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Resilience of U.S. Cattle and Beef Sectors: Lessons from COVID-19

Resilience of U.S. Cattle and Beef Sectors: Lessons from COVID-19 1IntroductionThe COVID-19 pandemic severely disrupted the U.S. red meat value chain. In the beef sector, short-term processing plant closures, worker scarcity that continues today, higher meat prices, and occasional rationing at retail outlets followed the first wave of retail food service and restaurant impacts. However, it could have been worse. This article describes and explores ways in which the beef value chain incentivized and rewarded agents whose actions reduced the degree of disruption from COVID-19 and identifies resiliency opportunities learned from within and outside of the beef chain. Some of these resilience-increasing signals and actions were subtle and others were obvious. We document these signals and actions to better prepare for another similar set of disruptions and to facilitate more strategic thinking about options to mitigate future disruptions. Our logic is that if more supply chain participants (e.g., producers, marketers, processors) are in a position to recognize and respond, then they may at least partially mitigate the disruptions. We refer to these market signals and optimal responses as “lessons.” We acknowledge that we have the advantage of hindsight and realize that industry participants were operating under enormous uncertainty about the severity and length of the disruptions and the governmental responses to the crises.2Prior WorkIn addition to being a massive economic sector, the cattle and beef industry is immensely complex, diverse, and dynamic (Schroeder, Coffey, and Tonsor 2021). While supply chain disruptions from COVID-19 are new, there has, of course, been research on the impact of agricultural supply chain disruptions from infectious animal diseases that impacted a food input (e.g., Elbakidze et al. 2009; Pendell et al. 2007, 2015; Schlenker and Villas-Boas 2009; Schroeder et al. 2015), as well as from exogenous trade disruptions (e.g. Balistreri et al. 2018); however, in those cases, the vertical structure of the supply chain was not impacted, only the supplies of products along it.Summaries of the literature on agricultural vertical supply chain coordination may be found in Barry, Sonka, and Lajili (1992), Moschini and Meilke (1992), Hennessy (1996), Lawrence et al. (1997), Royer and Rogers (1998), Cotterill (2001), Goodhue and Rauser (2001), Sexton and Lavoie (2001), and Martinez (2002). Summaries of the literature on vertical supply chain coordination for cattle specifically may be found in Crespi and Saitone (2018).COVID-19 focused the agricultural economics literature on something that researchers had neglected: disruptions along an entire value chain. Even general discussions about how the food supply chain might react under stress (like, for example, Chopra and Sodhi 2004) were mostly absent in the published agricultural economics literature prior to COVID-19. Many initial papers on the impact of COVID-19 on the beef industry focus on the human aspect and the high rates of infection tied to beef packing plants themselves (Saitone, Schaefer, and Scheitrum 2021; Taylor, Boulos, and Almond 2020). In a short time, however, more and more studies emerged looking at broader impacts. There is now a large and growing literature on the impact of COVID-19 on the entire value chain.A February 2022 U.S. Department of Agriculture Economic Research Service working paper by Vaiknoras et al. reviewed almost forty published reports and data sources. The report also documents the impact of COVID-19 from farms and packing plants to wholesale and retail outlets. Of relevance to our study, Vaiknoras et al. (2022) mention a slight uptick in beef slaughter prior to the April-May shutdowns of plants and a slight uptick in meat in cold storage prior to the closures. Another valuable source, Martinez, Maples, and Benavidez (2021) describe the impact COVID-19 had on each section of U.S. cattle production. Germane to us, it highlights a significant slowdown in feeder and stocker cattle placements into feedlots during COVID-19. Lusk, Tonsor, and Schulz (2021) showed how meat and livestock prices and processing volumes were extraordinarily volatile during COVID-19 and explained how this affected marketing margins and price spreads. They document that at the worst of slaughter and processing disruptions, beef and pork packing each lost 40% of total capacity. Hobbs (2021) explores supply side disruptions to the food chain including labor shortages, disruptions, and slowdown at border crossings. Peel (2021) documented the dual disruptions in the beef supply chain that prolonged product availability, initiated by retail shutdowns and followed immediately by impacts to labor, which crippled processing plants. Hayes et al. (2021) describe the impact of the pandemic on pork, turkey, and eggs markets and identified the price signals that hog producers had to sell close-to-market-weight hogs prior to the shutdown. A small number of hog producers were able to sell, but many could not, leading to euthanization of pigs (Hayes et al. 2021). Ultimately, the number removed was modest relative to expectations at the height of the pandemic (Johnson et al. 2021). We are not aware of any need to euthanize cattle, but additional challenges have persisted. Marani et al. (2021) estimate the annual probability of another extreme pandemic with associated disruptions at 1–2% per year. This means that there is a very high probability of a new pandemic in an eighty-year lifespan.One implied objective of this growing body of literature is to develop an understanding of how our processing industries can mitigate future similar disasters through increased supply chain resiliency. Chenarides, Manfredo, and Richards (2021) looked to the supply chain management literature to evaluate the U.S. food supply chain challenges. While they echoed the literature’s consensus of a trade-off between supply chain efficiency and resiliency, they emphasize that to understand and address these challenges, we would be well-served to perceive the supply chain pinch points and solutions (including policies) through the dual lens of agility (the ability to respond rapidly) and flexibility within and between supply chains. Using a real-options approach, they demonstrate the value of flexibility under varying uncertainty and switching cost regimes, stating, “The option to switch, and to maintain supply-chain flexibility, has considerable value.” The question our U.S. beef supply chain and policymakers must contemplate, then, is whether and which investments in cattle feeding, beef processing, and the downstream activities of the value supply chain improve flexibility and agility sufficiently to justify their costs. For all our speculation, this has not been demonstrated.3Impact of the Pandemic on Cattle and Beef IndustriesThere has historically been a great deal of research on coordination and concentration along the beef supply chain. Crespi and MacDonald (2022) discuss much of that literature in detail, reporting how concentration of the four largest steer and heifer slaughtering firms has grown from about 36% of industry value in 1980 to 85% today. Because of the significance of fixed costs to the large firms, cost is highly sensitive to even small swings in supply anywhere along that chain. Costs of transporting cattle across the country to meet production needs of course does happen, but transport is costly for such large animals that also suffer from “shrinkage” on long trips, adding to costs. We can mostly, though not entirely, describe livestock markets as regional. Hence, a plant closure due to an infectious outbreak (human or animal) is immensely disruptive to the entire supply chain, which must absorb animals. Packers have an incentive to maintain mostly nearby supplies for their plants and any given (large) plant today is processing between 6 and 8% of all U.S. beef (Elliott 2020).Figure 1 shows how beef packing plant shutdowns affected steer and heifer slaughter as well as total cow slaughter. We make comparisons to 2019 to account for seasonality and to measure against recent, and more normal, market fundamentals (Bina et al. 2022; Hayes et al. 2021; Lusk, Tonsor, and Schulz 2021). Steer and heifer slaughter were up slightly at the beginning of March 2020, rose notably by the end of March, and then fell substantially before rebounding to 2019 levels by the end of June. However, the shutdowns did not impact cow slaughter. We explore, in our lessons learned, some possible reasons for these observations.Figure 1:Percentage change (‘20 vs. ‘19) in FI cattle slaughter, weekly. USDA actual slaughter under federal inspection report (SJ_LS711), complied by the livestock marketing information center. FI, federally inspected.Figures 2 and 3 illustrate the impacts on select values across the beef chain. Figure 2 uses monthly data. Wholesale values spiked in May 2020, retail prices also rose at this time, and both prices fell as beef production recovered.The USDA Economic Research Service farm-wholesale-retail meat price spread series is widely used for informing producers, retailers, food service, consumers, analysts, consultants, investors, academics, government agencies, market regulators, and policymakers about livestock and meat price relationships. Schroeder et al. (2019b) and Lusk, Tonsor, and Schulz (2021) provided definitions, measurement details, and interpretation of price spread data.Figure 3 uses weekly comprehensive boxed beef values and cattle prices and shows a similar trend with wholesale prices peaking in mid-May. The two measures of farm-level prices increased slightly in January and February before declining to levels at or below prior levels as plant closures occurred. Although it is difficult to see in the chart because of the enormous increase in boxed beef values, there was a reduction in live cattle prices. All beef-type steers and heifers, weighted average of all grades and sales types, traded at $124/cwt in January 2020, which fell to $103/cwt in the first week of May 2020.https://mymarketnews.ams.usda.gov/viewReport/2700.It is notable that the wholesale level primarily captured the increase in beef prices, which did not transmit to the farm value. We expand upon this further in our lessons learned sections.Figure 2:Monthly retail, wholesale, and farm values of choice beef. USDA economic research service meat price spreads, complied by the livestock marketing information Center.Figure 3:Weekly live cattle prices and boxed beef values. USDA-AMS National weekly fed cattle comprehensive. USDA-AMS National comprehensive Boxed beef cutout – all fed steer/heifer sales (LM_XB463), complied by the livestock marketing information Center.Figures 4 and 5 use 2020 price data to illustrate the futures market reaction as COVID-19 took hold in the United States. In Figure 4, feeder cattle futures prices trended down from late January 2020 onward, hitting a bottom in Mid-March and again in early April. Prices recovered by June but did not regain their January levels. Martinez, Maples, and Benavidez (2021) identify that the cash prices of feeder cattle at various points across the United States had a similar pattern to the August futures, suggesting that no region was insulated from the market downturn. Figure 5 shows live cattle futures for the same period. Here again, prices fell beginning in late January, bottomed out in early June, and did not return to their January highs.Part of this may be due to seasonality. Live cattle prices tend to be highest in springtime.Figure 4:Daily feeder cattle futures prices by contract month. Chicago mercantile exchange (CME) group, complied