Nobody’s Fault
By Steve Meyer, Kerns & Associates
COVID-19 has impacted the U.S. livestock and meat sectors in several ways since entering the country early in 2020. Each impact has had a separate economic effect and sent wildly varying signals to U.S. pig farmers and processors.
The most important factor to remember about this situation is that it is no one’s fault. This is caused by a virus and the sickness it causes among people who happen to work in meat processing plants.
1. The initial impact of coronavirus was a reduction in total demand due to the closures of millions of foodservice outlets. Beef and chicken were impacted most by this initial swing with pork being hurt less due to its lower inclusions on lunch and dinner menus.
2. As consumers took measures to self-quarantine and shelter in place, retail demand for all goods surged. The “stocking up” action cleared shelves of everything from steaks to toilet paper. The resulting re-stocking of retail meat cases pushed wholesale values higher and drove U.S. beef and pork packers to increase their purchases of livestock to provide enough product.
3. The uniqueness of foodservice and retail processing and packaging prevented much of the product that normally flowed to restaurants and other foodservice outlets from easily and efficiently being transferred to retail products and packaging. Foodservice bacon, for instance, is packaged in very different ways from retail bacon and the facilities to produce the foodservice products cannot be easily or quickly be adapted. Some cannot be adapted at all. This inability to transfer product between sectors cause some wholesale items – most notably pork bellies, the raw material for bacon – to begin backing up in packers’ inventory driving their prices to their lowest level since the 1980s.
4. The most recent and most damaging and tragic situation has been driven by slowdowns or closures of beef and pork packing facilities due to COVID-19 cases among their work force.
The swings in hog harvest (and, not shown, pork production) and the pork cutout value can be clearly seen in the Figures 1 and 2 below.
MORE ON THE CURRENT CAPACITY CRISIS
Every indication points to continuing strong demand for pork for both exports and in retail outlets. Foodservice demand remains soft but shows signs of improvement as the sector adapts to mandated and suggested closures of dining areas and, in some cases, begins to reopen. It is clear from recent price action that demand is not being met by limited supplies. The average pork cutout value reached $113.49 on May 9. That is the highest value since the PEDv-driven prices of 2014-15. The record high weekly average of $134.86 may well be reached in coming weeks
The problem is not hog supply. USDA’s March Hogs and Pigs report said that market inventories were 3.5 percent larger than one year ago. This inventory and recent productivity measures suggest that federally inspected harvest should have been just above 2.5 million head per week in April. As can be seen in Figure 1, weekly harvest plunged to just over 1.5 million head the week ended May 1 when roughly 42% of U.S. hog harvesting capacity was idled. As many as eight plants closed at one time or another and 18 others have ran below capacity.
The hog pork system is time-dimensioned. Today’s supply of market-ready hogs was, in essence determined 10 months ago when sows were bred. Those sows farrowed (gave birth) four months later and their pigs have been fed to market weight over the past six months. This process begins every week so there are pigs in grow-finish buildings presently that will come to market each week over the next 23 weeks. There are pigs nursing their mothers in farrowing (birthing) facilities that will come to market three weeks after that. There are pregnant sows at those farrowing farms that will give birth to the pigs that will come to market the 16 weeks following those. In all, 42 weeks of pigs are “in process” at any one time.
The disruption of processing has backed up roughly 2 million hogs on finishing farms to date. Most pig farmers have put finishing hogs on maintenance diets that have slowed their growth rate while still meeting their nutritional requirements. But those hogs will eventually have to move to make room for pigs behind them and packing plants cannot handle large number of animals that weigh more than 330-350 pounds. Therefore, some of the backed up hogs are reaching weights at which they must be moved to plants or euthanized and composted. Several thousand have already met this fate. More will do so as the packing sector, even running at full capacity, will not be able to handle this size of backlog.
KEY FACTORS AND TAKEAWAYS
The most important factor to remember about this situation is that it is no one’s fault. This is caused by a virus and the sickness it causes among people who happen to work in meat processing plants.
The design of meat processing plants – developed over many years to provide wholesome, safe pork products while using all resources efficiently and providing the best value to consumers – put workers in close proximity with one another. The fact that many workers in packing plants are immigrants who tend to live in “immigrant communities” played another critical role in the spread of coronavirus. The lack of sufficient knowledge about coronavirus, test kits, personal protective equipment and other factors all played a role in the situation becoming critical for U.S. pig farmers.
The two key factors that will determine the total impact of this crisis are the degree and speed at which plants can come back online and the level of capacity that can be achieved under new corona-virus influenced operating procedures. Plant re-openings and recoveries had pushed the idled-capacity level down to 32.7% of Friday, May 8. Three more plant re-openings are expected on Monday, May 11. Further progress will be determined by the success of plants’ testing and prevention procedures.
But most believe that the adoption of the Center for Disease Control’s packing plant guidelines will leave many plants unable to achieve their pre-COVID-19 operating levels. Some analysts believe that impact may be as high as 25% in some plants. Tyson Foods is on record saying their plants will get back to full capacity. The truth for the industry as a whole will likely be somewhere in between. I find it hard to see a scenario where the collective impact will be below 10%.
The likely outcome of this situation is euthanization of market ready animals and the consequent challenges of disposing of those carcasses. My calculations using a steady improvement of capacity utilization from 38.6% the week ending May 9 to 10% the week ending August 1 suggests that 8 million pigs currently in grow-finish barns and 4.6 million pigs to be born over the next four months will have to be destroyed. Reductions beyond that point will be accomplished by lower breeding and reductions in the sow herd. Pig farmers are capable of making these last changes.
The economic losses of these actions are huge. Pig farmers have from $40 to $150 invested in each of those 8 million growing pigs in question. They will have roughly $32 per head in all of the unusable piglets. Using an average of $100/head for 8 million growing hogs and $32 for the 4.6 million piglets, one arrives at a total loss of $950 million before account for costs of euthanization and disposal, both of which are substantial.
These losses will force some pig farmers out of business and drive another round of consolidation at the producer level. It is difficult to predict the magnitude of these changes at the present time as pig farmers’ individual risk management efforts and financial positions will both be major factors.
Beyond the financial implications, we must remember the psychological impact that euthanizing and not using perfectly healthy animals will place on pig farmers their families and workers. These people care about these animals. They raise them for harvest only because they are useful as food. Removing that purpose places all of the people involved in an ethical conflict that will drive significant mental and emotional consequences. The damage here goes far beyond pocketbooks and may have lasting impact on some people and families.