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Kay’s Cuts: COVID-19’s continuing chaos

Jon Condon, April 14, 2020

Editor’s note: This month’s Kay’s Cuts was written prior to Easter developments, including more US meat packing plant closures  

 

A monthly column written for Beef Central by US meat and livestock market commentator, Steve Kay, publisher of US Cattle Buyers Weekly

 

 

 

 

AS I write this, the April live cattle futures contract here in the US has closed down its 450-point extended daily limit for the third day in a row. The contract closed at US$88.32 per cwt, losing US$12.63 per cwt in one week.

In contrast, the contract settled on February 21 at US118.25 per cwt before it and all other contracts lost 20-23pc from then until March 16. All the contracts have now fallen well below their March 16 lows.

Such is the chaos and volatility that is sweeping livestock commodity futures markets here. An extremely negative equities market means that unprecedented volatility continues to plague the live cattle, feeder cattle and live hog futures markets. All three markets saw limit-down closes several days this past week and more are surely to occur.

As if the declines were not enough, what has especially unnerved analysts is the extreme volatility from day-to-day, week-to-week. For example, feeder cattle futures saw a US$25 per cwt rally from their lows then a collapse back to those lows in just two weeks.

It seems the markets are powerless to find anything positive to stop them from falling. That is understandable, because the US and global death tolls from the virus continue to soar and it is clear that an economic recession might already have started.

Demand destruction

The onset of recession already has livestock analysts and economists talking about “demand destruction” for beef in the coming months in the US. Everyone realises why that might occur, as beef is by far the highest-priced major protein. Retail beef sales (there are hardly any anywhere else) will suffer long before pork and chicken sales, as these two proteins are much cheaper.

The 2008-2009 recession saw beef sales suffer as many Americans bought more ground (minced) beef instead of higher-priced steak cuts. The same will occur from now on, especially as the unemployment rate continues to soar. Ten million Americans applied for unemployment benefits in just two weeks, the largest number in such a short time in US history. Federal government benefits announced in a US$2 trillion rescue package might help jobless people pay their rent. But they won’t be spending a penny of it on beef.

Grilling season questionmarks

The timing of all this could not be worse. The start of the grilling season in the US is about a month away. In past years, it marks the best two months of the year for retail beef demand. But analysts are already warning that retailers might feature beef less aggressively than in past years. This is because they will get more store traffic than normal because of the collapse in restaurant sales. So why lower their beef prices?

Another question surrounds how much beef Americans will grill in 2020, versus prior years. Social distancing means Americans will not be able to gather at barbecue parties as in previous years. I know of people who say they always buy more beef for grilling than just for themselves because they invite friends over to enjoy a grilled steak. This suggests that on a per-person basis, there could be a cutback in how much beef is grilled. Consumers might even switch to grilling more hot dogs and sausages, which they do anyway on other major holidays.

Extreme volatility has permeated the live (grainfed) cattle cash market and the wholesale boxed beef markets as well. After declining US$10 per cwt in four weeks, cattle prices had a huge US $9.50 per cwt rally the week before. But they gave most of it back the week before Easter. Boxed beef cutout values had a record rally in mid-March, with the Choice cutout gaining US$45.61 per cwt on the spot market. But it gave up more than US$32 of this gain in the week prior to Easter.

US meat and poultry processors meanwhile act on several fronts to protect and reward their plant workers. JBS USA suspended slaughter operations at its Souderton, Pa., beef processing plant for the first two weeks of April (see yesterday’s update, click here). This came after several senior management team members displayed flu-like symptoms.

Cargill and Tyson Foods joined other companies in the food industry to offer temporary pay increases or one-time bonuses (US$60 million for Tyson workers) to encourage and/or thank employees for working through the COVID-19 crisis.

This came as some employees at Tyson and several other companies complained they were not being sufficiently protected from exposure to the virus. This has led to concerns that packers will reduce their slaughter levels because of workers’ health concerns related to possible exposure and because of tumbling boxed beef cutout values.

Slowdowns

Workers’ concerns have not yet led to production slowdowns of any significance in beef plants. But should plants be forced to take more drastic measures, weekly production could plummet.

The New Zealand government three weeks ago said all meat plants in the country could only operate if they spaced every worker in the plant two metres apart. This forced beef plants to operate much slower slaughter and fabrication lines and has cut production in plants by 20pc to 50pc.

Such an extreme move in US beef plants would have an enormous impact on the beef supply, on live cattle prices and feedlot marketings and on carcase weights. Average carcase weights remain far above last year’s levels and would stay that way if marketings slowed down. It would raise beef prices to retailers, which in turn might cause even more demand destruction.

 

 

 

 

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