by the livestock marketing information Center.Figure 5:Daily CME live cattle futures prices by contract month. Chicago mercantile exchange (CME) group, complied by the livestock marketing information Center.The cash and futures price signals reflected the expectations and realities of the COVID-19 pandemic and its disruptions. Prices are how markets transmit information along value chains and serve as the backdrop and rationale for exploring the lessons we can take from the experiences of our cattle and beef supply chains.4Lesson #1 – Price Signals Potentially Increase AgilityPrices are coordinating signals. In February and early March 2020, as COVID-19 concerns were mounting, futures market participants bid down prices for live animals. It seems likely that they did this because they were concerned about the possibility of plant closures. One of the functions of futures is to anticipate the worst-case scenario so that market participants get a signal to respond and in so doing moderate the ultimate price impact (Peel 2019). The first reported U.S. COVID-19 case was on January 20, 2020, and given the densely packed, cold, and damp conditions in packing plants, it was somewhat predictable that these plants would encounter COVID-19 related problems (Saitone, Schaefer, and Scheitrum 2021; Taylor, Boulos, and Almond 2020). Even while plants were running near capacity and beef demand was strong, futures prices for April and June delivery fell well below cash prices. The strong (positive) basis provided a signal to producers to market cattle early. By comparison, a weak basis, as in 2019 (for the April contract), was a signal to delay marketing, with the idea that the basis was likely to return to a more normal level.Figures 6 and 7 show basis patterns using the negotiated 5-Area cash price for the April and June contracts. The very unusual size of the 2020 basis is clear, especially for the April contract. We do not know if producers saw and responded to this opportunity (or warning, in this case), but we do know that slaughter levels picked up slightly in March as described in Vaiknoras et al. (2022). If the large positive basis had encouraged marketings, then meat processors would have scheduled fewer slaughter weight animals to hit the market during the shutdown. This embedded agility—the coordinating signals in cash and futures prices—improved the resilience of the system by shifting inputs between the farm and processing level. Arguably this insulated cattle producers’ prices from a more negative response as the pandemic developed.Figure 6:Weekly 5-area live cattle basis, April contract. Chicago mercantile exchange (CME) group and the USDA-AMS 5 area weekly weighted average direct slaughter cattle (LM_CT150), complied by the livestock marketing information center. Basis = cash price–futures Price.Figure 7:Weekly 5-area live cattle basis, June contract. Chicago mercantile exchange (CME) group and the USDA-AMS 5 area weekly weighted average direct slaughter cattle (LM_CT150), complied by the livestock marketing information center. Basis = cash price–futures Price.A negotiated purchase, also known as a spot market purchase, is when the buyer and seller determine the price and schedule cattle delivery to the plant within 30 days of the agreement. As part of Livestock Mandatory Reporting (LMR), beef packers report negotiated purchases as scheduled for delivery in either 0–14 days or 15–30 days.https://www.ams.usda.gov/sites/default/files/media/LMRCattleUserGuide.pdf.The U.S. Department of Agriculture’s Agriculture Marketing Service summarizes and publishes this information, head counts, and average prices on a national basis in the National Weekly Fed Cattle Comprehensive report. Purchases within the 0–14-day delivery window are much more common than the 15–30-day window. Nationally, 85% of domestic negotiated purchases over the 2014–2018 period was 0–14 day and 15% were 15–30 day delivery windows (Schroeder, Schulz, and Tonsor 2019a) and in 2019 these levels were 80 and 20%, respectively (Figure 8). From the week ending 4/12/2020 to the week ending 4/19/2020, the share of 15–30-day negotiated purchases fell from 30 to 6% and was 0% for the first three weeks of May 2020 while packing plant disruptions were at their worst. Packers could have only bought negotiated cattle for 15–30-day delivery, and the feed yard would have incurred the additional cost to hold the cattle. Instead, it appears packers did prioritize purchasing the most market-ready cattle first and scheduled them for delivery within 0–14 days.Figure 8:Weekly shares of 0–14 day and 15–30 day National negotiated purchases. USDA-AMS National weekly fed cattle Comprehensive.The weekly negotiated purchase basis volume, as a percentage of the total purchase volume, did increase above 30% in late-March 2020—an indication that some producers did take advantage of the strong basis levels (Figures 6 and 7). The negotiated purchase percentage fell to less than 10% during the first three weeks of April 2020 as stay-at-home orders and market uncertainty impacted cattle buying behavior, and possibly, selling behavior. The negotiated share rebounded by mid-May and even increased into June. Packers could have bought zero negotiated cattle if they were truly the marginal or residual supplies in the market as these would have been the first cattle dropped from slaughter and the last cattle brought back once packing capacity was available. Packers continued to buy negotiated cattle, a sign that buyers and sellers coordinated to prioritize slaughtering the most market-ready cattle.5Lesson #2 – Wholesalers Used the Theory of StorageAccording to the theory of storage, adjustments in inventories can stabilize prices in response to shocks, and the degree to which storage is an effective mitigation of price shocks depends on the storage level (Peel 2021). Karali and Thurman (2009) show, using lumber futures, that the impact of information shocks—something akin to the impending COVID-19 crisis—smooth price changes over time. Beef in cold storage typically exhibits predictable, seasonal trends. Peel (2021) explained that, in normal conditions, cold storage consists primarily of domestic lean trimmings that increase going into fall and winter to support ground beef production the following summer. The increase in cold storage happens from the higher cow culling period during fall.Figure 9 illustrates the stock of beef in cold storage by month in 2020 relative to the same month in 2019. Boneless beef stocks began the year at a relatively low level and then increased rapidly, going from 95% of 2019 levels in January to more than 110% in March and April. Boneless beef cold storage stocks ran inverse to futures prices. It is plausible that speculators recognized the possibility of plant shutdowns and responded by storing wholesale beef primals. These surplus stocks were drawn down by August. Had this additional beef not been available, then the high prices and occasional stock outs that happened in May and June would have been exasperated. However, we note that cold storage stocks of beef are low relative to fresh beef production, so the moderating impact here was small. Tonsor, Schulz, and Lusk (2020) estimate that cold storage stocks of beef, pork, and chicken on March 31, 2020, corresponded with about 10 days of normal consumption.Figure 9:Percentage change (‘20 vs. ‘19) in monthly beef in cold storage. USDA-NASS cold storage, complied by the livestock marketing information Center.As Peel (2021) notes, cold storage was unable to substitute for the retail shortages of beef because cold storage is the “… wrong set of products and because the quantity of cold storage holding is small.” So, while beef cold storage stocks pre-COVID-19 were not intended to absorb significant supply shocks for retail-bound beef products, this link in the U.S. beef supply chain infrastructure has potential to provide flexibility and agility downstream from processing capacity shocks. Again, we do not know what drove the actions of the individual wholesalers, but in hindsight, it was profitable to wholesalers, avoided even larger problems at the retail level, and therefore provided a temporary cushion. In the search for future resiliency-enhancing innovations and investments, cold storage expansion investments and flexibility merit consideration.6Lesson #3 – Diversification in Feeding is a Flexibility StrategyAs Martinez, Maples, and Benavidez (2021) described, producers of calves and feeder cattle can hold animals when producers believe a price decline is temporary. This is, in part, due to the outdoor nature of this part of the value chain and producers’/ranchers’ ability to use a variety of feed resources. Figure 10 uses the USDA-AMS National Feeder & Stocker Cattle Summary (SJ_LS850) and compares the weekly number of feeder and stocker animals sold during 2020 relative to the same week in 2019.Note, this is a voluntary report and does not include every transaction.By the end of March and in early April, sales were less than 40% of year-ago levels. Given the low cash feeder cattle prices described in Martinez, Maples, and Benavidez (2021), the reason sales fell so dramatically is clear—the owners of these animals used pasture or harvested feed to hold animals rather than to flood feedlots with animals that were not needed and where space was scarcer. Feedlot owners were able to modestly slow growth by changing diets and avoiding the use of growth promotants as described in Vaiknoras et al. (2022). Euthanasia in cattle was avoided even though national slaughter capacity was well below normal. One reason for this, among many, was that fewer feeder cattle were being placed in yards.Figure 10:Percentage change (‘20 vs. ‘19) in weekly feeder & stocker cattle receipts. USDA-AMS National feeder & stocker cattle summary (SJ_LS850), complied by the livestock marketing information Center.The SJ_LS850 report breaks out feeder cattle trade volume through three channels―traditional auction facilities, direct trade, and video/internet sales. Auction trade typically accounts for most of the total volume. July tends to see the smallest movement through auctions. Many of the summer months (June, July, and August) tend to have smaller auction volumes. Direct sales have generally seen stronger volumes in the first half of the year and are progressively smaller in the fourth quarter. Video auctions have seen large volumes in July and August and relatively stable numbers through the rest of the year (Daily Livestock Report 2021a). In 2020, all sale types fell dramatically in March and direct sales surged in May (Figure 11). As part of the food supply chain, the Trump administration deemed livestock auctions an essential business and allowed them to remain open. However, major changes occurred in how they could operate. State governments provided guidance on protective measures. Some sales were postponed or canceled, others occurred as originally planned, and some auctions went forward, but with bidding by video, internet, or phone only, or through a hybrid approach.Figure 11:Percentage change (‘20 vs. ‘19) in monthly feeder & stocker cattle receipts by type. USDA-AMS National feeder & stocker cattle summary (SJ_LS850), complied by the livestock marketing information Center.An important dimension in the discussion of pasture and cattle feeding is the use of federal lands for grazing. Only 6% of the two billion acres of land in the United States is pasture—21% is rangeland extensively owned by the federal government, 38% of which (approximately 155 million acres) the government provides to mostly western ranchers for forage. Although rangeland may represent a small percentage of national forage the share is much higher for western ranchers who obtain more than half of their summer forage and nearly 20% of their annual forage from these lands (Crespi and Saitone 2018, p. 318). In 2019, the Bureau of Land Management (BLM) authorized 8.05 million “animal unit months” (AUMs) for ranchers on these rangelands; and, in 2020, BLM increased forage authorization by approximately 5%–8.44 AUMs.Source: U.S. Department of the Interior, Bureau of Land Management (2021). AUM stands for Animal Unit Months. 