For several years prior to the disruptions of COVID-19, American consumers were shifting many of the dollars they spent on food to food- away-from-home spending, meaning they were spending more eating out at restaurants than at grocery stores to make food in their kitchens. This shift dramatically impacted animal protein supply chains when stay-at-home orders took hold around the country and shut down the food service demand channel as consumers had to stay home to cook, rather than eat out. The complicated nature of our supply chain means that one cannot simply flip a switch and move product that was destined to the food service sector over to the retail sector. At the same time, we saw consumers rush into grocery stores and panic buy to stock up for the upcoming quarantine. As a result, many grocery meat cases were emptied as consumers filled their freezers with whatever beef, pork, and poultry they could get their hands on. At this point in the pandemic, there was no real shortage of supply in the country, instead the surge of demand at the retail level happened more quickly than the supply chain could react. Packing plants met this higher retail demand by increasing their processing volumes, which included the addition of weekend shifts. Meat that moves through the food a home distribution network is different than food in restaurants and foodservice sector, and there are specialized production processes and networks to serve these different channels. 

As a result of consumer panic buying, retailers looking to restock their meat cases rushed into the wholesale spot market, pushing the beef cutout up substantially. In just a week, the daily boxed beef cutout jumped roughly 25% (it would later increase by a much greater magnitude). Something that should be mentioned here is the way beef is sold. Typically, retailers are not going to order more meat for delivery the next day. The meat that retailers sell on a typical day is product the retailer started planning sales around as many as three months before. They may have actually purchased the product as many as six weeks prior. This means that there is not a large volume of “unspoken for” meat in the market on a typical day, and much of the meat being processed in a plant is “spoken for.” The spike in the cutout at the end of March 2020 was partly driven by a surge in demand as retailers looked to refill their meat cases, increasing competition for the small share of “unspoken for” meat. 

From the middle of March into early April, there was a moderate increase in the price of dressed fed cattle. However, at the same time futures markets were reacting negatively, mostly driven by the uncertainty of the situation and the market’s reaction to that uncertainty. The rise in the boxed beef cutout, combined with fluctuating cattle prices, resulted in a widening packer gross margin, with the margin increasing almost 170% from the end of February to the end of March.

The real test of COVID-19 for the supply chain came later, in April and May. Over the course of a few months, more than two dozen livestock processing plants closed due to issues with COVID-19, for periods ranging from a few days to several weeks. In some cases, the closures were due to outbreaks among workers at the plants. In other cases, it was a struggle to keep workers, who were afraid of getting sick, coming into the plant. It is the latter impact that largely led to severely reduced capacity across many plants that remained open, and reduced processing capacity by more than a third from the end of March to the beginning of May, when slaughter numbers hit their lowest levels. USDA estimates that daily capacity at U.S. cattle and hog facilities declined as much as 45% in May of 2020. 
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The decline in slaughter capacity created a backlog of animals that would take months to work through. This was a particular challenge for livestock producers, who scrambled to slow the weight gain of animals already in the pipeline. While it certainly was a challenge for all livestock producers, the just-in-time delivery nature of the hog supply chain was particularly difficult for hog producers, forcing some of them to depopulate their animals. This capacity reduction also created an oversupply of animals available for slaughter, driving the price of fed cattle down. From early April until early May, dressed fed cattle prices declined nearly 20%. It wasn’t until July that processing capacity mostly recovered, and beef and pork production recovered accordingly.

One side effect of the backlog of animals was heavier animals coming to market, which pushed beef and pork production above 2019 levels throughout the back half of the summer, even though the number of animals that could be processed in the new socially distanced plants stayed slightly below year- ago numbers. Weekly dressed weights for both cattle and hogs took a counter seasonal upward movement in late April 2020, and in the case of cattle stayed counter seasonal for the summer.

This historically high cutout combined with declining fed cattle prices created historical spreads that favored packers. From early April to mid-May, the average packer gross margin on beef nearly quadrupled, increasing from $481 per 1,000 lbs. of steer to $1,839 per 1,000 lbs. of steer. This historic increase, like the increase in the beef cutout, dwarfed any past increases.

While this calculated spread typically provides a good measure of the overall health of packer margins, the uncertainty surrounding this situation makes that incredibly difficult to gauge. Processing plants’ new COVID-19 safety measures add a cost that is not included in the spread. There is no way to know the exact cost without getting a look at the processing companies’ internal information, but one can infer that the cost of protective gear, increased sick leave, increased bonuses and increased incentive pay are very high for these businesses. Additionally, while a plant may be profitable while operating at 90%- 100% capacity, that may not hold true at 50% capacity, even with record-breaking spreads. The fixed costs associated with operating a plant come in many forms, including massive asset investment costs and large regulatory costs. The companies normally spread those costs over many animals when operating at or near full capacity, but when capacity is reduced significantly, the ability to operate profitably declines as they spread these fixed costs over fewer animals. That being said, these levels reveal that processing margins were very healthy for many plants. 

A major limiting factor at this point for slaughter plants is labor. Over the past year this has impacted the profitability and availability of some of the further processed cuts. Many of the cuts of meat and poultry that require further processing such as boneless cuts rely heavily on manual cutting to get the cuts to that point, meaning that during the worst of the pandemic we saw more bone in hams than boneless hams, etc. As the labor situation improves at the packing plants this should improve for these cuts as well.