by David Murray
Source: High Plains Journal
Date Published: May 24, 2020
As the COVID-19 crisis grinds on, it is exposing serious stress points in the nation’s delicately balanced meat supply system. Decades of consolidation and centralization in the meat processing industry have created a system precisely attuned to serve the exact mix of retail and wholesale meat customers that existed prior to the virus.
Improved logistics and data management techniques have helped the system operate in as much of a “just-in-time” manner as possible—given that live animals are not standardized products, and raising and feeding them will never be as smooth as producing widgets.
But the same consolidation and vertical integration that reduces risk in good times and lowers prices for consumers has no reserve capacity and little flexibility to react quickly to disruptions. When disruptions occur, protein producers say, the costs are not borne equally by all participants.
The consolidation of the packing industry to the point where four giant packers control 85% United States beef and pork processing system has been an issue for producers for years, especially since two of the Big Four are foreign-owned. But now concern about how this system is reacting to the COVID-19 crisis is bringing together bipartisan allies.
On April 30, the Organization for Competitive Markets, a policy and farmer advocacy organization based in Lincoln, Nebraska, that was founded to challenge meatpacker consolidation, called for the Big Four meatpackers to be broken up via antitrust legislation. In a statement, OCM said, “Recent packing plant closures due to the COVID-19 pandemic have caused supply-chain disruptions that have had severely harmful consequences for producers, including meatpacking workers, farmers, and ranchers.”
Sen. Chuck Grassley (R-IA) has called for investigation of allegedly anti-competitive meatpacking practices, as has the National Cattlemen’s Beef Association. Those calls have recently been echoed by President Donald Trump. Eleven state attorneys general are looking into packer practices.
Fire showed vulnerabilities
The current system’s proponents say it benefits everyone—including protein producers—when prices are good and all the pieces work together. “We’ve all played a part” in developing it, said Shane Tiffany, CEO of Tiffany Cattle Company, a cattle finishing feedlot which has operations in central Kansas.
The system’s vulnerabilities were illustrated last year, before COVID, when a fire at a single Tyson beef processing plant in Holcomb, Kansas, threw the nation’s beef futures market into turmoil. The Holcomb plant slaughters 6,000 head of cattle per day, or about 5% of the U.S. total. News of the fire prompted price spikes for beef.
Protein producers say the meatpacking industry is the choke point in the COVID crisis, too. Cattle, hog and poultry production are all timed as precisely as possible to fit windows in the schedules of the meatpacking plants and chicken integrators. When those schedules are disrupted because plants must be shut down, the producers absorb most of the costs. Contracts with these plants specify certain weights. If the animals exceed them, the contracts can be declared null. Producers have no other outlets for their animals. They face the stark alternatives of absorbing the unsustainable costs of supporting them, or euthanizing them. The price per head they receive goes down, while retail prices go up for consumers. The added profit in that spread is captured by the processors, not the producers.
“In the name of efficiency, we have consolidated our packing industry to a razor’s edge,” said Tiffany. “Efficiency is great, but maybe we need to build in some redundancy and resiliency.”
While struggling meat producers appreciate the efforts of Congress so far to aid them, they say more must be done. Some are arguing for a re-examination of the entire system when the crisis eases.
Those stresses were on display in a May 6 online webinar sponsored by the Farm Credit Council. Besides Tiffany, panelists included Mike Boerboom, CEO of Boerboom Ag Resources, a third-generation family farm in Marshall, Minnesota, and Louisiana poultry farmer Butch Sensley. Titled “From the Farm Gate: COVID-19 Impacts on Livestock Producers,” the panel was moderated by Will Sawyer, lead animal protein economist in CoBank’s Knowledge Exchange research division.
Sawyer began by noting that while beef and pork packer profit margins have been “outstanding” during this crisis, those profits are being offset by weaker capacity use and increased costs for labor and COVID safety measures.
Meat exports remain a bright spot, as overseas countries are also suffering from their own COVID restrictions and turn to the U.S.’s surpluses. Strong exports aside, the impact of the virus on meat producers has been devastating.