1 AUM is pounds of dry forage needed to maintain a 1,000 lb cow and her calf for one month. An increase in AUMs corresponds to opening the rangelands for longer and/or allowing more cattle.Forage varies from year to year, and while the BLM reports availability and permits regardless of use, they report the number of permit applications changed less than one-half of a percent from 2019 to 2020, implying that the same ranchers using rangeland in 2019 would have had potentially 5% more forage at their disposal in 2020.As we look for opportunities to improve the cattle and beef processing industry, it is illustrative to draw comparisons with the pork industry. We take stock of the additional flexibility cattle producers have to ‘hold’ animals in feedlots and forage programs that the pork industry does not have. Commercial producers raise hogs indoors and run a narrow edge on animal weights. This may explain why animal welfare concerns were so much worse in the pork sector, with a few exceptions.Later we explore producer-ownership of processing. We argue that pork producers who owned processing facilities were likely better off in terms of prices received.The lesson here, with the benefit of hindsight, is that feedlot placements should have and could have declined even more to avoid declines in feeder cattle prices. In this sense, we missed an opportunity of built-in system flexibility to bolster resiliency.7Lesson #4 – Processing Susceptibility to Labor Shortages is not UniformIn the after-light, there is much attention directed at potential solutions to what was arguably the Achilles’ heel of beef processing stability―labor. Whether due to worker illness or concerns for risk-increasing conditions in plants (Luckstead, Nayga, and Snell 2022), the importance of labor and its contribution to the U.S. beef supply chain was never more on display than during the height of COVID-19 disruptions. Coming to terms with two yet-unanswered questions can move us towards greater resiliency: (a) Does plant size (in capacity terms) have a differential effect on disruptions from labor shortages? and, (b) Is there an optimal way to design or redesign plants utilizing multi-species models to reduce susceptibility to labor shortages?Plant size is a scrutinized factor in susceptibility to shocks like COVID-19, cyberattacks, fires, and natural disasters. A critical dimension of plant size is labor. Labor in the context of COVID-19 is paradoxical, as noted in Hobbs (2021). On the one hand, labor-intensive processing systems were especially vulnerable because of the working conditions and proximity of laborers in the plant. On the other hand, labor in meat processing exhibits scale economies, and larger firms generally can utilize labor more efficiently. This means that labor-intensity is a positive feature in terms of output. Bina et al. (2022) investigate impacts of COVID-19 on beef processing capacity and found limited statistical evidence of plant size and regional reliance on processing as a contribution to slaughter declines.The question of whether plant size is a factor in reduced capacity or shutdowns has not settled, nor, to our knowledge, studied widely.In an investigation of market power, Saitone, Schaefer, and Scheitrum (2022) examined the human impact of market structure during COVID-19 by investigating what happened when a large firm, Tyson, mandated immunization. They concluded, “the mandate resulted in approximately 35,000 additional vaccinations across the U.S. This increased vaccine uptake avoided thousands of COVID-19 infections and almost 75 COVID-19 deaths with an associated public health savings of approximately $45.4 million” (p. 18.), implying there is a possibility concentration could have a positive impact on reducing COVID-19’s spread.In a Proceedings of National Academy of Sciences study, Taylor, Boulos, and Almond (2020) investigated the incidence of COVID-19 infections among livestock and poultry processing facilities and found that the largest plants, controlling for species, exhibited the greatest transmission of COVID-19 relative to location county, whereas small-and medium-sized plants did not significantly impact county-level transmission rates. Furthermore, though they studied poultry plants only, they found a significant and positive relationship between line processing speeds and transmission, noting that county-level transmission rates were nearly double in counties with plants that received line speed waivers and operated at higher line speeds. Taylor, Boulos, and Almond (2020) explained why we might expect larger plants to be more susceptible to spread of disease and, by extension, to labor shortages—the larger plants, besides encompassing more activities and people, have larger physical spaces that are louder and require more shouting and more distance for workers to cover in reaching their workspace, which increases workplace interactions. Yet we do not fully understand the extent to which this renders larger plants more susceptible to shutdowns and disruptions and therefore less resilient than smaller plants. What we do know is that when a single large plant shuts down, it has a significant impact on our system’s processing capacity and capabilities.Plant type is a second potential area in which to identify opportunities for flexibility. The data in Figure 1 shows more impact on steer and heifer slaughter than cow slaughter. In this sense, cow plants showed more resilience than steer and heifer plants. The Daily Livestock Report (2021b) provides possible reasons for cow plant resilience. They discussed the way cow plants have handled labor scarcity since the fed-cattle plants reopened, but we can apply that logic to explain the difference in shutdowns as well.By virtue of their size (multiple shifts, Saturday work, and overall complexity) fed cattle plants are more vulnerable to the tight labor market. These plants are far more difficult to run when labor is scarce, and when the plant managers do not know how many people will show up for work in a given day. It is difficult to schedule cattle for slaughter when you do not have a reliable work schedule plan. Also, some of these plants we think need to run at far higher processing capacity than some of the smaller, single shift cow processing plants.The report does acknowledge that cow plants harvest far fewer cuts than fed cattle plants. The resilient performance of cow plants during the crisis in fed cattle plants as shown in Figure 1, as well as the better performance in dealing with labor uncertainty and labor availability since then as described in the Daily Livestock Report (2021b), suggests that the optimal design of plants may be changing towards smaller plants with some built in redundancies or slack. The announcement of several beef packing plant expansions and new facilities with capacities well below many of largest existing plants (NAMI 2021) has further supported this idea. Hobbs (2021), Lusk, Tonsor, and Schulz (2021), and Bina et al. (2022) described a cost versus resiliency trade-off, and these authors tended to favor the larger plants for reasons of scale and scope. Therefore, it is too early to draw strong conclusions on this issue.8Lesson #5 – Diversification into Further Processing Improves FlexibilityIsley and Low (2022) conduct an econometric study of the firm and market characteristics that positively influenced the survivability of U.S. meat processors between 1997 and 2020. Their results highlight two elements that can inform our thinking about plant-level characteristics that improve resiliency. First, plant-level factors (size, age, ownership, scope) are a better predictor of survivability than market-level factors (concentration, wages, prices). This corroborates the findings of Anderson et al.’s (1998) work on exit from cattle slaughter. Second, processors that had downstream activities, such as a wholesale or retail meat market, had significantly higher probability of survival. Specifically in medium-sized processors, defined as having 50–249 employees, survivability is higher when the plant engages in wholesale marketing. Small plants with 10–49 employees are 40% more likely to survive when they have the capability to enter retail markets. A driver of this result is an increasing preference among consumers for beef with extrinsic and intrinsic attributes.The Isley and Low study (2022) did not explicitly model COVID-19 disruptions, but their results translate to inform future investments. It makes intuitive sense that diversifying the source of income for meat firms enhances flexibility and agility into downstream markets and should improve the resiliency of the firm and ultimately the system. Anecdotally, during the March 2020–August 2020 period of COVID-19, we observed that retail grocers with meat repackaging capabilities were better off and avoided stock-outs because of their investments in this type of flexibility. The question remains: where and what type of added flexibility in processing and packaging will pass the cost-benefit test? Nationally, hundreds of meat processing establishments invested in flexibility as part of their value differentiation, presumably as a profit-enhancing outcome. Policies to improve system flexibility should consider the role diversification of processing into different markets plays in normal and stressed market periods.9Lesson #6 – Distributed Capacity Alone is Not a Substantial Driver of ResiliencyBy way of the American Rescue Funds Program, the USDA made explicit its awareness of the impacts of concentrated processing on the U.S. food supply chain, including on farmers and ranchers.https://www.federalregister.gov/documents/2021/07/16/2021-15145/investments-and-opportunities-for-meat-and-poultry-processing-infrastructure.USDA committed $500 million in infrastructure, capacity, and diversification investments, with a stated focus on “strategic investments in the addition and expansion of small-and medium-sized processing facilities. …” Critics of making investments in smaller plants argue that economies of scale are significant and important to meat processing, and to force the system to a more diverse processing ecosystem would lower system efficiency, increase costs, and may not improve flexibility, agility, or resiliency at all. They posit that the result would be smaller, economically fragile plants and firms that would, when the market sustains tight margins, be acquired by the largest processors or abandoned. They further argue that forcing distributed capacity could weaken, not strengthen, our beef processing system. By extension, the implication is that long-run equilibrium for commodity meat products is a highly concentrated animal processing industry.The evidence to support this view is substantial. Crespi and Sexton (2004) simulated the impacts of different capacity scenarios and transportation on purchases of cattle based on actual purchases of cattle from feedlots in the Texas Panhandle. Using firm-level data, they accounted for plant capacity, travel distances, transportation costs, and procurement behaviors along with a variety of plant-and region-specific factors. They conclude that impacts of capacity would not have greatly changed the purchasing patterns of the packers in the Texas Panhandle region at that time, though the impacts