Three of America’s leading livestock economists have released a new working paper that examines in-depth the dramatic impact the COVID-19 pandemic unleashed on cattle, beef and pork markets this spring.
“Beef and Pork Marketing Margins and Price Spread during COVID-19” seeks to clarify the events that transpired during the spring of 2020 and why. Specifically, the authors sought to address the factors that created confusion among many industry stakeholders over the extreme volatility in the markets for both cattle and wholesale prices.
The authors, Glynn Tonsor, Kansas State University, Jayson Lusk, Purdue University and Lee Schulz, Iowa State University, say their paper notes “the difference between price spreads and marketing margins, outlines corresponding economic theory, and describes the empirical evidence on wholesale meat and livestock price dynamics in the wake of COVID-19 disruptions.”
The authors acknowledge the “controversy surrounding wholesale and farm-level price movements following a packing plant fire in Kansas was but mere prelude to the unprecedented COVID-19-related disruptions and historic rise in the spread between livestock and wholesale meat prices.”
In a phone interview with Drovers, Tonsor said COVID-19 created some unprecedented challenges for both producers and packers, and the three economists sought to explain why the markets reacted in the manner they did.
“The ability to run packing plants was notably constrained at the extreme,” Tonsor said. “They lost (up to) 40% of their weekly processing capacity. That creates what we call a cost wedge – it was more expensive to do anything in that sector – and not surprisingly, that resulted in more expensive wholesale beef prices and lower cattle prices.”
The authors note in their paper that beef and pork packers were both operating at 60% of the previous year’s volume at one point. That’s a “massive supply shock” that would be expected to affect marketing margins. The economists also document how margins measurements are “critically sensitive to selection of data and information utilized.”
Tonsor notes “the bulk of the cost wedge – the difference between livestock prices and wholesale meat prices – had a lot more affect on wholesale meat prices going up than it did with cattle prices going down. The magnitude of the change was much smaller (on producers) than on the elevated meat prices.”
The result, he says, created more pressure on meat buyers – retailers, consumer and exporters – than it did on the sellers of livestock, though he is quick to acknowledge that is not to deny the extreme volatility producers experienced. Tonsor also noted the economists sought to examine the margins packers saw during the height of the pandemic, but admits it is a difficult task.
“We know that packers’ costs went up,” Tonsor said. “But there was massive confusion over their gross margins, which did not account for increasing costs and reductions in volume.”
The reductions in volume of animals processed meant packers had some of the same fixed costs they had before the pandemic, with no revenue to offset those costs. Moreover, two decades of Mandatory Price Reporting have given the beef and pork industries “lots more information on prices” for animals and wholesale meats, but packer costs remain proprietary information to each individual company.
“It makes it difficult to see behind the curtain,” he says.
The authors note concerns about “concentration and allegations of anticompetitive behavior have led to several civil suits and inquiries by the U.S. Department of Agriculture and the U.S. Department of Justice, with increases in price differentials serving as a focal point.”
The authors conclude their paper with some discussion around policy proposals that would pit industry concentration against industry coordination and economies of scale.