We are currently running at 35% to 40% below last year’s beef processing capacity due to COVID19-related shutdowns and slowdowns. As, I’ve previously noted, wholesale beef prices are rising as a result. At the same time, cattle prices have been taking a hit.
Here are USDA data from the Livestock Marketing Information Center showing the change in fed cattle price (the 5-market average steer price, over 80% choice) and wholesale choice boxed beef price since the beginning of the year. Since January, wholesale beef prices are up 67% but live cattle prices are down 24%.
What’s going on? I’ve talked to enough journalists in the past month to know that these divergent price movements seems almost paradoxical. It is not a paradox. It’s basic economics at work. You can find all the supply and demand graphs here, but the basic explanation is as follows.
When a packing plant goes down, the packers don’t need as many cattle. That is, a plant closure results in too many cattle floating around relative to the ability to process them. There is an excess supply of cattle given to the processing capacity. Thus, plant closures cause a reduction in demand for fed cattle. As a result, cattle prices fall.
At the same time, a plant closure means fewer cattle getting turned into burgers and steaks. A plant closure results in less meat being on the market. There is a reduction in meat supply. Groceries and consumers are left competing for a smaller amount of meat, which results in meat prices getting bid up.
The divergence in cattle and meat prices, causes the so-called “marketing margin” to increase. Here is a graph of the marking margin (the difference in wholesale beef and cattle prices) over time since January 1, 2019. The last time we saw an increase in the marketing margin of this magnitude was back in August of 2019, which was when there was a plant closure for an altogether different reason (an accidental fire in a packing plant in Holcomb).
The rising margin (both in August and now) has led to calls from legislators to investigate packing firms’ behavior.
There is no doubt that falling cattle prices have harmed the economic well-being of farmers and ranchers. It is less clear that the packers profit every time the marketing margin increases. As described in this paper by Gary Brester, John Marsh, and Joe Atwood:
“marketing margins are not reliable measures of changes in producer surplus (welfare) given exogenous shocks to various economic factors. ... In fact, little or no accurate information is conveyed by [farmer’s share of the retail dollar] statistics.”
While we can observe the price of cattle and the price of wholesale beef, and thus the marketing margin, what we can’t observe are the packer’s costs. A plant fire is a huge cost. Likewise, running a plant at lower capacity with workers spaced out for social distancing is costly; it is also costly to close down, refrigerate empty buildings, pay sick employees who aren’t at work, install partitions between workers, deal with legal challenges, etc. Presumably, if it was in a packer’s interest to significantly reduce capacity, they could have closed down any of their plants prior to the emergence of COVID19. The fact that they didn’t voluntarily shut down processing facilities suggests they believe they’re better off trying to run near capacity. The packer’s business model relies on trying to running plants at or near capacity to obtain cost efficiencies to make a small amount by selling large volumes.
All that said, it is of course, possible the packers are more profitable with rising marketing margins. Even though we can’t observe packers’ costs, we can observe the market’s perception of their profitability - at least for publicly traded firms. The price of a stock reflects the market’s expectations of a firm’s profitability, and one widely accepted model of stock price determination is that stock prices reflect the net-present value of all future dividends (i.e., profits) paid to shareholders.
Here is the change in the price of Tyson (TSN - solid black line), JBS (JBSAY - pinkish line), and the S&P 500 for reference (the purple line). The two meat packing firms have taken a big hit since COVID-19 disruptions began. In fact, they’ve taken a bigger hit than other types of companies listed in the S&P 500. While there was a brief increase in stock price last week, both Tyson and JBS’s stock have fallen today; both are down nearly 40% relative to the first of the year.
So, what can we say about winners and losers from COVID-19 in the meat and livestock sectors? We know consumers are worse off. Consumers are paying higher prices for less meat. We know livestock producers are worse off. They’re receiving lower prices and selling fewer animals. And packers? The graph above suggests they’re worse off too. It’s a kick in the pants all the way around. Whose to blame? The coronavirus.