Changes in Meat Supply and Demand

Back in January, I posted about a paper I wrote with Glynn Tonsor about an approach to disentangle price and quantity changes to determine if they were occurring from a shift in the supply curve, a shift in the demand curve, or both. If there was ever a time to put these calculations to good use, this is it.

Because of the COVID-related shutdown and slowdown in meat processing, we know the supply curve for meat has shifted upward and to the left (i.e., the marginal cost of producing a pound of beef or pork has risen). Since the beginning of March, it’s less clear what has happened to demand. First, there was the closure of many restaurants (which would depress demand) but there was also the run on grocery stores and the stocking-up that occurred in mid to late March (which would boost demand). How is all this netting out?

Using the same data on wholesale meat prices and slaughter numbers that I’ve been posting about in the last couple weeks, I created supply and demand indicies for wholesale beef and pork using the formulas described in this paper.

The figure below shows the changes in wholesale beef supply and demand relative to the beginning of March. Beginning in mid-March beef demand began to rise and outpace supply as consumers stocked up amidst the shut-down panic. Apparently, in the short run, the stocking up behavior offset the loss of food away from home sales, and aggregate beef demand increased. This behavior, however tailed off and demand began to fall until about April 9th, after which it started to increase again. At about the same time, beef supply began to fall. The simultaneous combination of rising beef demand and falling beef supply is why we are seeing such dramatic wholesale beef price increases.

What about pork? Overall, the general pattern is similar to that of beef, except that after the mid- to late-March peaking stocking up phase, pork demand has continued to trend downward. Pork supply has also trended downward since about April 9th with the plant closures and shutdowns. The fact that pork demand, in aggregate, is now below where we were at at the beginning of March means there has been less upward pressure on wholesale pork prices. At least in the case of pork, the loss of food away from home sales has depressed demand by more than stocking up behavior has in grocery outlets has boosted demand.

The Scale of the Problem

With numerous stories emerging about the the bottlenecks associated with the closure of meat packing plants, my sense is that many consumers and journalists have a hard time grasping the nature and scale of the problem. Here’s a little primer.

Poultry, hog, and to a somewhat lesser extent, cattle, production operates on a just-in-time basis.  From the day a sow (a mama pig) becomes pregnant, a chain of events is set in motion that will result in a pig being sent to the packing plant in approximately 300 days.  The well-orchestrated supply chain involves the coordination of many players operating in a timely manner.  Once piglets are born, they move to a farrowing house for 3 weeks.  Then, they are moved to another barn or farm in a nursery for 7 weeks.  After that, hogs are moved again to growing or finishing barn for about 16 weeks.  Check out this useful graphic from the National Pork Board.

If the finished pigs, who weigh about 280lbs, are unable to head to the packing plant, there is no room in the barn to receive the new batch of pigs from the nursery.  If the nursery isn’t vacated, there is no room for the piglets.  All the while, new piglets are being born with nowhere to go.  Thus, the closure of packing plants leaves farmers with no good options. 

It is possible to hold onto the finished pigs for a bit longer and change diets or barn temperature to slow down growth, but this is costly and doesn’t stop the flow of new pigs into the system.  Producers could put more hogs in the barn, but this could create animal welfare problems and expose animals to disease.  This is also a reason hogs aren’t moved outside (such a move would expose animals to weather, diseases, and parasites), in addition to the fact that most hog producers do not have the pens and equipment to comfortably house hundreds of hogs in this way.  Keep in mind, there are 77.6 million pigs in this country. Iowa alone has 23.6 million pigs, or about 7.6 pigs for every man, woman, and child in that state.

Here is where the scale of the problem really kicks in. We have a national pork processing capacity of about 500,000 head per day. Latest data suggests that because of plant closures and slowdowns, we are processing about 40% fewer pigs, which means an extra 500,000*0.4 = 200,000 pigs that are left on the farm. Every. Single. Day. Do that for 5 days, and that’s 1 million “excess” pigs left on the farm.

Why not send the the hogs to smaller local packers? Well, assuming those packers even had room, how big are they? Some of the small-ish packers of any scale process 200 hogs a day. But, the largest plants now shut down can process 20,000 hogs a day. That means, 1 of those small plants would have to run 20,000/200 = 100 extra days to make up for just 1 day of lost production from the large plant. Or, stated differently, we’d need 100 brand new small packing plants to make up for the loss of one large plant.

The Road from Farm to Table

That’s the title of a new resource I helped pull together for the Purdue College of Agriculture.

I answered questions like:

• If there’s a surplus at the farm, why is there a shortage in the grocery store?

• Why would farmers throw away food?

• Why are meat packing plants shutting down?

• What are the impacts of packing plant shutdowns for farmers and consumers?

• Are we going to run out of food?

• How much of our food comes from abroad?

My colleague, Candace Croney, in the vet school also answered some important question about farm animals in light of recent packing plant closures:

• Why euthanize the animals instead of just keeping them on farms?

• Why not wait to see if things improve instead of euthanizing now?

• How will the animals be euthanized?

You can read the whole thing here.

My colleagues in agricultural communications pulled together a cool graphic to illustrate some of the challenges we are currently seeing in the food supply chain.

With some meatpacking plants temporarily shutting down due to #COVID19, how will it affect our food supply?@JaysonLusk, department head of @PurdueAgEcon, and Candace Croney, director of @pucvm's Center for Animal Welfare Science, discuss the impacts. https://t.co/TvH38uRuP9 pic.twitter.com/cZcJId9LZs

— Purdue Agriculture (@PurdueAg) April 28, 2020

More Meat Market Madness

Plant closures and slow-downs from COVID-19 have reached such levels that it will be impossible for consumers not to notice effects on meat prices or availability in the coming weeks. If the full page ad in the New York Times wasn’t enough to convince you, below is some updated data on animal processing numbers and wholesale beef and pork prices.

Estimated daily hog and cattle slaughter are both down about 40% compared to this time last year.

Less meat being produced means less meat available for grocery stores to buy. As a result grocery stores and consumers are bidding up the price of the available supplies. Wholesale beef prices have skyrocketed, and have reached a level (at least in nominal terms) we haven’t seen in at least a decade. Wholesale pork prices have also increased significantly from the dip a few weeks ago, but as of today, they remain below where they were in 2019.

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!