would have slightly increased bidding. Even removing 20% of capacity did not greatly alter the procurement patterns, which tended to be regional. Their study did not examine the impact from plant shutdowns but is useful in thinking about how capacity redistribution affects coordination between producers and processors.More theoretical and nascent empirical work specific to COVID-19 has recently emerged. Azzam (2022) created a theoretical model of dominant firms facing a competitive fringe of smaller processors and concluded that adding more plants would lead to reduced disruptions unless market share were split between the two firm types and dominant firms price competitively. Azzam and Dhoubhadel (2022) and Lusk, Tonsor, and Schulz (2021) found that COVID-19 disruptions caused margins that could be consistent with a perfectly competitive market structure. Deriving a Cournot model to resemble the U.S. beef industry today, Ma and Lusk (2021) perturbed their model with exogenous shutdowns under a variety of firm and industry-size scenarios and find that price spreads increased when there was an exogenous, industry-wide risk of shutdown, even when no processor had market power. Hence, having more packing plants might do nothing to relieve the impacts of an exogenous shock such as COVID-19. Specifically regarding labor—the primary culprit of COVID-19 disruptions—Hobbs (2021, p. 3) argues, “Furthermore, if significant scale economies exist with respect to labour, an industry with a large number of smaller processing plants by definition requires more labour, which hampers rather than helps supply chain resiliency.”In the context of understanding distributed capacity, differentiation between single-plant and multi-plant firms and an area for fruitful inquiry is largely missing. The question is whether capacity utilization and pricing is unchanged across plants if the capacity is in single-plant or multi-plant firms operating as separate profit centers or maximizing firm-level profits. Pudenz and Schulz (2022) explored multi-plant coordination in beef packing and demonstrated that this could lead to wider spreads between downstream beef prices and upstream fed-cattle prices. They found that, as cattle inventories declined, a multi-plant coordinator would permanently shut down a plant before a plant run as an individual profit center would shut down, adding that a strategically located packing plant, owned by a different firm, could narrow the farm-to-wholesale beef price spread. This research demonstrates the need to think critically about the role of heterogeneity of firms in the beef supply chain.To date, the related theoretical and empirical literature largely agrees that redistributing capacity nationally would not likely have had a meaningful impact on the U.S. beef industry experiences during COVID-19. However, there is emerging evidence to the contrary, particularly if we are interested in price and outcomes upstream and downstream from processing. Certainly, as data become available, more research is necessary to explore if and how an industry with significant economies of scale can become more resilient through heterogeneity in processing capacity.10Lesson #7 – Producer-Ownership is a Strategy to Improve ResiliencyBreaking up existing large plants into smaller plants is both unrealistic and unwise. Many studies have all but put to bed the argument that the United States can meet worldwide demand by investing in small or very-small processing capacity while maintaining current levels of efficiency and low costs in commodity beef markets. Yet, to date, the exploration of distributed capacity among heterogeneous firms is not complete. The studies have found model processing firms, whether in duopoly or perfect competition, that are profit-maximizers at the firm level. However, that we are aware of, no study has considered how the U.S. meat industry might have fared during the exogenous production shocks in the last decade if significant capacity heterogeneity had existed in the dimension of firm ownership, specifically, vis-à-vis producer-owned processing.Cooperatives are mechanisms by which the industry can achieve vertical integration of producers and processors in a way that increases coordination and information along the supply chain.A producer-owned limited liability company (LLC) with control and governance rights over the processor secured by producers is an alternative way to think about “cooperation” between steps in the supply chain.Optimization in many dimensions (e.g., pricing, harvest, transportation, information) occurs across the functions integrated by the cooperative. For example, cotton producers in Texas collectively own cooperative gins and the downstream cotton storage, distribution, and marketing services. Similarly, grain producers throughout the U.S. have invested in their upstream and downstream markets by owning input-supply cooperatives, grain marketing functions, grain processing, and export. The intent is for the integration of producers into their upstream and downstream activities to enhance coordination, information exchange, and stability in their respective markets. Cooperatives invest in, with long-term success, a more distributed infrastructure than investor-owned counterparts. Of important, because producers own and govern the value-added activities, they retain residual rights to the benefits of those economic activities.In the context of the beef industry, consider a cooperative cattle slaughter and beef processing plant owned by producers who have long-term obligations to supply it. The processing cooperative, faced with an exogenous shock, would function to coordinate information and harvest timing among producers to stabilize and solve capacity constraints at both levels and determine joint optimal pricing. The presumption is that higher margins at the processing level that are characteristic of exogenous shocks (Azzam and Dhoubhadel 2022; Lusk, Tonsor, and Schulz 2021) would be allocated to producers as owners of the plant. During normal margin cycles, cattle producers could experience more stable and predictable pricing for their animals because they would capture the composite of live animal and processing margins. The importance of this is clear in Figures 2 and 3 where boxed beef prices increased even as live animal prices fell. In addition, a producer-owned processing plant with long-term supply contracts is insulated from aggressive pricing by the largest competitors and the concern of capacity exiting or being absorbed into the larger processors is mitigated.Cooperatives are not a panacea. While there are certainly examples of failed experiments in producer-owned processing, the producer-owned model has shown remarkable longevity. According to U.S. Department of Agriculture, Rural Development (2019), the United States had 1,779 agricultural cooperatives representing nearly 1.9 million member-producers. Of these, 17.8% were more than 100 years or older, over 54% were 75 years or older, and 77% were 50 years or older. Among all agricultural cooperatives are 70 livestock marketing cooperatives representing more than 49,000 livestock producers. Cooperative enterprises, including and outside of agriculture, are known to have lower failure rates than traditional businesses, with 90% of cooperatives still in business after five years, while only 3–5% of non-cooperative enterprises survive beyond five years (Williams 2007).The research to date implies that a medium-sized processor of commodity beef could not compete long term, and, furthermore, that having “excess” capacity or differently distributed capacity would not have had much impact. However, if medium-sized processors are integrated with and owned by producers who do not require the same returns as investors in the largest processors and who coordinate and optimize over both levels to manage shocks, are the economics different? If the U.S. beef industry expects to see demand for beef increase and a need for additional capacity, then there is an opportunity for that new capacity to be structured differently spatially (more distributed) and in terms of ownership than our current system reflects. It seems plausible that a processing ecosystem with medium-sized, producer-owned processing can survive, particularly when other resiliency-enhancing strategies identified in our “lessons learned” are layered into the value-chain.11Discussion and ConclusionsThe global pandemic had an enormous impact on the U.S. beef sector and there is a small but economically significant probability that this will reoccur. The purpose of this article is to use lessons learned from the 2020 COVID-19 disruptions to help prepare the cattle and beef sectors for residual and similar disruptions. The COVID-19 pandemic affected the U.S. beef supply chain primarily through labor―labor was susceptible to illness and this was a catastrophic shock to slaughter, processing, and distribution. Another COVID-19-like event does not have to occur for the United States to experience this disruption again. Perennially low unemployment, labor disputes, and migrant labor issues all invoke a similar, albeit smaller, disruption. The first and second lessons are based on futures market participants signaling a possible plant closure problem throughout February and March. Cash prices for fed cattle did not see the same drop as live cattle futures, which lead to futures prices that were well below cash. Why hold on to an animal that is worth a lot today when it will be worth less in the future? The plant closures that the drop in futures anticipated also signaled a possible scarcity of beef and associated increase in boxed beef prices. Here, the best plan of action is to buy boxed beef today and store until the predicted scarcity occurs. There is evidence that some market participants responded to these signals by sending animals to plants early or by storing more beef in cold storage, and if this is the case, their actions increased resilience.The third lesson is that, it was obvious, in hindsight, and that the plant shutdowns were going to be temporary. It seems unlikely that the U.S. political system would allow long-running scarcity of beef. Some owners of feeder and stocker cattle waited things out and refused to sell their animals at discounted prices. This reduction in placements reduced the need to sell fed cattle at heavily discounted prices to clear the market.Cow plants did not notably reduce operations during the COVID-19 crisis; according to the Daily Livestock Report (2021b), cow plants have been able to adapt to labor scarcity much better than fed-cattle plants. Cow plants typically operate on a single shift and do not work on Saturdays, they are also smaller and easier to manage than fed-cattle plants. The scale and scope efficiencies associated with fed-cattle plants needs to be compared to the reduced resilience of these plants.Finally, there is evidence that red meat plants that are involved in downstream sales have shown more financial resilience than commodity plants. Here, the tradeoff is between the resiliency associated with diversification and the efficiencies of large-scale commodity plants. Related to this issue, and the issue of greater distribution of capacity, is the opportunities for producer ownership. When plants closed, boxed beef prices increased even as live animal prices fell, and producers who owned shares in plants were able to offset lower animal prices with income from higher meat prices. http://www.deepdyve.com/assets/images/DeepDyve-Logo-lg.png Journal of Agricultural & Food Industrial Organization de Gruyter

Resilience of U.S. Cattle and Beef Sectors: Lessons from COVID-19

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Publisher
