Underlying data from Bloomberg.

I previously wrote that there won’t be a toilet paper shortage and that oil storage won’t fill up. But I’m more concerned about the meat situation, where there may be a shortage coming in the next few weeks.

Slaughter rates are plummeting and prices are rising

What’s going on? Facilities around the country are reporting an increase in employee COVID-19 infections, leading to many plant closures, many of which are mega-size plants. Tyson closed Waterloo, Iowa, for example, which alone is 4% of the nation’s pork processing capacity. In total, Tyson has about 18% of capacity offline. Smithfield, JBS USA and others are closed as well.

And we’re seeing it in the daily slaughter rates reported by the USDA. Beef slaughter rates are down 31% and hogs down 20%, with the decline in the slaughter rates accelerating. As a result, beef wholesale prices are up 36% this year; as this continues they are likely to rise further. Also, this is the wholesale price; it’s possible the markup above this you pay as a retail consumer may make the increase even higher for you.

Exhibit 1: Slaughter rates fell sharply in April to down 31% for beef and down 20% for hogs

Underlying data from United States Department of Agriculture (USDA).

Exhibit 2: Zoom-in on daily slaughter rates for April-2020 shows it’s getting worse as we continue

Underlying data from United States Department of Agriculture (USDA).

Exhibit 3: Wholesale prices rapidly rising; beef cutouts up 36% this year

Underlying data from Bloomberg.

With fewer animals slaughtered, cattle and hog prices plummeting – this could lead to liquidation of the herd

With less effective slaughterhouse capacity given the shutdowns, fewer animals can be processed into finished meat. This means the slaughterhouses are demanding less cattle and hogs, which perversely, means the prices of a head of cattle or hog are falling. You will not see that benefit as a consumer; it goes to the meat processors (see below).

And those raising cattle and hogs will not see the benefit. In fact, they are on the verge of negative margins; the price for a hog has declined to about $50 from $80 recently. Smithfield and other growers of hogs may make the (hard) decision to euthanize the hogs. That would prolong the potential meat shortage even if slaughterhouses reopen because the grow-out of animals takes years.

Exhibit 4: Cattle and lean hogs prices have collapsed, putting pressure on growers

Underlying data from Bloomberg.

Do not rely on cold storage

Cold storage is a nice comfort, but the USDA hasn’t even released the data, which may indicate it is depleted. Even so, it’s just not that much in absolute terms; certainly not enough to feed a nation. Beef, for example, is about <2lbs per person. It only takes weeks to burn through these. This is not designed as a strategic reserve, but a simple mechanism to manage ebbs and flows. And that doesn’t include April-2020 as the USDA will not be releasing the next data until May 21, 2020, electing to skip the April-2020 release.

Exhibit 5: Cold storage data is delayed, but focus on the absolute values of the inventory, which are not high on a per capita basis

Underlying data from United States Department of Agriculture (USDA).

Already had a pending shortage due to African Swine Fever supply shock

This is beyond the scope of this post, but before coronavirus, there was African Swine Fever (ASF), which wiped out about 50% of Chinese hogs. It takes years to regrow them. This means, we started the year with a 5-15% global negative protein supply shock even before the above dynamics. In response to the ASF, US producers began to accelerate exports. So you have not just a US supply shortage, but a global one as well. See here for more details.

Meat producers like TSN (Tyson) beneficiaries

Meat processors buy cattle and hogs and slaughter them. They earn the processing margin, or the spread between what they pay for the animal and what they sell it wholesale (the cutout price). If they offer prepackaged foods, they may get a markup beyond that.

Exhibit 6: Processing margins for beef and hogs have exploded upwards

Underlying data from Bloomberg.

Let’s just quickly take TSN. They have lost 18% of their production capacity. But the beef packer margin is up from $37.20/head at the start of the year to $696.40/head at present. With that type of margin expansion, you could lose 95% of your production and still be better off. Now, there are still fixed costs burdens, so it’s not quite that extreme, but they are an obvious beneficiary.

Again, a reminder – oil has imploded, and while it will be volatile, marginal producers need to go bankrupt. And the consumer (70% of the economy) is under pressure already, and will be moreso with rising food costs.