By Clint Hardy
The coronavirus is the first pandemic experience for most people living in the United States today.
History shows that pandemic illness occurrences are not new to the U.S. From the earliest settlers through the 1800s, various illnesses often swept populated areas. These episodes typically resulted in economic recessions.
The Centers for Disease Control and Prevention was created because of the experience of our forefathers who learned what effect pandemic illness can have on healthcare resources, the general population welfare, and the economy. Fortunately, the CDC still exists.
While the pandemic continues, the CDC is at work to limit its effects. Unfortunately, it is another reminder of how “black swan” events can create market turmoil and how the importance of price risk management strategies is increasing. Dr. Kenny Burdine, UK Extension Livestock Marketing Specialist, prepared the following discussion regarding the impact on cattle prices.
Some agricultural economists are comparing current cattle market trends to the bovine spongiform encephalopathy situation in December 2003. Similarities exist but the primary impact of BSE was on exports.
The loss of export markets led to increased domestic supply, which is where the primary price impact came from. There is no precedent for something like this. For the most part, we are seeing that demand shocks like this usually have the largest impact on cattle closest to harvest. Fed cattle prices have dropped drastically and it’s hard to give a current price with things moving so quickly.
Feeder cattle futures have dropped a lot as well. The March futures contract has fallen by about $20 per cwt since early March and may not be done. This has been a larger response than expected for cattle that are 6 months from harvest; it speaks to how long the market is expecting this to last.
In the short run, we don’t expect much supply impact from COVID-19. It doesn’t impact current livestock inventory or meat production. One of the problems we have is that this demand shock is hitting when the production of all meats is relatively high.
There is potential for longer run supply impacts. This happens when producers delay selling cattle because of sharp and fast price drops, which is exactly what we are seeing. Cattle tend to stay on feed longer, which leads to higher slaughter weights.
Cow-calf operators and backgrounders will tend to do the same thing, which creates a backlog of cattle. Ultimately, this just delays supply and forces the market to work through a “bubble” when things start to improve. The longer this persists, the more of a potential problem it becomes.
The magnitude of the market impacts comes down to how significantly, and for how long, this demand shock persists. Looking back on January and February, it appears the market was largely trying to price in the impact of international demand.
Specifically, it was likely considering how the impact of COVID-19 in Asian Countries would impact U.S. beef exports to those areas. In March, the markets seem to have shifted their focus to the impact on domestic demand.
It is important to remember that about 88% of U.S. beef is consumed domestically. In the very short run, it probably doesn’t impact how much meat consumers eat, but likely impacts where they eat it.
Foodservice/restaurant markets are a significant part of meat demand and with closures, we will inevitably see decreases there. As we think a little further down the road, a lot of what we have seen is unprecedented. It’s hard to grasp the impact of canceling of major events, conferences, athletics, domestic and international travel, etc. These are all economic drivers and have impacts on support industries, lodging, dining, travel, shopping, etc. There is no way to list them all.
As we think a little further ahead, understand that cancellation of travel and major events, combined with less active consumers, has consequences for huge numbers of businesses. Those impacts can also lead to layoffs, reduction of hours, etc.
The more of that we start to see, the more potential for longer-term impacts on the economy. If this leads to higher unemployment and lower incomes, consumers will make substitutions towards cheaper meats.
This is where beef is more vulnerable than pork or poultry, but all meats and livestock will be affected as they compete in the meat case.