America’s Indispensable Industry

That’s the title of an editorial Glynn Tonsor and I wrote for the City Journal.

Here’s an excerpt:

“In the future, owners of large food-processing and packing facilities may look to more regionally distributed facilities to mitigate supply risks that occur from a total plant shutdown. It may be prudent to sacrifice some economies of scale in order to provide insurance against plant shutdowns caused by human-spread illnesses. Such analyses will surely start soon, warranting a balance of security during pandemics with economic efficiency during normal times.

Besides economies of scale, the concentration of meat processing is a function of high regulatory and oversight costs, which may deter the emergence of a larger number of smaller processors. Requiring federal inspectors and testing regimes is prudent from a food-safety standpoint, but as we’re now seeing, such measures may create other risks when the barriers to entry are too high. In fact, adjustments in some of these regulations may well help the industry navigate current Covid-19 challenges.

Another solution is to reduce labor use through increased automation. The nuts-and-bolts assembly of automobiles or even computer chips doesn’t carry over well to animals that come in widely varying shapes, sizes, weights, and even colors. Advancements in robotics, machine learning, and artificial intelligence, however, are beginning to allow more automation in the processing of animal carcasses. We need to invest in research in digital agriculture and automation to help eliminate tedious—and sometimes dangerous—jobs, while reducing the likelihood of disrupted food supplies resulting from illnesses in processing plants. This approach, combined with the likely continuation of workforce health monitoring, may permanently alter labor relations in the meat-processing industry.”

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!

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.