Hot summer – and even hotter demand for red meat – expected
The summer of 2021 will be remembered for many things: the summer when we as a society collectively emerged from lockdowns, the summer of the cicadas invasion Brood X (at least in the eastern states). United) and the summer when the red meat markets took off. Okay, maybe only people who live and breathe the animal protein complex will remember this latest fact 10 years from now, but high meat prices certainly raise eyebrows in grocery stores and restaurants and around tables. to have dinner with the family. The main culprit here is the high demand for beef and pork, which is pushing wholesale beef and pork prices to historic highs. Add to that a recent cyber attack targeting one of the largest meat processors in the United States and we’ve got quite a bit to dig into this Intel Market.
The extremely healthy demand from the beef market in 2021 has not quite passed through the supply chain to the producer. The feeder cattle markets have been fairly lackluster, as healthy domestic and export demand pushed canned beef cutting to record levels. Packaging factories have been hampered by a growing problem of labor shortages which has made it difficult to operate factories that are already operating at what can only be described as “hard” levels.
However, this is not a new problem that was created solely by the government’s stimulus measures during the pandemic; the difficulty of finding labor in packing plants has been a problem for years. Ultimately, working in a packaging factory is incredibly difficult work that requires a specialized skill set – two factors that will continue to put pressure on these employers even if they raise wages to attract workers. Figure 1 shows that despite these labor issues, total cattle slaughter has largely recovered from COVID-19-related slowdowns and shutdowns and, with the exception of one winter hiccups, remained mostly above last year and above 2019. This figure also shows that dressed weights are not decreasing to the level they usually would be at this time of year – an indicator of the backlog of cattle in the supply chain. This is probably a sign that the cattle are moving back into the system, because we have more cattle ready to market than the current slaughter capacity available.
The demand for beef is perhaps a bigger story for cattle markets than the supply. So far 2021 has been a story of rising beef prices supported by extremely healthy demand for beef. A variety of factors are contributing to this, ranging from government stimulus to reopening economies. Grocery stores, foodservice and exporters all vie for products. It is certainly true that this recession has been very different from previous recessions in that most analysts (including myself) expected a very difficult second half of 2020 for beef demand due to recessionary pressures. . I am very happy I was wrong and to report that we did not take full account of how this recession has been different: many consumers have remained employed as their spending declined due to the lockdowns, and Government stimulus checks have bolstered spending for those who made it face employment difficulties. Another factor is that we are seeing much of the country reopening, which has prompted many food establishments and restaurants to rush to the market to ensure the supply of the pent-up demand that most expect. And finally, a potential wildcard is consumer preferences, which means that consumers may have become much more comfortable with preparing a variety of cuts of meat without access to restaurants and we can see this preference leading to an increase in purchases. Simply put, because of changing consumer preferences, we may even be in the early stages of an outward shift in the demand curve for red meat.
Figure 2 shows the historic (non-COVID-19) rise in beef cutting as well as a comparison of per capita beef disappearance and cutting. A simple way to interpret the scatter plot is that we see a stronger beef market as we move up and to the right on the chart. This means that we both consume more beef per person and pay more for that beef. This particular graph only looks at the January-March averages of each variable for each year, but we appear to have had both high consumption and high prices in the first quarter of 2021, as well as in 2020. If we looked at April- June cutoff levels so far (we don’t have any disappearance data yet), we can clearly see that wherever that disappearance number is, we are on a whole new level compared to the data. of the first trimester. As we move through most of the summer, we can largely expect high prices to continue.
Like the beef markets, the demand for pork has been extremely healthy. Pork cutting has steadily increased to all-time highs and is now at levels not seen since the 2014 supply crisis caused by PEDv. Many of the same reasons for the increased demand for beef apply to pork: restocking the restaurant industry, reopening economies, and higher levels of consumer savings / government support. High beef prices can also support pork prices, especially in terms of retail demand. Pork also benefited from favorable exposure to export demand; However, this goes back a while and has less to do with COVID-19 and more to do with Southeast Asia’s protein deficit.
In addition to showing historical pork cutting levels, Figure 3 also shows the change in the contribution to the cut value by each of the primals for January-June. The story here revolves mainly around a revival of the pork belly and the part attributed to the primal loin. The share of overall pork cut from bellies increased from 19% in 2020 to 26% in 2021. After a two- to three-week gully in late April-early May, pork bellies have largely returned to their more robust levels . Admittedly, this period comparison also includes the disruptions induced by COVID-19 which resulted in a collapse of the belly market for the first half of April 2020. This shift in value towards the belly came in large part to the detriment of the loin. Regardless of how much each contributes to the cut, levels have risen for all major cuts throughout the first half of 2021.
JBS hack continued
Anyone who glanced at a screen last week is probably aware that JBS, the largest beef packer and second-largest pork packer in the United States, has suffered a high-profile hack. Of immediate concern for much of the country was how this event would impact our supply of animal protein. News articles warning of an impending meat shortage began to appear and some worried about a potential panic buy, similar to the recent race to gas stations. While the company reportedly paid the hackers more than $ 10 million in ransom, the impact on their slaughterhouses was mostly short-lived. Figure 4 shows the national slaughter estimates for the week before, week and week after the hack (for the days for which data is available). It is very important to note at this point that these numbers are estimates, and soon USDA will have officially reported slaughter data.
First of all, it should be noted that the Monday following the hack was a public holiday, making any weekly comparisons unnecessary. Here, we’ll need to look at the daily kill estimates to get a better idea of the impacts of the hack. On the Tuesday following the hack, total slaughter estimates in the United States were down 22% from the previous week. Industry estimates place JBS’s market share in US slaughter capacity at 23%, which could imply that the hack effectively destroyed all of JBS’s cattle slaughter plants. On Wednesday, the company said in a press release that it is working hard to get back online and that many (not all) of its factories will be operating at a certain capacity. This is corroborated by national slaughter estimates, as slaughter levels rose on Wednesday, reaching 13% lower than the week before. Slaughter was largely back to normal on Thursday, with a drop of 1% from the previous week, to climb to a 2% increase on Friday. The number of domestic killings increased significantly on Saturday, more than JBS could make up for. This is likely a response from packers to both the Monday vacation and the drop in levels due to the hack into the computer system. I guess when we come back to this hack, we’ll see it as a little detour on the road to exceptional demand for red meat throughout this summer.
The big takeaway from this Market Intel article is that the beef and pork markets are hot this summer. When we saw the surge in beef and pork cuts last year in the wake of COVID-19, many speculated that it would take a long time to revise beef and pork prices to these levels. Fast forward just 12 months and we’re seeing historic levels for beef and pork cuts, except this time it’s without the pandemic-induced drop in slaughter numbers. Normally, I might be concerned about the impact of a surge in selling prices on consumers’ willingness to pay for the product, but the upside is that the prices of all proteins seem to go up, which can prevent one protein from gaining considerably at the expense of another. However, it is certainly worth considering whether these prices are sustainable for the industry.