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The meat industry problem is now two fold

By Staff | Jun 8, 2020

A Feedstuffs magazine headline read “Ag economists warn against overreaction to meat industry structure.” What does that mean? The livestock and packing industries have been in a constant state of restructuring for decades that has resulted in concentrating the market leverage with packers. They have even been able to avoid transparent price reporting despite provisions such as mandatory price reporting. When beef packers are making more total profit from beef than what it cost them to procure the entire animal, how much concentration is enough? Feedlots are losing money and consumers are being charged exorbitant prices for beef while packers make windfall profits.

The Des Moines Register surprised me by endorsing Admiral Michael Franken for the democratic nomination for the U.S. Senate to run against Joni Ernst. In Franken’s bio, he tells of working in a packing plant to pay his way through his undergrad college. That was a long time ago, back in the 1970s. Then, packing plant workers were highly paid. It was work to lug beef but young men drove new cars and paid for their college education as Franken had done by working a summer in the packing plant. Workers earned a living wage. The packing industry decided to lower their labor costs, break the unions and that evolved into IBP sending busses to Mexico to procure a new labor force that thought that half the money U.S. workers were getting was a good enough deal to move to the Midwest. Now they complain about illegal immigrants working in packing plants but they have not done anything much about it. That is because they can’t. If they sorted out who was documented and deported the rest, they would have depleted the packing plant workforce as much or more than Covid-19 has. Packers have their company spokesman tell how they put worker safety first but that has not been the case. They kept them working, even with symptoms, without testing and PPE until it blew up on them. Then they were forced to close plants. Packing plants became Covid-19 hothouses. As meat prices soared and shortages developed, DJT issued an executive order for plants to reopen putting USDA in charge. They reorganized, tested employees, acquired PPE, announced bonuses to incentivize workers to return and then the plants started to come back on line.

The problem now is two-fold. First, if they adopt CDC and OSHA guidelines for distancing on the line in plants, they have to slow the line speed way down losing productivity. That may not be a problem initially as they do not have enough workers coming back to fully man the lines anyway. If they run the lines without distancing, they will operate shorter hours. It will take a while to get workers healthy, get past quarantines and operate plants without new flare ups before some of the former workforce will consider setting foot back in the place. These workers know that they were treated badly. Packers are bribing them with bonuses to get them to take another health risk. This industry never had an excess worker capacity to begin with so losing some of what they had, means U.S. kill capacity has been downsized. They have asked Ag Secretary Sonny Purdue to adopt safety measures other than distancing but have not gotten approval.

The just of it is that plants are reopening but at significantly impaired kill capacities. There are livestock that need to be processed today and the industry kill capacity is nowhere near matched to the supply. They have a goal of recovering to 80%-90% of pre-Covid-19 kill capacity and that will take a while to achieve. Even then, there would be more livestock than plant capacity to process them. There is a lot of talk about euthanasia but are they going to euthanize hundreds of thousands of animals for months? Given that they successfully achieve or even exceed their goal of 80%+ pre-Covid kill capacity, livestock industries still have to downsize. There is no quick fix here. They can break eggs and euthanize chickens so that the broiler industry can adjust the quickest. The cattle industry can put feeder cattle on the shelf but that is easier said than done. It takes 10 1/2 months when they stop breeding sows before there are fewer market hogs. They can adjust rations and slow gains but that will not be near enough to balance numbers with kill capacity. They can trim that supply quicker by euthanizing isoweens and even market hogs. It is an ugly situation. If there is kill capacity for only eight out of every 10 hogs, whose hogs do you think that packers will kill? Big packers, who do not own hogs, will kill the hogs of big producers with the best contracts. Integrated packers that own hogs will kill their own hogs. The integrated packers have no intention of euthanizing their own hog production. That will be left up to smaller producers who will be denied access to shackle space because there will not be enough to go around. The burden of euthanizing hogs will fall on the smallest independent producers. Even when these smaller independent producers were able to get shackle space, the basis for bids is atrocious. They do not get the Lean Hog cash average for their pigsthey get a big discount. Being honest, given the concentration in the industry, I do not see how remaining independent producers survive. In a game of musical chairs when there are not enough chairs for everyone to sit down, some fall out. In this case it is not a game. Another Feedstuffs headline read “Tyson leaders remain positive amid headwinds.” Why would they be negative with a $162 head margin on hogs and a $1600 head margin on cattle? I am sure that they love the current structure of the hog industry, as they have the market leverage over both hog producers and consumers. The Department of Justice is investigating soaring meat prices. History says that at the very worst packers will get a tongue lashing for being greedy and that will be the end of it.

David Kruse is president of CommStock Investments Inc., author and producer of The CommStock Report, an ag commentary and market analysis available daily by radio and by subscription on DTN/FarmDayta and the Internet.

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