Analysis: High U.S. meat prices: packer profiteering or capacity crunch?

Seaboard

19/01/2022 11:00

By David Lawder
    WASHINGTON, Jan 19 (Reuters) - The Biden administration is
targeting a small group of meat packers for high beef, pork and
poultry prices that it says are squeezing consumers and fueling
inflation, arguing that they are abusing their market power.
    The U.S. meatpacking industry is dominated by a few global
companies which say prices reflect a surge in demand,
pandemic-constrained supplies, and rising costs for labor and 
transportation. They deny the administration's pandemic
profiteering https://www.reuters.com/business/meat-packers-profit-margins-jumped-300-during-pandemic-white-house-economics-2021-12-10
 allegations. 
    Agricultural economists say that pandemic-stoked meat demand
 has exposed a shortage of slaughterhouse capacity, especially
in beef, a supply-chain problem similar to those of other
industries. 
    "I think there's probably some truth on both sides," said
David Anderson, a livestock economist at Texas A&M University,
about the White House's battle with meat processors. 
    "Consumers are buying beef. Our exports are booming," he
said. "What we're seeing with prices, I would argue as an
economist, that's exactly what we should see given this
bottleneck. And capacity problems aren't going to be fixed
overnight."
    Cattlemen are frustrated with limited options for selling
their herds, he said, adding: "I don't think it's a bad thing
that the government is looking in to this stuff."
    
    MEAT INDUSTRY  
    At the heart of the issue, just as with supply chain snarls
https://www.reuters.com/world/us/us-supply-chain-too-snarled-biden-christmas-fix-experts-say-2021-10-14,
 is unusually strong consumer demand for meat, and especially
beef. 
    Americans hunkered down during the pandemic and splurged on
consumable treats instead of travel or entertainment, and
Chinese traded Australian imports for grain-fed U.S. beef https://www.reuters.com/world/china/china-gorges-american-grain-fed-beef-amid-shrinking-supplies-down-under-2021-10-01/#:~:text=Beef%20imports%20from%20the%20U.S.,than%20%241%20billion%20this%20year,
 amid a diplomatic dispute.
    That jump collided with a U.S. meat processing system
already stretched to its limits by a decades-long drive for
maximum efficiency and profit, leaving just four companies https://www.reuters.com/business/how-four-big-companies-control-us-beef-industry-2021-06-17
 to dominate the beef packing market.
    COVID-driven plant shutdowns, safety protocols spacing
employees further apart and labor shortages cut the number of
cows these plants could process, reducing prices they paid to
cattle farmers even as the cost of the end product spiked for
consumers.
    
    Beef retail prices rose 30% from the beginning of 2020,
before pandemic lockdowns started, to a peak of $7.90 per pound
in October, before declining slightly in November and December,
according to U.S. Department of Agriculture data https://www.ers.usda.gov/webdocs/DataFiles/52160/beef.xls?v=8739.3.
 
    The price cattle farmers earned declined slightly over the
same period, and the National Farmers Union argues that more
competition https://nfu.org/2022/01/03/fairness-for-farmers-campaign-central-to-administrations-new-effort-to-increase-competition-in-ag-markets
 is needed in meat packing.
    
    EXPLOITATION OR CAPITALISM?  
    President Joe Biden has announced steps to boost competition
in beef, pork and poultry processing to curb what he argues is
"exploitation" of consumers and farmers.
    The administration's action plan https://www.whitehouse.gov/briefing-room/statements-releases/2022/01/03/fact-sheet-the-biden-harris-action-plan-for-a-fairer-more-competitive-and-more-resilient-meat-and-poultry-supply-chain
 includes $1 billion for grants and loans for new independent
processing plants, $100 million for worker training, new
labeling rules and ways for farmers to report anticompetitive
practices. 
    That is after a White House said in a December analysis https://www.whitehouse.gov/briefing-room/blog/2021/12/10/recent-data-show-dominant-meat-processing-companies-are-taking-advantage-of-market-power-to-raise-prices-and-grow-profit-margins
 that the four big meatpackers - Tyson Foods Inc  TSN.N , JBS SA
 JBSS3.SA , Marfrig Global Foods SA  RFG3.SA  and Seaboard Corp
 SEB.A  - had tripled their net profit margins during the
pandemic.
    JBS's U.S. beef operation more than doubled its
third-quarter operating margin - the rough difference between
revenue  and costs - to 21%, compared with the same periods of
2020 and 2019, the Brazilian company's earnings statement shows.
https://api.mziq.com/mzfilemanager/v2/d/043a77e1-0127-4502-bc5b-21427b991b22/5c65b4c8-a358-615f-bf06-277f30fc22d3?origin=1
 
    
    
    PAYING QUOTED PRICES
    "The margins have been extremely wide" in beef, said Derrell
Peel, a livestock economist at Oklahoma State University, citing
the processing bottlenecks. He blames them not on deliberate
anti-competitive behavior, but on 30 years of market-driven
consolidation that left the industry with no spare capacity to
handle the COVID-19 demand surge.
    "The main driver of why we have the industry structure we
have today is because of the economics of cost efficiency. Those
small packers just went broke. And the ones that got bigger
survived," Peel said.
    The North American Meat Institute https://www.meatinstitute.org/ht/display/ReleaseDetails/i/200243,
 representing beef and pork packers, and the U.S. Chamber of
Commerce https://www.uschamber.com/security/supply-chain/u-s-chamber-objects-to-misguided-administration-efforts-to-address-meat-prices
 argue that higher meat prices are a temporary result of forces
stoking inflation across the economy, including labor shortages.
    "The market is behaving predictably," said Sarah Little,
vice president of communications for the North American Meat
Institute. Grocery chains compete for supplies and set retail
meat prices - not meat processors - she noted, and Americans are
willing to pay higher prices for beef. 
    "There are going to be times when cattlemen make more money
and packers lose money. We've certainly seen that cycle before."
    U.S. grocery chains' prices to consumers also reflect acute
labor shortages, high trucking costs, and competition from China
and other foreign buyers, said Jayson Lusk, head of Purdue
University's agricultural economics department. 
    Chinese demand for pork is easing as the country rebuilds
its hog herd from a devastating bout of African swine fever,
returning pork processing margins to their five year average https://nppc.org/wp-content/uploads/2021/12/Retail-Pork-Price-Inflation_Final-12162021.pdf,
 according to Dermot Hayes, economics professor at Iowa State
University.
    Price spikes show the industry needs some slack in the
system, Hayes said. Government incentives could encourage more
farmer groups to build processing plants and earn more selling
meat rather than live animals, Hayes said.

    <^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^
JBS Q3 profit margins soar on beef demand    https://tmsnrt.rs/3pXpkKg
U.S. beef price spreads: farm, wholesale and retail    https://tmsnrt.rs/3pYBe6s
U.S. pork price spreads: farm, wholesale and retail    https://tmsnrt.rs/3HHxKeV
U.S. beef wholesale, livestock prices    https://tmsnrt.rs/3FYuECD
U.S. retail meat price increases, 2020-2021 U.S. retail meat
price increases, 2020-2021    https://tmsnrt.rs/3rhlJq1
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 (Reporting by David Lawder in Washington Editing by Heather
Timmons and Matthew Lewis)
 ((David.Lawder@tr.com; +1 202 354 5854; Reuters Messaging:
david.lawder.thomsonreuters.com@reuters.net))