de Gruyter
Copyright
© 2022 the author(s), published by De Gruyter, Berlin/Boston
ISSN
1542-0485
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1542-0485
DOI
10.1515/jafio-2022-0021
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Abstract

1IntroductionThe COVID-19 pandemic severely disrupted the U.S. red meat value chain. In the beef sector, short-term processing plant closures, worker scarcity that continues today, higher meat prices, and occasional rationing at retail outlets followed the first wave of retail food service and restaurant impacts. However, it could have been worse. This article describes and explores ways in which the beef value chain incentivized and rewarded agents whose actions reduced the degree of disruption from COVID-19 and identifies resiliency opportunities learned from within and outside of the beef chain. Some of these resilience-increasing signals and actions were subtle and others were obvious. We document these signals and actions to better prepare for another similar set of disruptions and to facilitate more strategic thinking about options to mitigate future disruptions. Our logic is that if more supply chain participants (e.g., producers, marketers, processors) are in a position to recognize and respond, then they may at least partially mitigate the disruptions. We refer to these market signals and optimal responses as “lessons.” We acknowledge that we have the advantage of hindsight and realize that industry participants were operating under enormous uncertainty about the severity and length of the disruptions and the governmental responses to the crises.2Prior WorkIn addition to being a massive economic sector, the cattle and beef industry is immensely complex, diverse, and dynamic (Schroeder, Coffey, and Tonsor 2021). While supply chain disruptions from COVID-19 are new, there has, of course, been research on the impact of agricultural supply chain disruptions from infectious animal diseases that impacted a food input (e.g., Elbakidze et al. 2009; Pendell et al. 2007, 2015; Schlenker and Villas-Boas 2009; Schroeder et al. 2015), as well as from exogenous trade disruptions (e.g. Balistreri et al. 2018); however, in those cases, the vertical structure of the supply chain was not impacted, only the supplies of products along it.Summaries of the literature on agricultural vertical supply chain coordination may be found in Barry, Sonka, and Lajili (1992), Moschini and Meilke (1992), Hennessy (1996), Lawrence et al. (1997), Royer and Rogers (1998), Cotterill (2001), Goodhue and Rauser (2001), Sexton and Lavoie (2001), and Martinez (2002). Summaries of the literature on vertical supply chain coordination for cattle specifically may be found in Crespi and Saitone (2018).COVID-19 focused the agricultural economics literature on something that researchers had neglected: disruptions along an entire value chain. Even general discussions about how the food supply chain might react under stress (like, for example, Chopra and Sodhi 2004) were mostly absent in the published agricultural economics literature prior to COVID-19. Many initial papers on the impact of COVID-19 on the beef industry focus on the human aspect and the high rates of infection tied to beef packing plants themselves (Saitone, Schaefer, and Scheitrum 2021; Taylor, Boulos, and Almond 2020). In a short time, however, more and more studies emerged looking at broader impacts. There is now a large and growing literature on the impact of COVID-19 on the entire value chain.A February 2022 U.S. Department of Agriculture Economic Research Service working paper by Vaiknoras et al. reviewed almost forty published reports and data sources. The report also documents the impact of COVID-19 from farms and packing plants to wholesale and retail outlets. Of relevance to our study, Vaiknoras et al. (2022) mention a slight uptick in beef slaughter prior to the April-May shutdowns of plants and a slight uptick in meat in cold storage prior to the closures. Another valuable source, Martinez, Maples, and Benavidez (2021) describe the impact COVID-19 had on each section of U.S. cattle production. Germane to us, it highlights a significant slowdown in feeder and stocker cattle placements into feedlots during COVID-19. Lusk, Tonsor, and Schulz (2021) showed how meat and livestock prices and processing volumes were extraordinarily volatile during COVID-19 and explained how this affected marketing margins and price spreads. They document that at the worst of slaughter and processing disruptions, beef and pork packing each lost 40% of total capacity. Hobbs (2021) explores supply side disruptions to the food chain including labor shortages, disruptions, and slowdown at border crossings. Peel (2021) documented the dual disruptions in the beef supply chain that prolonged product availability, initiated by retail shutdowns and followed immediately by impacts to labor, which crippled processing plants. Hayes et al. (2021) describe the impact of the pandemic on pork, turkey, and eggs markets and identified the price signals that hog producers had to sell close-to-market-weight hogs prior to the shutdown. A small number of hog producers were able to sell, but many could not, leading to euthanization of pigs (Hayes et al. 2021). Ultimately, the number removed was modest relative to expectations at the height of the pandemic (Johnson et al. 2021). We are not aware of any need to euthanize cattle, but additional challenges have persisted. Marani et al. (2021) estimate the annual probability of another extreme pandemic with associated disruptions at 1–2% per year. This means that there is a very high probability of a new pandemic in an eighty-year lifespan.One implied objective of this growing body of literature is to develop an understanding of how our processing industries can mitigate future similar disasters through increased supply chain resiliency. Chenarides, Manfredo, and Richards (2021) looked to the supply chain management literature to evaluate the U.S. food supply chain challenges. While they echoed the literature’s consensus of a trade-off between supply chain efficiency and resiliency, they emphasize that to understand and address these challenges, we would be well-served to perceive the supply chain pinch points and solutions (including policies) through the dual lens of agility (the ability to respond rapidly) and flexibility within and between supply chains. Using a real-options approach, they demonstrate the value of flexibility under varying uncertainty and switching cost regimes, stating, “The option to switch, and to maintain supply-chain flexibility, has considerable value.” The question our U.S. beef supply chain and policymakers must contemplate, then, is whether and which investments in cattle feeding, beef processing, and the downstream activities of the value supply chain improve flexibility and agility sufficiently to justify their costs. For all our speculation, this has not been demonstrated.3Impact of the Pandemic on Cattle and Beef IndustriesThere has historically been a great deal of research on coordination and concentration along the beef supply chain. Crespi and MacDonald (2022) discuss much of that literature in detail, reporting how concentration of the four largest steer and heifer slaughtering firms has grown from about 36% of industry value in 1980 to 85% today. Because of the significance of fixed costs to the large firms, cost is highly sensitive to even small swings in supply anywhere along that chain. Costs of transporting cattle across the country to meet production needs of course does happen, but transport is costly for such large animals that also suffer from “shrinkage” on long trips, adding to costs. We can mostly, though not entirely, describe livestock markets as regional. Hence, a plant closure due to an infectious outbreak (human or animal) is immensely disruptive to the entire supply chain, which must absorb animals. Packers have an incentive to maintain mostly nearby supplies for their plants and any given (large) plant today is processing between 6 and 8% of all U.S. beef (Elliott 2020).Figure 1 shows how beef packing plant shutdowns affected steer and heifer slaughter as well as total cow slaughter. We make comparisons to 2019 to account for seasonality and to measure against recent, and more normal, market fundamentals (Bina et al. 2022; Hayes et al. 2021; Lusk, Tonsor, and Schulz 2021). Steer and heifer slaughter were up slightly at the beginning of March 2020, rose notably by the end of March, and then fell substantially before rebounding to 2019 levels by the end of June. However, the shutdowns did not impact cow slaughter. We explore, in our lessons learned, some possible reasons for these observations.Figure 1:Percentage change (‘20 vs. ‘19) in FI cattle slaughter, weekly. USDA actual slaughter under federal inspection report (SJ_LS711), complied by the livestock marketing information center. FI, federally inspected.Figures 2 and 3 illustrate the impacts on select values across the beef chain. Figure 2 uses monthly data. Wholesale values spiked in May 2020, retail prices also rose at this time, and both prices fell as beef production recovered.The USDA Economic Research Service farm-wholesale-retail meat price spread series is widely used for informing producers, retailers, food service, consumers, analysts, consultants, investors, academics, government agencies, market regulators, and policymakers about livestock and meat price relationships. Schroeder et al. (2019b) and Lusk, Tonsor, and Schulz (2021) provided definitions, measurement details, and interpretation of price spread data.Figure 3 uses weekly comprehensive boxed beef values and cattle prices and shows a similar trend with wholesale prices peaking in mid-May. The two measures of farm-level prices increased slightly in January and February before declining to levels at or below prior levels as plant closures occurred. Although it is difficult to see in the chart because of the enormous increase in boxed beef values, there was a reduction in live cattle prices. All beef-type steers and heifers, weighted average of all grades and sales types, traded at $124/cwt in January 2020, which fell to $103/cwt in the first week of May 2020.https://mymarketnews.ams.usda.gov/viewReport/2700.It is notable that the wholesale level primarily captured the increase in beef prices, which did not transmit to the farm value. We expand upon this further in our lessons learned sections.Figure 2:Monthly retail, wholesale, and farm values of choice beef. USDA economic research service meat price spreads, complied by the livestock marketing information Center.Figure 3:Weekly live cattle prices and boxed beef values. USDA-AMS National weekly fed cattle comprehensive. USDA-AMS National comprehensive Boxed beef cutout – all fed steer/heifer sales (LM_XB463), complied by the livestock marketing information Center.Figures 4 and 5 use 2020 price data to illustrate the futures market reaction as COVID-19 took hold in the United States. In Figure 4, feeder cattle futures prices trended down from late January 2020 onward, hitting a bottom in Mid-March and again in early April. Prices recovered by June but did not regain their January levels. Martinez, Maples, and Benavidez (2021) identify that the cash prices of feeder cattle at various points across the United States had a similar pattern to the August futures, suggesting that no region was insulated from the market downturn. Figure 5 shows live cattle futures for the same period. Here again, prices fell beginning in late January, bottomed out in early June, and did not return to their January highs.Part of this may be due to seasonality. Live cattle prices tend to be highest in springtime.Figure 4:Daily feeder cattle futures prices