The last two months have been a roller coaster of shifting food demand, tanking farm-level prices, and closed processing plants as a result of COVID-19. As ranchers, feedlot operators, processors, and food retailers navigate the pandemic, tensions are high as some points in the value chain receive top prices while ranchers are hurting.
Jayson Lusk, agriculture economist, professor, and department head in the Department of Agricultural Economics at Purdue University says that the dynamic has shifted to basic supply and demand dynamics for the packers. Closures and reduced shifts because of sick or absentee staff means the demand for fed cattle has dropped. Less processing means less supply of finished beef to head to retail where consumers are stocking up. Prices have followed the demand up and down, depending on where you’re at on the supply chain.
But what goes up, what must come down, so what can we expect as plants come back online? And are more smaller-scale plants part of the solution to both the processing backlog and the price ranchers are paid for cattle? (Story continues below the video)
Lusk says that there are a few things to consider on both prices and processing capacity. On the packer side, it’s important to remember that those prices that packers are being paid don’t equal profit. There are significant costs associated with processing, and those costs have increased as plants sit idle and as plants upgrade health and safety for employees.
If you look at stock price as a proxy of profitability, for example, both Tyson and JBS stock prices have taken a hit recently, Lusk says.
As for the call for more, smaller-scale plants, Lusk says that it’s important to look at why we don’t have more now. What are the barriers to entry? What can we do to lower those barriers? Regulations are a barrier, but often it just comes down to cost — a smaller plant has to spread the same inspection costs and infrastructure costs over fewer animals. Can they recoup that with higher prices?
But if the call for changes to processors is about resiliency in the food system, perhaps that’s worth the added cost, Lusk says. But is a medium-sized plant more or less risky for humans? This could be where automation comes in. Adoption in poultry plants has been faster because of the uniformity of the protein.
Listen above for more from Lusk on packer competitiveness, regulation, and the potential for global protein demand, post-COVID-19.