– Dr. Brenda Boetel, UW Madison Division of Extension Livestock Economist
Through Saturday, April 18, 2020, US beef slaughter capacity had decreased by approximately 14,000 head per day due to the closure and/or slowing down of several plants in the United States. Wisconsin has (as of the time of this writing) not seen major packers close; however, concerns are growing as confirmed cases increase at Wisconsin plants.
The Five-area Weekly Weighted Average Direct Slaughter Report for the week ending April 12, 2020 showed 16,520 confirmed head sold, compared to 20,702 head the week prior and compared to 112,499 head for the same week in 2019. Note that the week ending April 12, 2020 did have one less day due to the Easter holiday. The cattle market will likely see continued closures and slowdowns for several plants until at least May 1 and likely longer. The week ending April 12 was the third consecutive week with significant slowdown in the processing sector after the surge in March.
This Friday, April 24, the USDA will release the monthly Cattle on Feed report. The February report showed approximately 3.84 million head on feed for greater than 120 days. These animals would be marketed ideally by March 31. March slaughter exceeded this anticipated number by approximately 400,000 head. This slaughter is in addition to the strong February slaughter numbers as well. The April report will give some indication on the number of cattle pulled forward in February and March, and the extent to which cattle slaughter would need to increase to accommodate finished cattle.
Beef production through March 2020 is up approximately 5% over 2019. With a decline in beef processing for the months of April and May, beef production is estimated to be down in the second quarter by 4.3%. There is ample supply of beef for the US consumer. The supply chain challenges stem from the change from food service demand to retail grocery demand. Food service demand has declined significantly due to the closure of restaurants in most states, while retail grocery demand has increased significantly.
The US beef marketing and distribution system is not set up to pivot easily. Very few retail grocery stores have significant cold storage, and typically they do not need to have it. The US system is highly efficient and runs on a just in time delivery calendar, which helps keep marketing costs down. Grocery stores track the amount of beef sold, the days and dates that sales are highest, and the time of day sales are highest, etc. Grocery stores use this information to order beef to be delivered just in time to restock shelves and have very little extra inventory on hand.
The COVID-19 pandemic has created problems where the retail grocery demand for beef increased at a rate no one saw coming and initially retail grocery didn’t have orders in to meet the increased demand. Additionally, beef products sold through food service and those sold at retail grocery are not the same products and vary in both size of the packaging and the actual cuts. Hamburger for retail grocery is packaged in 1, 2, 3, 5 and sometimes 10-pound packages, whereas those sold in food service are packaged in much larger quantities. Given the efficiency of the US marketing system, it is not an easy task to simply repackage product into smaller quantities. Furthermore, the food service industry typically demands different cuts than the retail grocery market (consumers do not order the same meals at restaurants that they make at home). The market recognizes this change in demand. The decrease in demand for loins has pushed the loin price lower since the closure of restaurants while the chuck price has increased due to increased demand in the retail grocery market.
Where will the cattle market go? Barring any additional closures, the market seems to have found some support. Last week packers were willing to pay $105 per cwt, on very limited sales. On Monday, the Choice/Select cutout value increased to the late March peak of approximately $255 per cwt. This cutout value will likely keep a floor beneath cash cattle prices for the next couple weeks.
I hope that the demand for live cattle has hit its low with several of the plants expected to begin processing again this week or next. The market will see front-end cattle backed up for some time, but hopefully the market will correct this by July.