As Much As 25% Of America’s Meat Production Is Offline. Looming Shortages Show COVID’s Inflationary Side.

Last weekend, I talked a bit about pork and how prospective meat shortages in the US amplify a larger debate centered around how to characterize the coronavirus epidemic from a 30,000-foot economic view.

Broadly speaking, the question is whether the current circumstances are conducive to an outright deflationary spiral or whether this is a setup for the return of inflation in the developed world sometime down the road.

There’s no question that the lockdowns associated with the global effort to contain the disease represent a near-term demand shock. Indeed, I’ve described some manifestations of that demand shock as “a deflationary supernova”. The collapse in oil demand (and prices) is obviously the poster child in that regard.

And yet, most market observers and economists will point out that the crisis also has elements of a supply shock. In some areas, the seeds are sown for shortages and rising prices.

That is perhaps nowhere more evident than in the market for some wholesale meat, where prices are surging thanks to a series of plant closures tied to COVID-19 outbreaks. I talked at length about this in “Pork Problems And The Great COVID Deflation/Inflation Debate“, but things have escalated materially over the past several days.

Dozens of USDA inspectors have contracted coronavirus, and one died this week. Earlier this month, a critical Smithfield plant in Sioux Falls, South Dakota, was forced to temporarily shut down due to the prevalence of COVID-19 (at the time, more than half of Minnehaha County coronavirus cases were linked to the plant), setting the stage for a wave of closures across the country.

For example, Tyson this week announced a series of actions, including shuttering a pair of pork processing plants and a critical beef facility in Washington. US wholesale beef touched a record high Thursday.

Tyson’s Pasco, Washington, facility “produces enough beef in one day to feed four million people”, the company said, adding that while the plant is closed for testing, employees will be paid to self-isolate at home pending test results. In all, 1,400 employees are being tested.

“We’ve taken both of our responsibilities to continue feeding the nation and keeping our team members safe and healthy seriously”, Steve Stouffer, group president of Tyson Fresh Meats said. “That’s why we’ve been focused on COVID-19 since January when we first formed a company coronavirus task force”.

That would suggest Tyson was forming a task force at least a month before Mike Pence was appointed to lead the federal government’s own dedicated team of virus fighters. That’s pretty amusing, even as it’s simultaneously disconcerting.

The company’s most ardent supporter on the Street threw in the towel this week. “Overall, we expect production disruptions to be a ~60% headwind to TSN’s pork volume for four weeks given the impact of plant closures and reduced production levels due to absenteeism”, Bernstein’s Alexia Howard wrote, in a note. Guidance will likely be withdrawn “until the dust settles”, she said.

Of course, if farmers don’t have anywhere to send their animals, well then, prices for those animals are bound to fall. Sure enough, feeder pig prices have plummeted to the lowest in some 20 months.

(BBG, USDA)

And there you have it, folks. A supply shock and a demand shock. Inflation and deflation.

In Minnesota, it’s so bad that some farmers have resorted to “destroying” full-grown hogs, Bloomberg reported Thursday.

“Hog farmers don’t have the facilities to hold the animals and when they grow too large to be handled by packers, growers don’t have much choice”, the linked article reads, noting that north of the border, Canadian producers are losing money. Apparently, the hog backlog (if you will) stood at nearly 100,000 in eastern Canada as of last Friday.

Ultimately, we’re in a situation where nearly 25% of pork production is offline in the US. For beef, the number is around 10%. That’s according to United Food & Commercial Workers who said the following in an urgent statement on Thursday:

The UFCW also released new updates on the serious and deadly impact of the Covid-19 virus. As of today, and based on UFCW internal estimates, 10 meatpacking workers and 3 food processing workers have died. In addition, at least 5,000 meatpacking workers and 1,500 food processing workers have been directly impacted by the virus. The estimates of those meatpacking and processing workers directly impacted includes individuals who have tested positive for COVID-19, missed work due to self-quarantine, are awaiting test results, or have been hospitalized and/or are symptomatic.

In total, the UFCW identified that 13 plants have closed at some point in the past two months. These closures have resulted in over 24,500 workers impacted and a 25 percent reduction in pork slaughter capacity and a 10 percent reduction in beef slaughter capacity.

Marc Perrone, international president of the union, didn’t mince words. “If workers in these plants are as essential as our elected leaders say, then it’s about time that our elected leaders provide them with the essential protections they need”, he warned. “Make no mistake, without national safety standards to protect these workers from the coronavirus— more lives will be lost, more workers will be exposed, and our food supply will face jeopardy”.

Earlier this week, Donald Trump had a different take. “The US food supply is totally secure”, the president declared, on Wednesday. “[It’s] in great shape”.

For his part, Jersey Mike’s CEO Peter Cancro begrudgingly predicted scarcities in remarks to Bloomberg. “We’re backing [our pork supply] up already because of the coming — we feel — the coming shortages”, he said.