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Ag economists weigh in on COVID shutdown

Progressive Cattle Editor David Cooper Published on 26 March 2020

Nationwide response to the COVID-19 pandemic continued to shake segments of the entire beef industry near the conclusion of a historic March 2020. Consumers continued to purchase food commodities off grocery shelves, while ag economists, like their counterparts on national economics, all began preparing for the reality of a recession.

With much of the nation facing social distancing and stay-at-home restrictions from governors and the U.S. Centers for Disease Control (CDC), the consumer-driven economy is shifting dynamics of how we obtain commodities such as beef and dairy.

Meanwhile, futures prices have taken a hit, as have fed cattle prices – going in the $105 to $112 live range – in spite of the run on grocer aisle and meat shelves. The cutout value on boxed beef saw Choice boxes jump $43.86 higher the week of March 20, with Selects not far behind in a jump of $43.18.

As for what looms ahead, it doesn’t look good on a national scale, according to Lance Zimmerman, CattleFax analyst, writing in a March 20 report.

“The futures market is concerned with how food service losses translate to beef demand. This response is new to everyone, and the market discounts uncertainty. Stronger retail sales will make up for some of the food service declines today, but a recession is imminent.

“Furloughs and layoffs will shake consumer confidence and erode beef demand later. The futures market is pricing in a worst-case scenario early. Food service sales will remain low through the spring and early summer – challenging beef demand later in 2020. It is too soon to know how much of that sales loss can be absorbed by grocery stores.”

Strong beef prices over the past few years have been driven by a strong economy and healthy consumer spending, explained David P. Anderson, professor and economist with Texas A&M AgriLife Extension. The COVID disruption halts that growth, with jobless claims rising suddenly and consumers literally being forced to hold back.

“The question is, ‘Is this really a one-quarter, GDP slowdown type of quarter?’ That’s going to depend on consumers’ ability to spend money, or are they going to be too afraid? Those consumers with a job, if they get back up to going out and buying things, that brings all those jobs back and we have a short-lived recession. I’m hoping that’s what we do.”

Meat industry officials, along with those representing other ag products, spread the word through the month that American shoppers do not face a shortage of food supplies. Milk, poultry and beef supplies remain viable and steady. The issue relates to distribution. With restaurants restricted to take-out, and schools at all levels closed, deliveries to those institutions are down. The industry must now realign its distribution network to get to grocers and empty shelves.

That also creates heavy demands on logistics. “We had restaurants that booked supply in beef, and grocery stores had planned to run features, or booked supplies on what they would need. In all the classical examples, we would have a run on the bank, now it’s a run on the grocery store.”

Anderson says the price declines on cattle would not be outside the norm for this season before the virus hit. The U.S. is producing 6% more beef this quarter than last year during the quarter, he said. “If we looked at fed cattle prices, even the futures market, fed cattle prices were declining in February. I think it’s really supply driven. … If I apply a little bit of economics, and elasticity in demand, and use a 5.5% percent increase in supply, it will be 6%, and I come up with a fed cattle price at $113. I think those prices we saw in early March were even based on supply.”

Questions remain for when the distribution network catches up and delivers greater supplies to grocers. Will the cycle change back just as suddenly? And will the supply chain be able to adjust for price-conscious consumers who may have been hit by job losses in the coming weeks? “I think this is temporary and represents spot buying. As grocery stores get the pipeline refilled, prices could be coming down,” Anderson explained.

“Longer term, I’m pretty optimistic on the cattle side. Cyclically we’re on our peak of production. We get to the fall with fewer cows, we’re going to have fewer calves on the market. I think we’re going to work through very cheap feed costs, a record crop from plantings, and both sides argue for better calf prices than we had a year ago.”

As for the futures markets, Kevin Good of CattleFax said the uncertainty of the times is going to test some patience. Cattle placements into feedyards will go down as producers hold to see what happens on price stability. 

“Time is needed for the markets to digest the extent and further potential economic and demand damage done because of the coronavirus,” Good wrote in a CattleFax update. “Once the markets feel comfortable with the timeframe needed for the virus cases to subside and commerce to regain a more normal pattern, prices will be more predictable. With the continued uncertainties, placements into feedyards have and will run well below year-ago levels, leaving placed against supplies more manageable in the late summer/fall timeframe.”  end mark

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