Two dozen animal protein plants have closed in recent weeks to deal with COVID outbreaks among their workers. Restaurant sales are down by half. When plant closures happen, farmers’ and ranchers’ costs continue, as they must keep on feeding and maintaining their animals, buying or raising feed crops and paying employees.
Before COVID, Americans ate about half their meals at home and half in restaurants. Now the balance is more like 75% at home and 25% away from home, said Sawyer. Large meat processing plants cannot quickly adapt their processing systems to switch from wholesale to re-tail packaging.
As Boerboom pointed out, contractual weight limits are there for a reason. Boerboom’s operation owns an interest in a packing plant. “There are physical and engineering limits” to meat plant operations, he said. A plant’s equipment is set for certain sizes and weight limits. Too-large carcasses can break the rails that move them from one processing station to the next.
Boerboom said the cost of euthanizing animals falls on producers. It costs between $20 and $30 to euthanize and dispose of a hog, he said, and that doesn’t include indemnifying the farmer for the loss. Losses to meat producers may total more than $30 billion.
Tiffany worries that even after the threat from COVID recedes, consumers’ habits might permanently change. Even before COVID, American’s meat consumption faced challenges from health concerns and the recent popularity of plant-based “meat.” “We run the risk of de-stroying fundamental underlying demand [for meat] if we don’t get it back on the shelves quickly,” he told High Plains Journal.
‘A Band-Aid on a knife wound’
Boerboom said his operation employs 45 employees and raises about 325,000 pigs annually. The farm also raises corn and soybeans for feed, operates its own feed mill and owns an interest in a packing plant.
Like all farms and businesses, his operation has had to set up COVID safety procedures and social distancing measures, but he said the work of the farm has to go on. Boerboom said meat plant closures had “crippled” his farm, leaving 9,000 backlogged hogs with nowhere to go, worth about $1.26 million. Buying stations have been closed so that no farmers can drop off pigs. Last week, he sold some pigs for $41—a loss of $100 per head. While the Paycheck Protection Program has been helpful, labor costs represent only 5% of his costs, he said; the rest is overhead and feed. “We appreciate what Congress has done, but it’s not enough. It’s like a Band-Aid on a knife wound.”
Tiffany finishes 70,000 head a year with 50 employees. Usually, he sends 1,600 head of cattle a week to the processor. Today he is down to about 400, and said he “feels lucky,” even though he is losing about $250 per head.
Both Tiffany and Boerboom said they hoped the last week of April might be the “trough” of COVID impacts to their industry. Tiffany said he had heard that processors were running at 60% of capacity in the first week of May, as opposed to 55% the previous week. Both said the situation might not get back to normal until the fourth quarter, if then.
Integrated poultry market
Sensley pointed out one shortcoming of recent farm stimulus bills from Congress: they don’t even mention poultry producers like him, even though chicken is the most-consumed meat in America.
Poultry production is the most vertically integrated protein sector. Poultry farmers are contract employees of integrators, large processing facilities that supply farmers with chicks, food and supplements. All in-frastructure costs and any additional costs are borne by the farmers, but the prices they get are preset by contract. While this arrangement reduces risk and provides stability and predictability to producers, it gives integrators the market power to set prices. If retail chicken prices go up, it’s the integrators who capture the value. Sensley said he has had to switch from providing six flocks a year to four.
Excess chickens can be frozen more easily than pork or beef—but it’s the integrators, not producers, who have those freezing facilities, said Sensley. On the other hand, the integrators do contribute to the cost of euthanizing excess poultry, since the birds ultimately belong to them. With cattle, that cost falls wholly on the producers.
To increase their income streams, poultry producers diversify. Sensley’s farm, which normally produces 2.5 million birds per year, has a 650-head cow/calf operation. His employees also clean other poultry facilities and sell the fertilizer. Sensley said that because of recent dis-ruptions, his operation has gone from supplying six flocks a year to four.
Employment is a bottleneck
One of Louisiana’s three poultry integrators in Louisiana has said it is short 200 employees, according to Sensley—and that it might move if it cannot find new ones. Sensley wonders whether it might not be a good idea in a future stimulus bill to “let those workers know they are valued” by providing them with a bonus or other payment—even those who are temporarily unemployed. “The producers can’t fix the employee shortage,” he said. Sawyer agreed that hazard pay to attract more plant workers might be a good idea. Employment is an issue at beef and pork plants too.
