Pork Problems And The Great COVID Deflation/Inflation Debate

Abstract arguments over whether the COVID-19 crisis is a demand shock or just a supply shock in waiting are something of a cottage industry these days.

You can, if you like, stoke an unceasing dialogue by sitting on the fence, taking one side of the argument today and the other tomorrow, leaving the audience to tie themselves in knots sorting through what, ultimately, is a self-referential debate.

Put simply: There’s a spirited argument to be had over whether the current circumstances are conducive to an outright deflationary spiral or just a setup for the return of inflation in the developed world sometime down the road.

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This is a mainstream discussion that mirrors some of the banter heard during the worst days of the trade war.

That banter is much louder as it relates to the pandemic. Here’s a representative excerpt from an article that appeared in The Economist on Friday:

Inflation in the rich world resembles a fairy-tale beast. Older members of society frighten younger ones with stories of the creature’s foul deeds, but few serious people expect to see one and some doubt it ever existed. Although high inflation seemed a fixture of the economic landscape in the 1970s, changes to policy and the structure of the global economy since have ushered in four decades of ever meeker growth in prices. As COVID-19 shutters businesses and leaves supermarket shelves bare, some economists fret that the pandemic could lead to inflation making an unwelcome return. 

A better take comes from Brookings. “There is a perfect storm brewing in the global economy”, a piece published March 17 reads. “Most recessions are caused by a demand shock (think 9/11), a supply shock (think of the first oil price increase) or a financial shock (think Lehman Brothers and the Great Recession)”, the authors wrote, on the way to warning that “COVID-19 promises to deliver all of the above in a single package”.

I’m not going to endeavor to take everyone into the weeds on this over the weekend, but what I did want to point out is that the tale of the shuttered Smithfield plant in South Dakota is a microcosm of this debate.

For those who missed it, the full story of the coronavirus outbreak at the Sioux Falls pork processing facility can be found here, but the gist of it is that the plant’s outbreak accounted for a large share of South Dakota’s total COVID-19 cases. As such, it was forced to close.

Smithfield CEO Ken Sullivan wasn’t thrilled. “The closure of this facility, combined with a growing list of other protein plants that have shuttered across our industry, is pushing our country perilously close to the edge in terms of our meat supply”, he warned, in a statement. “It is impossible to keep our grocery stores stocked if our plants are not running”.

Of course, he also pointed to the existential threat the closures pose to the nation’s farmers. “These facility closures will also have severe, perhaps disastrous, repercussions for many in the supply chain, first and foremost our nation’s livestock farmers”, Sullivan said. “These farmers have nowhere to send their animals”.

So, there it is, an inflationary supply shock (no pork) and a deflationary demand shock (bankrupt farmers who, by virtue of being bankrupt, cannot consume) all rolled up into one. Bloomberg summarizes similar instances of plants being affected by the virus:

Two people who worked at a Tyson Foods pork plant in Iowa died and two dozen are ill, with operations down. Three people died who worked at a Tyson poultry plant in Georgia. A worker at a Cargill plant in Colorado also died. JBS USA delayed the reopening of a Pennsylvania beef plant from Thursday to Monday.

People are dying at slaughterhouses, a somewhat ironic development, considering what happens at those facilities.

The end result is volatile food prices. “Wholesale pork jumped the most in more than two years Thursday”, Bloomberg observes, in the same linked post, adding that “last week, pork prices fell to the lowest since 2009”.

Meanwhile, choice-grade beef prices are up six days running.

Consider the following excerpts from a good Reuters piece out earlier this month which underscores the chaotic nature of the situation and, in turn, the difficulty in parsing the demand/supply shock argument:

In the fertile Satara district in western India, farmers are putting their cattle on an unorthodox diet: Some feed iceberg lettuce to buffalo. Others feed strawberries to cows.

It’s not a treat. They can either feed their crops to animals or let them spoil. And other farmers are doing just that – dumping truck loads of fresh grapes to rot on compost heaps.

The farmers cannot get their produce to consumers because of lockdowns that aim to stop the spread of coronavirus. In India, as in many parts of the world, restrictions on population movement are wreaking havoc on farming and food supply chains and raising concern of more widespread shortages and price spikes to come.

Across the globe, millions of laborers cannot get to the fields for harvesting and planting. There are too few truckers to keep goods moving. Air freight capacity for fresh produce has plummeted as planes are grounded. And there is a shortage of food containers for shipping because of a drop in voyages from China.

In Florida, a lack of Mexican migrant laborers means watermelon and blueberry growers face the prospect of rotting crops. Similar shortages of workers in Europe mean vegetable farms are missing the window to plant.

Such sprawling food production and distribution shocks illustrate the pandemic’s seemingly boundless capacity to suffocate economies worldwide and upend even the most essential business and consumer markets. There has been limited disruption so far to supplies of staple grains such as rice and wheat, although problems with planting and logistics are mounting.

The Trump administration on Friday said the government is taking steps to ensure the stability of the nation’s food supply.

“These are great people, great Americans, never complain – they just do what they have to do”, Donald Trump said, in the course of unveiling new aid for farmers who are now struggling with the vagaries of a pandemic after spending the last two years coping with a trade war that effectively shut US agriculture out of its most important market.

Later Friday, the USDA said it will spend $19 billion to “provide critical support to farmers and ranchers, maintain the integrity of the food supply chain, and ensure every American continues to receive and have access to the food they need”.

This is another example of a situation where a press release intended to allay public angst invariably does the opposite – and through no fault of the PR team. There’s no “right” way to say that nearly $20 billion needs to be spent in order to make sure America’s food supply is safe.

Here’s how the program will work:

1. Direct Support to Farmers and Ranchers: The program will provide $16 billion in direct support based on actual losses for agricultural producers where prices and market supply chains have been impacted and will assist producers with additional adjustment and marketing costs resulting from lost demand and short-term oversupply for the 2020 marketing year caused by COVID-19.
2. USDA Purchase and Distribution: USDA will partner with regional and local distributors, whose workforce has been significantly impacted by the closure of many restaurants, hotels, and other food service entities, to purchase $3 billion in fresh produce, dairy, and meat. We will begin with the procurement of an estimated $100 million per month in fresh fruits and vegetables, $100 million per month in a variety of dairy products, and $100 million per month in meat products. The distributors and wholesalers will then provide a pre-approved box of fresh produce, dairy, and meat products to food banks, community and faith based organizations, and other non-profits serving Americans in need.

The Trump administration’s farmer bailouts came under intense scrutiny for funneling allegedly disproportionate sums to the largest (and richest) farmers. One assumes this iteration of farm relief will be spared that kind of criticism, as you’d certainly imagine it will be handled with the utmost care by Sonny Perdue, although it’s possible I’m being too optimistic.

“The American food supply chain had to adapt, and it remains safe, secure, and strong”, Perdue promised on Friday, in remarks accompanying the rollout of the new program.

Fingers crossed.

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