Unprecedented volatility in meat markets

The words "unprecedented” and “uncertain” are being thrown around a lot these days, and it is precisely because the words have never been more true. I’ve been positing on happenings in the meat and livestock markets in the wake of COVID-19, and thought it might be useful to try to illustrate just how unusually volatile these markets have been.

Consider the weekly changes in wholesale met prices (all data are from the USDA compiled by the Livestock Marketing Information Center). Below are weekly changes in pork prices over the past decade. For the week ending April 4, 2020, wholesale pork prices were down $16.32/cwt (or $1.63 per pound). This is the largest change in wholesale pork prices since at least the year 2000 (I haven’t looked at data prior to that). However, just two weeks prior (the week ending March 20, 2020) wholesale pork prices were up $7.58/cwt. This was the largest weekly increase in the past decade. So, within a three week time period, we’ve witnessed the 3rd largest weekly price increase and THE largest weekly price decrease in at least a decade.

We see a similar outcome for beef. For the week ending March 20th, 2020, we witnessed the largest weekly increase in the wholesale price of beef (an increase of $35.88/cwt) we’ve seen in at least a decade. And just two weeks later, the price fell $16.58/cwt, the largest weekly price decline in at least a decade. Prices fell again $13.10/cwt the following week, for the 3rd largest weekly price decline in a decade. Within a three week time period, we’ve witnessed THE largest weekly price weekly increase and THE largest weekly price decrease in at least a decade.

I’d call that volatile!

All meat isn't created equal

There has been a lot of recent discussion about the impact of COVID-19 on food prices and availability. The recent closure of several meat packing plants has focused attention on meat prices in particular. There is a tendency to lump all cuts together as “pork” or “beef,” but as we’ll soon see, price impacts can differ significantly depending on which types of pork or beef we’re talking about.

First, let me state the obvious. Animals come in fixed proportions. A cow has 4 legs, 2 ears, and 1 tail. Likewise, meat from a cow comes from seven primary anatomical regions (these are the beef “primals”). One of the primals is the chuck, which comes from the front, shoulder area. About half the chuck typically goes to producing ground beef, and the other part primarily goes to roasts. It is possible to cut “steaks” out of the chuck, but they tend to be lower quality. By contrast, the rib and loin primals (along the back of the animal) contain the high dollar steaks (ribeyes, strip steaks, tenderloin). It is possible, of course, to turn a tenderloin into ground beef, but typically one would be crazy to do it because steaks from a tenderloin sell at double, triple, or quadruple the price of ground beef.

Ok, now what happened to the wholesale prices of primals in the wake of COVID stay-at-home measures? The figure below shows changes in prices of four beef primals relative to the their prices at the beginning of March.

Apparently, all beef isn’t created equal. The prices of round and chuck have increased more than 40% since the beginning of March. These are the primals that tend to be lower priced and are more frequently used to create roasts and ground beef. As it turns out, these are also the beef cuts consumers can afford and are more easily able to utilize at home, and the cuts seem to have benefited from the shift in meat buying from restaurants to groceries. By contrast, loin prices fell about 9% before rebounding a bit. We apparently eat more steaks when we have the money and ability to eat away from home. The price of the “short plate” fell about 30% before rebounding to “only” a 17% decline. This primal includes cuts like the skirt steak that are frequently used to make fajitas and part of the brisket; cuts heavily used in Mexican and BBQ restaurants.

We can see a similar story for pork. All pork isn’t created equal. There are six pork primals. The figure below shows price changes for four of the primals since early March. The prices of bellies and hams fell more than 50% before recovering somewhat. Bellies, of course, are the source of bacon. Apparently, bacon is eaten much more away from home than at home. The trends for ham and butt (inaccurately named because the pork butt actually comes from the shoulder) are a bit harder to explain, but interestingly, pork loin prices increased and remained fairly steady, now selling about 50% higher than at the beginning of March.

Why did prices of pork loins respond so differently than beef loins? It may be the price point. On April 17, 2020 the wholesale price of pork loin was about $0.92/lb, whereas the wholesale price of beef loin was about $2.62/lb.

Cattle and Hog Slaughter in the wake of COVID-19

A quick follow-up on previous posts about the impact of meat processing plant slow-downs and shut-downs due to COVID-19. The USDA releases daily estimates of slaughter numbers (the data after March 31 are estimates, before that it is “actual”) . If these estimates hold, we’re processing about 24% fewer cattle and about 30% fewer hogs than the same time last year. All else equal, this will put downward pressure on cattle and hog prices and upward pressure on wholesale and retail meat prices. All, of course, isn’t equal. The upward pressure on meat prices will be dampened by the high amounts of pork in cold storage - roughly 20% more than this time last year.

