the best scenario is if the economy has a V-shaped recovery evident by the fourth quarter. 

“The two best things for fed cattle prices would be if we keep the plants running and cattle moving,” he says. “And two, that we have a strong economic recovery in Q3 and Q4 that will spill over into everything else.”

 

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