by contract month. Chicago mercantile exchange (CME) group, complied by the livestock marketing information Center.Figure 5:Daily CME live cattle futures prices by contract month. Chicago mercantile exchange (CME) group, complied by the livestock marketing information Center.The cash and futures price signals reflected the expectations and realities of the COVID-19 pandemic and its disruptions. Prices are how markets transmit information along value chains and serve as the backdrop and rationale for exploring the lessons we can take from the experiences of our cattle and beef supply chains.4Lesson #1 – Price Signals Potentially Increase AgilityPrices are coordinating signals. In February and early March 2020, as COVID-19 concerns were mounting, futures market participants bid down prices for live animals. It seems likely that they did this because they were concerned about the possibility of plant closures. One of the functions of futures is to anticipate the worst-case scenario so that market participants get a signal to respond and in so doing moderate the ultimate price impact (Peel 2019). The first reported U.S. COVID-19 case was on January 20, 2020, and given the densely packed, cold, and damp conditions in packing plants, it was somewhat predictable that these plants would encounter COVID-19 related problems (Saitone, Schaefer, and Scheitrum 2021; Taylor, Boulos, and Almond 2020). Even while plants were running near capacity and beef demand was strong, futures prices for April and June delivery fell well below cash prices. The strong (positive) basis provided a signal to producers to market cattle early. By comparison, a weak basis, as in 2019 (for the April contract), was a signal to delay marketing, with the idea that the basis was likely to return to a more normal level.Figures 6 and 7 show basis patterns using the negotiated 5-Area cash price for the April and June contracts. The very unusual size of the 2020 basis is clear, especially for the April contract. We do not know if producers saw and responded to this opportunity (or warning, in this case), but we do know that slaughter levels picked up slightly in March as described in Vaiknoras et al. (2022). If the large positive basis had encouraged marketings, then meat processors would have scheduled fewer slaughter weight animals to hit the market during the shutdown. This embedded agility—the coordinating signals in cash and futures prices—improved the resilience of the system by shifting inputs between the farm and processing level. Arguably this insulated cattle producers’ prices from a more negative response as the pandemic developed.Figure 6:Weekly 5-area live cattle basis, April contract. Chicago mercantile exchange (CME) group and the USDA-AMS 5 area weekly weighted average direct slaughter cattle (LM_CT150), complied by the livestock marketing information center. Basis = cash price–futures Price.Figure 7:Weekly 5-area live cattle basis, June contract. Chicago mercantile exchange (CME) group and the USDA-AMS 5 area weekly weighted average direct slaughter cattle (LM_CT150), complied by the livestock marketing information center. Basis = cash price–futures Price.A negotiated purchase, also known as a spot market purchase, is when the buyer and seller determine the price and schedule cattle delivery to the plant within 30 days of the agreement. As part of Livestock Mandatory Reporting (LMR), beef packers report negotiated purchases as scheduled for delivery in either 0–14 days or 15–30 days.https://www.ams.usda.gov/sites/default/files/media/LMRCattleUserGuide.pdf.The U.S. Department of Agriculture’s Agriculture Marketing Service summarizes and publishes this information, head counts, and average prices on a national basis in the National Weekly Fed Cattle Comprehensive report. Purchases within the 0–14-day delivery window are much more common than the 15–30-day window. Nationally, 85% of domestic negotiated purchases over the 2014–2018 period was 0–14 day and 15% were 15–30 day delivery windows (Schroeder, Schulz, and Tonsor 2019a) and in 2019 these levels were 80 and 20%, respectively (Figure 8). From the week ending 4/12/2020 to the week ending 4/19/2020, the share of 15–30-day negotiated purchases fell from 30 to 6% and was 0% for the first three weeks of May 2020 while packing plant disruptions were at their worst. Packers could have only bought negotiated cattle for 15–30-day delivery, and the feed yard would have incurred the additional cost to hold the cattle. Instead, it appears packers did prioritize purchasing the most market-ready cattle first and scheduled them for delivery within 0–14 days.Figure 8:Weekly shares of 0–14 day and 15–30 day National negotiated purchases. USDA-AMS National weekly fed cattle Comprehensive.The weekly negotiated purchase basis volume, as a percentage of the total purchase volume, did increase above 30% in late-March 2020—an indication that some producers did take advantage of the strong basis levels (Figures 6 and 7). The negotiated purchase percentage fell to less than 10% during the first three weeks of April 2020 as stay-at-home orders and market uncertainty impacted cattle buying behavior, and possibly, selling behavior. The negotiated share rebounded by mid-May and even increased into June. Packers could have bought zero negotiated cattle if they were truly the marginal or residual supplies in the market as these would have been the first cattle dropped from slaughter and the last cattle brought back once packing capacity was available. Packers continued to buy negotiated cattle, a sign that buyers and sellers coordinated to prioritize slaughtering the most market-ready cattle.5Lesson #2 – Wholesalers Used the Theory of StorageAccording to the theory of storage, adjustments in inventories can stabilize prices in response to shocks, and the degree to which storage is an effective mitigation of price shocks depends on the storage level (Peel 2021). Karali and Thurman (2009) show, using lumber futures, that the impact of information shocks—something akin to the impending COVID-19 crisis—smooth price changes over time. Beef in cold storage typically exhibits predictable, seasonal trends. Peel (2021) explained that, in normal conditions, cold storage consists primarily of domestic lean trimmings that increase going into fall and winter to support ground beef production the following summer. The increase in cold storage happens from the higher cow culling period during fall.Figure 9 illustrates the stock of beef in cold storage by month in 2020 relative to the same month in 2019. Boneless beef stocks began the year at a relatively low level and then increased rapidly, going from 95% of 2019 levels in January to more than 110% in March and April. Boneless beef cold storage stocks ran inverse to futures prices. It is plausible that speculators recognized the possibility of plant shutdowns and responded by storing wholesale beef primals. These surplus stocks were drawn down by August. Had this additional beef not been available, then the high prices and occasional stock outs that happened in May and June would have been exasperated. However, we note that cold storage stocks of beef are low relative to fresh beef production, so the moderating impact here was small. Tonsor, Schulz, and Lusk (2020) estimate that cold storage stocks of beef, pork, and chicken on March 31, 2020, corresponded with about 10 days of normal consumption.Figure 9:Percentage change (‘20 vs. ‘19) in monthly beef in cold storage. USDA-NASS cold storage, complied by the livestock marketing information Center.As Peel (2021) notes, cold storage was unable to substitute for the retail shortages of beef because cold storage is the “… wrong set of products and because the quantity of cold storage holding is small.” So, while beef cold storage stocks pre-COVID-19 were not intended to absorb significant supply shocks for retail-bound beef products, this link in the U.S. beef supply chain infrastructure has potential to provide flexibility and agility downstream from processing capacity shocks. Again, we do not know what drove the actions of the individual wholesalers, but in hindsight, it was profitable to wholesalers, avoided even larger problems at the retail level, and therefore provided a temporary cushion. In the search for future resiliency-enhancing innovations and investments, cold storage expansion investments and flexibility merit consideration.6Lesson #3 – Diversification in Feeding is a Flexibility StrategyAs Martinez, Maples, and Benavidez (2021) described, producers of calves and feeder cattle can hold animals when producers believe a price decline is temporary. This is, in part, due to the outdoor nature of this part of the value chain and producers’/ranchers’ ability to use a variety of feed resources. Figure 10 uses the USDA-AMS National Feeder & Stocker Cattle Summary (SJ_LS850) and compares the weekly number of feeder and stocker animals sold during 2020 relative to the same week in 2019.Note, this is a voluntary report and does not include every transaction.By the end of March and in early April, sales were less than 40% of year-ago levels. Given the low cash feeder cattle prices described in Martinez, Maples, and Benavidez (2021), the reason sales fell so dramatically is clear—the owners of these animals used pasture or harvested feed to hold animals rather than to flood feedlots with animals that were not needed and where space was scarcer. Feedlot owners were able to modestly slow growth by changing diets and avoiding the use of growth promotants as described in Vaiknoras et al. (2022). Euthanasia in cattle was avoided even though national slaughter capacity was well below normal. One reason for this, among many, was that fewer feeder cattle were being placed in yards.Figure 10:Percentage change (‘20 vs. ‘19) in weekly feeder & stocker cattle receipts. USDA-AMS National feeder & stocker cattle summary (SJ_LS850), complied by the livestock marketing information Center.The SJ_LS850 report breaks out feeder cattle trade volume through three channels―traditional auction facilities, direct trade, and video/internet sales. Auction trade typically accounts for most of the total volume. July tends to see the smallest movement through auctions. Many of the summer months (June, July, and August) tend to have smaller auction volumes. Direct sales have generally seen stronger volumes in the first half of the year and are progressively smaller in the fourth quarter. Video auctions have seen large volumes in July and August and relatively stable numbers through the rest of the year (Daily Livestock Report 2021a). In 2020, all sale types fell dramatically in March and direct sales surged in May (Figure 11). As part of the food supply chain, the Trump administration deemed livestock auctions an essential business and allowed them to remain open. However, major changes occurred in how they could operate. State governments provided guidance on protective measures. Some sales were postponed or canceled, others occurred as originally planned, and some auctions went forward, but with bidding by video, internet, or phone only, or through a hybrid approach.Figure 11:Percentage change (‘20 vs. ‘19) in monthly feeder & stocker cattle receipts by type. USDA-AMS National feeder & stocker cattle summary (SJ_LS850), complied by the livestock marketing information Center.An important dimension in the discussion of pasture and cattle feeding is the use of federal lands for grazing. Only 6% of the two billion acres of land in the United States is pasture—21% is rangeland extensively owned by the federal government, 38% of which (approximately 155 million acres) the government provides to mostly western ranchers for forage. Although rangeland may represent a small percentage of national forage the share is much higher for western ranchers who obtain more than half of their summer forage and nearly 20% of their annual forage from these lands (Crespi and Saitone 2018, p. 318). In 2019, the Bureau of Land Management (BLM) authorized 8.05 million “animal unit months” (AUMs) for ranchers on these rangelands; and, in 2020, BLM increased forage authorization by approximately 5%–8.44 AUMs.Source: U.S. Department of the Interior, Bureau of Land Management (2021). AUM stands for Animal Unit Months. 