Signposts to future
What will the future of the domestic meat-processing industry look like? Will it take anti-trust laws to decentralize the meat industry, or can changing consumer tastes and demands help bring that about? Can Americans ever go back to a domestic system in which a network of smaller processing plants serve nearby local markets and every family has its own butcher?
The popularity of direct-to-retail meat subscription services like Butcher Box, supported by Niman Ranch, is providing some signposts. Butcher Box’s subscription lists were temporarily closed as the COVID crisis surged and inquiries increased dramatically. Niman Ranch has just completed a small processing plant; its customers are experiencing neither price increases nor supply disruptions.
Neither are customers of Wahoo Meat Locker, “home of the fa-mous Wahoo Wiener,” in Wahoo, Nebraska. Wahoo is half custom butcher, half retail outlet. Customers can arrange to have a whole, half or quarter cow butchered to their precise requests. Wahoo Locker has direct relationship with hundreds of meat suppliers in a radius of hun-dreds of miles. They also have a retail shop where consumers can buy individual cuts of meat or have sausage made. “We process a lot of deer sausage in deer season,” said co-owner Conor Emswiler.
Wahoo Locker is not only not laying off, it is looking to hire to add to its current 30-plus employees, partly to help them stagger shifts to observe COVID-19 safety requirements.
Ben Gotschall, a fifth-generation rancher, is policy and research director for the Organization for Competitive Markets. Gotschall says a 1962 law is key to any decentralization of meat processing: the Talmadge-Akin Act, which allows the U.S. Department of Agriculture to empower state inspectors to perform the duties of federal meat inspectors for smaller, more remote meat processing plants. State inspectors must be trained to federal standards and are considered to be acting on the federal government’s behalf.
According to the National Association of State Departments of Agriculture, there are about 360 Talmadge-Akin meat and poultry facilities in nine states. The reasons for the act in the first place was the limited supply of federal inspectors. The issue of inspection capacity will remain if changing consumer tastes support more local operations like Wahoo Locker. But both technology and consumer awareness have advanced since 1962. After COVID-19, safety and cleanliness will be top of mind for consumers and no plant, state-inspected or not, can afford to neglect it.
In addition, 27 states have their own meat or poultry inspection programs covering nearly 1,900 small or very small establishments. These programs were authorized by the Federal Meat Inspection Act of 1967 and the Poultry Products Inspection Act of 1968. The states run the programs cooperatively with Food Safety and Inspection Service, which provides up to 50% of the funds for operating them, comprising about $65 million of the total annual FSIS budget. State-inspected meat and poultry products are limited to intrastate commerce right now, unless a state opts into an additional cooperative program. That might not be an issue for smaller operations that are only aiming at local business.
Specialty parts of the meat supply sector, like Wahoo Meat Locker and Niman Ranch, are ultimately supported by premium prices. The traditional wisdom was that these smaller companies would always re-main niche operations. However, their smaller, shorter supply chains that pass more value back to the producers may make them increasingly attractive as a permanent alternative to the current arrangements for those that can take advantage of them.
Labor conditions will also affect whether or not a more decentralized, distributed meat network can develop. Enswiler said Wahoo Meat Locker pays family-supporting wages and benefits, and its associates often make careers there. Some have been with the company since it was founded 21 years ago.
Whether or not a more decentralized system can absorb current volumes, and where that might leave the meat export market, are unanswered questions. Some parts of the cow are not valued by American consumers, but can fetch top dollar overseas.
All these changes, if they take place, will have to be supported by higher meat prices for Americans. But that’s something that will hap-pen anyway over the coming weeks and months. According to the FarmGate webinar, meat supplies for retail grocery stores could shrink by nearly 30% this Memorial Day, leading to retail pork and beef price inflation as high as 20% relative to prices last year.
As livestock prices have been collapsing, the National Cattlemen’s Beef Association predicts 2020 losses at $13.6 billion for U.S. cattle pro-ducers and the National Pork Producers Council predicts losses nearly $5 billion for U.S. hog producers.
“Protein producers should use this time as a catalyst to push for changes,” said Tiffany. “It all comes down to the plant.”