Addendum (4/16/2020)

I’ve had a couple people point out that some of the dip in slaughter numbers might be due to the Easter holiday. In 2019, Easter was on April 21. For context, hog slaughter numbers on the Friday, Monday, and Tuesday surrounding Easter in 2019 were 431132, 327319, and 478008. For cattle, the respective figures in 2019 were: 114286, 113435, and 121216. Here are updated figures.

These 15 Plants Slaughter 59% of All Hogs in the US

Headlines have started to appear indicating the shutdown of meat packing plants around the country as a result of COVID-19.

So, just how concentrated is meat processing and how impactful might a plant closure be? As it turns out, the National Pork Board puts out information on processing capacity. According to their data, the U.S. has the capacity to slaughter 506,470 pigs per day. Almost 60% of this capacity comes from just 15 plants.

These plants are heavily concentrated around Iowa.

Given the size relative to the industry, the closure of any of these plants has the potential to reduce hog prices and increase wholesale and retail pork prices (the economics are explained here). Glynn Tonsor and Lee Schultz’s recent analysis by suggests every 1% reduction in pork processing capacity is associated with a 1.82% reduction in hog prices. Hog prices have already been tumbling over the past couple weeks, potentially reflecting the market’s expectation of some capacity being brought off-line.

Meat and Egg Prices Following the COVID-19 Outbreak

The declaration of a national emergency on March 13, 2020 by President Donald Trump, and the corresponding state stay-at-home measures, caused significant disruptions in retail food markets.  Aside from take-out, many consumers were suddenly unable to dine at restaurants and food service establishments away from home, which according to U.S. Department of Agriculture data, represents about 54% of all food expenditures.  As a result, consumers turned to grocery stores and supermarkets, where the increase in demand, coupled with concerns about future reduced mobility and scarcity, led to a surge in foot traffic and sales. 

              For the week ending March 22, 2020, the number of trips to grocery stores and supermarkets increased 39%, and during each trip, consumers purchased about 12% more items, and spent, in aggregate, about 61% more as compared to the same week one year prior.  Fresh meat and frozen food sales led the increase in dollar sales.  Pork sales increased 101%, beef sales increased 95%, and chicken sales increased 70% for the week ending March 22, 2020 as compared to the same time period in 2019. 

      Increasing food prices suggest the increased demand in grocery establishments appears to have more than compensated for the lost demand at restaurants, at least in the short run.  The figures below report U.S. Department of Agriculture data made available by the Livestock Marketing Information Center on wholesale prices of pork, beef, chicken, eggs.  In each of these cases. wholesale prices began dramatically rising at about the time President Trump declared the national emergency.  For example, wholesale pork prices jumped almost $20/cwt from about $65/cwt in early March to just under $85/cwt by mid-March.  For beef, wholesale boxed beef prices increased about $50/cwt, going from about $205/cwt to over $255/cwt.  Wholesale chicken prices increased a bit over $10/cwt over this same time period.  However, as the figures reveal, the price pressure has already started to subside for beef, pork, and chicken.  In fact, for pork and chicken, price levels are near or below what was experienced at the same time last year. 

The case of eggs reveals a different story.  Wholesale egg prices were about $1/dozen in early to mid-March 2020, approximately in line with prices at the same time in 2019; however, prices have nearly tripled since that time, and by the week ending April 4, 2020, prices were $3/dozen, with the increase showing no sign of slowing yet.  A number of explanations have been offered for the price run-up in the egg market including consumer perceptions about the necessity of eggs and their longer shelf life relative to other animal proteins, dynamics associated with Easter egg buying, legal barriers that prohibited easy re-sale of eggs headed for restaurant markets to grocery, and the high degree of concentration in the egg production industry.

The increases in wholesale meat prices were not initially met with corresponding increases in farm-level hog and beef prices, causing consternation among some producers.  Going forward, increased concerns about illness spread in packing houses is likely to reduce processing capacity, further exasperating this problem, putting downward pressure on livestock prices.  A paper by Glynn Tonsor and Lee Schultz suggests a 20% reduction in processing capacity due to COVID-19 plant shutdowns could reduce cattle prices by 26% and hog prices by 36%. As they note, these effects may already be “baked in” to future’s prices. Moreover, coming into 2020, animal inventories were high, leading to large projected total meat and egg production for the year.  Temporary stocking-up behavior on the part of consumers buoyed demand in the short run following outbreak of COVID-19, providing a respite to the downward price pressure expected for 2020.   However, the loss of restaurant sales, coupled with reduced consumer incomes from a likely recession, and export markets for meat products being hard hit by COVID-19 suggest the general downward price movements witnessed in cattle and hog markets may continue even if wholesale prices rebound should processing capacity be adversely affected by disruptions associated with COVID-19.