1 AUM is pounds of dry forage needed to maintain a 1,000 lb cow and her calf for one month. An increase in AUMs corresponds to opening the rangelands for longer and/or allowing more cattle.Forage varies from year to year, and while the BLM reports availability and permits regardless of use, they report the number of permit applications changed less than one-half of a percent from 2019 to 2020, implying that the same ranchers using rangeland in 2019 would have had potentially 5% more forage at their disposal in 2020.As we look for opportunities to improve the cattle and beef processing industry, it is illustrative to draw comparisons with the pork industry. We take stock of the additional flexibility cattle producers have to ‘hold’ animals in feedlots and forage programs that the pork industry does not have. Commercial producers raise hogs indoors and run a narrow edge on animal weights. This may explain why animal welfare concerns were so much worse in the pork sector, with a few exceptions.Later we explore producer-ownership of processing. We argue that pork producers who owned processing facilities were likely better off in terms of prices received.The lesson here, with the benefit of hindsight, is that feedlot placements should have and could have declined even more to avoid declines in feeder cattle prices. In this sense, we missed an opportunity of built-in system flexibility to bolster resiliency.7Lesson #4 – Processing Susceptibility to Labor Shortages is not UniformIn the after-light, there is much attention directed at potential solutions to what was arguably the Achilles’ heel of beef processing stability―labor. Whether due to worker illness or concerns for risk-increasing conditions in plants (Luckstead, Nayga, and Snell 2022), the importance of labor and its contribution to the U.S. beef supply chain was never more on display than during the height of COVID-19 disruptions. Coming to terms with two yet-unanswered questions can move us towards greater resiliency: (a) Does plant size (in capacity terms) have a differential effect on disruptions from labor shortages? and, (b) Is there an optimal way to design or redesign plants utilizing multi-species models to reduce susceptibility to labor shortages?Plant size is a scrutinized factor in susceptibility to shocks like COVID-19, cyberattacks, fires, and natural disasters. A critical dimension of plant size is labor. Labor in the context of COVID-19 is paradoxical, as noted in Hobbs (2021). On the one hand, labor-intensive processing systems were especially vulnerable because of the working conditions and proximity of laborers in the plant. On the other hand, labor in meat processing exhibits scale economies, and larger firms generally can utilize labor more efficiently. This means that labor-intensity is a positive feature in terms of output. Bina et al. (2022) investigate impacts of COVID-19 on beef processing capacity and found limited statistical evidence of plant size and regional reliance on processing as a contribution to slaughter declines.The question of whether plant size is a factor in reduced capacity or shutdowns has not settled, nor, to our knowledge, studied widely.In an investigation of market power, Saitone, Schaefer, and Scheitrum (2022) examined the human impact of market structure during COVID-19 by investigating what happened when a large firm, Tyson, mandated immunization. They concluded, “the mandate resulted in approximately 35,000 additional vaccinations across the U.S. This increased vaccine uptake avoided thousands of COVID-19 infections and almost 75 COVID-19 deaths with an associated public health savings of approximately $45.4 million” (p. 18.), implying there is a possibility concentration could have a positive impact on reducing COVID-19’s spread.In a Proceedings of National Academy of Sciences study, Taylor, Boulos, and Almond (2020) investigated the incidence of COVID-19 infections among livestock and poultry processing facilities and found that the largest plants, controlling for species, exhibited the greatest transmission of COVID-19 relative to location county, whereas small-and medium-sized plants did not significantly impact county-level transmission rates. Furthermore, though they studied poultry plants only, they found a significant and positive relationship between line processing speeds and transmission, noting that county-level transmission rates were nearly double in counties with plants that received line speed waivers and operated at higher line speeds. Taylor, Boulos, and Almond (2020) explained why we might expect larger plants to be more susceptible to spread of disease and, by extension, to labor shortages—the larger plants, besides encompassing more activities and people, have larger physical spaces that are louder and require more shouting and more distance for workers to cover in reaching their workspace, which increases workplace interactions. Yet we do not fully understand the extent to which this renders larger plants more susceptible to shutdowns and disruptions and therefore less resilient than smaller plants. What we do know is that when a single large plant shuts down, it has a significant impact on our system’s processing capacity and capabilities.Plant type is a second potential area in which to identify opportunities for flexibility. The data in Figure 1 shows more impact on steer and heifer slaughter than cow slaughter. In this sense, cow plants showed more resilience than steer and heifer plants. The Daily Livestock Report (2021b) provides possible reasons for cow plant resilience. They discussed the way cow plants have handled labor scarcity since the fed-cattle plants reopened, but we can apply that logic to explain the difference in shutdowns as well.By virtue of their size (multiple shifts, Saturday work, and overall complexity) fed cattle plants are more vulnerable to the tight labor market. These plants are far more difficult to run when labor is scarce, and when the plant managers do not know how many people will show up for work in a given day. It is difficult to schedule cattle for slaughter when you do not have a reliable work schedule plan. Also, some of these plants we think need to run at far higher processing capacity than some of the smaller, single shift cow processing plants.The report does acknowledge that cow plants harvest far fewer cuts than fed cattle plants. The resilient performance of cow plants during the crisis in fed cattle plants as shown in Figure 1, as well as the better performance in dealing with labor uncertainty and labor availability since then as described in the Daily Livestock Report (2021b), suggests that the optimal design of plants may be changing towards smaller plants with some built in redundancies or slack. The announcement of several beef packing plant expansions and new facilities with capacities well below many of largest existing plants (NAMI 2021) has further supported this idea. Hobbs (2021), Lusk, Tonsor, and Schulz (2021), and Bina et al. (2022) described a cost versus resiliency trade-off, and these authors tended to favor the larger plants for reasons of scale and scope. Therefore, it is too early to draw strong conclusions on this issue.8Lesson #5 – Diversification into Further Processing Improves FlexibilityIsley and Low (2022) conduct an econometric study of the firm and market characteristics that positively influenced the survivability of U.S. meat processors between 1997 and 2020. Their results highlight two elements that can inform our thinking about plant-level characteristics that improve resiliency. First, plant-level factors (size, age, ownership, scope) are a better predictor of survivability than market-level factors (concentration, wages, prices). This corroborates the findings of Anderson et al.’s (1998) work on exit from cattle slaughter. Second, processors that had downstream activities, such as a wholesale or retail meat market, had significantly higher probability of survival. Specifically in medium-sized processors, defined as having 50–249 employees, survivability is higher when the plant engages in wholesale marketing. Small plants with 10–49 employees are 40% more likely to survive when they have the capability to enter retail markets. A driver of this result is an increasing preference among consumers for beef with extrinsic and intrinsic attributes.The Isley and Low study (2022) did not explicitly model COVID-19 disruptions, but their results translate to inform future investments. It makes intuitive sense that diversifying the source of income for meat firms enhances flexibility and agility into downstream markets and should improve the resiliency of the firm and ultimately the system. Anecdotally, during the March 2020–August 2020 period of COVID-19, we observed that retail grocers with meat repackaging capabilities were better off and avoided stock-outs because of their investments in this type of flexibility. The question remains: where and what type of added flexibility in processing and packaging will pass the cost-benefit test? Nationally, hundreds of meat processing establishments invested in flexibility as part of their value differentiation, presumably as a profit-enhancing outcome. Policies to improve system flexibility should consider the role diversification of processing into different markets plays in normal and stressed market periods.9Lesson #6 – Distributed Capacity Alone is Not a Substantial Driver of ResiliencyBy way of the American Rescue Funds Program, the USDA made explicit its awareness of the impacts of concentrated processing on the U.S. food supply chain, including on farmers and ranchers.https://www.federalregister.gov/documents/2021/07/16/2021-15145/investments-and-opportunities-for-meat-and-poultry-processing-infrastructure.USDA committed $500 million in infrastructure, capacity, and diversification investments, with a stated focus on “strategic investments in the addition and expansion of small-and medium-sized processing facilities. …” Critics of making investments in smaller plants argue that economies of scale are significant and important to meat processing, and to force the system to a more diverse processing ecosystem would lower system efficiency, increase costs, and may not improve flexibility, agility, or resiliency at all. They posit that the result would be smaller, economically fragile plants and firms that would, when the market sustains tight margins, be acquired by the largest processors or abandoned. They further argue that forcing distributed capacity could weaken, not strengthen, our beef processing system. By extension, the implication is that long-run equilibrium for commodity meat products is a highly concentrated animal processing industry.The evidence to support this view is substantial. Crespi and Sexton (2004) simulated the impacts of different capacity scenarios and transportation on purchases of cattle based on actual purchases of cattle from feedlots in the Texas Panhandle. Using firm-level data, they accounted for plant capacity, travel distances, transportation costs, and procurement behaviors along with a variety of plant-and region-specific factors. They conclude that impacts of capacity would not have greatly changed the purchasing patterns of the packers