What a difference a month makes. Just four weeks ago, Americans were going to work, dining out and enjoying their usual social activities. Today, the vast majority of us, including myself, are staying at home. Social distancing is now part of our everyday language, when the phrase scarcely existed a month ago.
The start of the new decade held much promise for the U.S. red meat industry, especially in relation to more exports of beef and pork to China and Japan. Now that promise has been threatened by a new coronavirus (COVID-19) that first emerged in central China last December and rapidly made its way to every continent except Antarctica. A global epidemic quickly became a pandemic.
The more than 4,100 deaths so far in the U.S. (as of April 1) and more than 44,000 globally are the tragic face of the pandemic. But the spread of the coronavirus has also upended the U.S. and global economies. A U.S. and global recession is almost certain to start, which will hurt beef demand everywhere.
The virus roiled the global equities and commodity markets somewhat in February, but the impact really began later in the month as investors reacted to ever-worsening economic fallout and as trade and supply chains were severely disrupted. Equities markets all plummeted and that began to batter the live cattle and feeder cattle futures markets. All live cattle contracts fell by 20-22 percent from Feb. 21 to March 16. This in turn forced cash prices 11 percent lower in the same period.
Conversely, operating margins for fed beef processors soared to record high levels. Some complaints arose that packers should have shared some of that money with cattle feeders. Some did. Tyson Fresh Meats, the industry’s largest fed beef processor, gave its cattle feeder suppliers the week before last a premium of $5 per cwt live or $7.94 per cwt dressed on all cattle it bought. This premium amounted to $70 per head over and above what Tyson paid for cattle on the cash market. National Beef Packing also paid its suppliers a flat price of $113 per cwt live for cattle bought two weeks ago.
By far the best response however was packers’ willingness to pay far more for cattle in the end of March. A rally of nearly $10 per cwt live allowed prices to recover to their levels of the third week of February before the virus crisis began to hit futures prices. The exceptional advance brought much-needed relief to cattle feeding margins and should snuff out most criticism of packer behavior relative to the market’s previous decline.
While all this was going on, beef and other food sales to the HRI (hotel, restaurant and institutional) sector were collapsing by the day. That was because business travel throughout the U.S. evaporated, cruise ships cancelled sailings and hundreds of conventions, meetings and other events were cancelled, including many in the beef industry.
Early estimates were that restaurant sales declined as much as 70 percent in three weeks. Beef sales to the entire foodservice sector are larger than pork and chicken, so beef was more impacted by the plummeting sales. Food away from home (HRI) accounts for 54 percent of total food expenditures and food at home accounts for 46 percent, according to USDA.
However, at the same time, Americans were emptying the meat cases in just about every supermarket in the country. Fresh meat and poultry sales skyrocketed 91 percent in the week ended March 22, versus the same week in 2019. They were up 13 percent from the week ended March 15.
Retailers’ frantic efforts to re-stock their meat cases led to the largest weekly wholesale beef sales (for the week ended March 20) on the spot market since January 2012. Retailers were prepared to pay just about any price for beef. This was why the spot Choice cutout that week gained a record $45.61 per cwt and the Select cutout gained $38.19 per cwt. This and lower live cattle prices caused packer margins to hit $400 per head that week and nearly $564 per head the following week. But the cutouts topped out the week before last and started to decline last week.
Retailers and their packer suppliers now face a dilemma for the next two months. Consumers have hoarded beef in their refrigerators and freezers (sometimes buying an additional one). They will start dipping into these stocks and will likely buy less fresh beef at the grocery store. This will slow beef sales in volume terms and might cause beef supplies destined for retail to become clogged. Let’s hope Americans barbecue even more beef than normal this spring and early summer. The grilling season can’t start soon enough. — Steve Kay
(Steve Kay is editor/publisher of Cattle Buyers Weekly, an industry newsletter published at P.O. Box 2533, Petaluma, CA, 94953; 707-765-1725. Kay’s Korner appears exclusively in WLJ.)