in the Texas Panhandle region at that time, though the impacts would have slightly increased bidding. Even removing 20% of capacity did not greatly alter the procurement patterns, which tended to be regional. Their study did not examine the impact from plant shutdowns but is useful in thinking about how capacity redistribution affects coordination between producers and processors.More theoretical and nascent empirical work specific to COVID-19 has recently emerged. Azzam (2022) created a theoretical model of dominant firms facing a competitive fringe of smaller processors and concluded that adding more plants would lead to reduced disruptions unless market share were split between the two firm types and dominant firms price competitively. Azzam and Dhoubhadel (2022) and Lusk, Tonsor, and Schulz (2021) found that COVID-19 disruptions caused margins that could be consistent with a perfectly competitive market structure. Deriving a Cournot model to resemble the U.S. beef industry today, Ma and Lusk (2021) perturbed their model with exogenous shutdowns under a variety of firm and industry-size scenarios and find that price spreads increased when there was an exogenous, industry-wide risk of shutdown, even when no processor had market power. Hence, having more packing plants might do nothing to relieve the impacts of an exogenous shock such as COVID-19. Specifically regarding labor—the primary culprit of COVID-19 disruptions—Hobbs (2021, p. 3) argues, “Furthermore, if significant scale economies exist with respect to labour, an industry with a large number of smaller processing plants by definition requires more labour, which hampers rather than helps supply chain resiliency.”In the context of understanding distributed capacity, differentiation between single-plant and multi-plant firms and an area for fruitful inquiry is largely missing. The question is whether capacity utilization and pricing is unchanged across plants if the capacity is in single-plant or multi-plant firms operating as separate profit centers or maximizing firm-level profits. Pudenz and Schulz (2022) explored multi-plant coordination in beef packing and demonstrated that this could lead to wider spreads between downstream beef prices and upstream fed-cattle prices. They found that, as cattle inventories declined, a multi-plant coordinator would permanently shut down a plant before a plant run as an individual profit center would shut down, adding that a strategically located packing plant, owned by a different firm, could narrow the farm-to-wholesale beef price spread. This research demonstrates the need to think critically about the role of heterogeneity of firms in the beef supply chain.To date, the related theoretical and empirical literature largely agrees that redistributing capacity nationally would not likely have had a meaningful impact on the U.S. beef industry experiences during COVID-19. However, there is emerging evidence to the contrary, particularly if we are interested in price and outcomes upstream and downstream from processing. Certainly, as data become available, more research is necessary to explore if and how an industry with significant economies of scale can become more resilient through heterogeneity in processing capacity.10Lesson #7 – Producer-Ownership is a Strategy to Improve ResiliencyBreaking up existing large plants into smaller plants is both unrealistic and unwise. Many studies have all but put to bed the argument that the United States can meet worldwide demand by investing in small or very-small processing capacity while maintaining current levels of efficiency and low costs in commodity beef markets. Yet, to date, the exploration of distributed capacity among heterogeneous firms is not complete. The studies have found model processing firms, whether in duopoly or perfect competition, that are profit-maximizers at the firm level. However, that we are aware of, no study has considered how the U.S. meat industry might have fared during the exogenous production shocks in the last decade if significant capacity heterogeneity had existed in the dimension of firm ownership, specifically, vis-à-vis producer-owned processing.Cooperatives are mechanisms by which the industry can achieve vertical integration of producers and processors in a way that increases coordination and information along the supply chain.A producer-owned limited liability company (LLC) with control and governance rights over the processor secured by producers is an alternative way to think about “cooperation” between steps in the supply chain.Optimization in many dimensions (e.g., pricing, harvest, transportation, information) occurs across the functions integrated by the cooperative. For example, cotton producers in Texas collectively own cooperative gins and the downstream cotton storage, distribution, and marketing services. Similarly, grain producers throughout the U.S. have invested in their upstream and downstream markets by owning input-supply cooperatives, grain marketing functions, grain processing, and export. The intent is for the integration of producers into their upstream and downstream activities to enhance coordination, information exchange, and stability in their respective markets. Cooperatives invest in, with long-term success, a more distributed infrastructure than investor-owned counterparts. Of important, because producers own and govern the value-added activities, they retain residual rights to the benefits of those economic activities.In the context of the beef industry, consider a cooperative cattle slaughter and beef processing plant owned by producers who have long-term obligations to supply it. The processing cooperative, faced with an exogenous shock, would function to coordinate information and harvest timing among producers to stabilize and solve capacity constraints at both levels and determine joint optimal pricing. The presumption is that higher margins at the processing level that are characteristic of exogenous shocks (Azzam and Dhoubhadel 2022; Lusk, Tonsor, and Schulz 2021) would be allocated to producers as owners of the plant. During normal margin cycles, cattle producers could experience more stable and predictable pricing for their animals because they would capture the composite of live animal and processing margins. The importance of this is clear in Figures 2 and 3 where boxed beef prices increased even as live animal prices fell. In addition, a producer-owned processing plant with long-term supply contracts is insulated from aggressive pricing by the largest competitors and the concern of capacity exiting or being absorbed into the larger processors is mitigated.Cooperatives are not a panacea. While there are certainly examples of failed experiments in producer-owned processing, the producer-owned model has shown remarkable longevity. According to U.S. Department of Agriculture, Rural Development (2019), the United States had 1,779 agricultural cooperatives representing nearly 1.9 million member-producers. Of these, 17.8% were more than 100 years or older, over 54% were 75 years or older, and 77% were 50 years or older. Among all agricultural cooperatives are 70 livestock marketing cooperatives representing more than 49,000 livestock producers. Cooperative enterprises, including and outside of agriculture, are known to have lower failure rates than traditional businesses, with 90% of cooperatives still in business after five years, while only 3–5% of non-cooperative enterprises survive beyond five years (Williams 2007).The research to date implies that a medium-sized processor of commodity beef could not compete long term, and, furthermore, that having “excess” capacity or differently distributed capacity would not have had much impact. However, if medium-sized processors are integrated with and owned by producers who do not require the same returns as investors in the largest processors and who coordinate and optimize over both levels to manage shocks, are the economics different? If the U.S. beef industry expects to see demand for beef increase and a need for additional capacity, then there is an opportunity for that new capacity to be structured differently spatially (more distributed) and in terms of ownership than our current system reflects. It seems plausible that a processing ecosystem with medium-sized, producer-owned processing can survive, particularly when other resiliency-enhancing strategies identified in our “lessons learned” are layered into the value-chain.11Discussion and ConclusionsThe global pandemic had an enormous impact on the U.S. beef sector and there is a small but economically significant probability that this will reoccur. The purpose of this article is to use lessons learned from the 2020 COVID-19 disruptions to help prepare the cattle and beef sectors for residual and similar disruptions. The COVID-19 pandemic affected the U.S. beef supply chain primarily through labor―labor was susceptible to illness and this was a catastrophic shock to slaughter, processing, and distribution. Another COVID-19-like event does not have to occur for the United States to experience this disruption again. Perennially low unemployment, labor disputes, and migrant labor issues all invoke a similar, albeit smaller, disruption. The first and second lessons are based on futures market participants signaling a possible plant closure problem throughout February and March. Cash prices for fed cattle did not see the same drop as live cattle futures, which lead to futures prices that were well below cash. Why hold on to an animal that is worth a lot today when it will be worth less in the future? The plant closures that the drop in futures anticipated also signaled a possible scarcity of beef and associated increase in boxed beef prices. Here, the best plan of action is to buy boxed beef today and store until the predicted scarcity occurs. There is evidence that some market participants responded to these signals by sending animals to plants early or by storing more beef in cold storage, and if this is the case, their actions increased resilience.The third lesson is that, it was obvious, in hindsight, and that the plant shutdowns were going to be temporary. It seems unlikely that the U.S. political system would allow long-running scarcity of beef. Some owners of feeder and stocker cattle waited things out and refused to sell their animals at discounted prices. This reduction in placements reduced the need to sell fed cattle at heavily discounted prices to clear the market.Cow plants did not notably reduce operations during the COVID-19 crisis; according to the Daily Livestock Report (2021b), cow plants have been able to adapt to labor scarcity much better than fed-cattle plants. Cow plants typically operate on a single shift and do not work on Saturdays, they are also smaller and easier to manage than fed-cattle plants. The scale and scope efficiencies associated with fed-cattle plants needs to be compared to the reduced resilience of these plants.Finally, there is evidence that red meat plants that are involved in downstream sales have shown more financial resilience than commodity plants. Here, the tradeoff is between the resiliency associated with diversification and the efficiencies of large-scale commodity plants. Related to this issue, and the issue of greater distribution of capacity, is the opportunities for producer ownership. When plants closed, boxed beef prices increased even as live animal prices fell, and producers who owned shares in plants were able to offset lower animal prices with income from higher meat prices.

Journal

Journal of Agricultural & Food Industrial Organizationde Gruyter

Published: May 1, 2023

Keywords: beef market; COVID-19; resiliency

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