Post-COVID uncertainty complicates beef decisions

Cow-calf operators and the rest of the beef industry are facing their usual dilemma, but it is being exaggerated and worsened by COVID-19.

When they invest today, they’re investing in a market that is years away. And the trends that will reveal what that market should be won’t be visible for months, or years.

It’s a stark reminder that cattle producers live in a market dictated by extremely long lead times and trends that can have incredible lag times.

“Unlike other livestock commodities, beef’s supply chain is protracted, more complex, and has less integration across sectors,” says University of Alberta agricultural economist James Rude in a March paper in the Canadian Journal of Agricultural Economics.

“With a lag that extends up to two years before calves are marketed as slaughter cattle, the impacts of the initial demand side shock and subsequent packer shutdowns have not yet worked their way through the system back to cow-calf investment/retention decisions.”

But that’s really just the short-term impact on calf production. The more profound issue facing the beef sector is how much demand will exist two years, five years or 10 years from now. That’s the demand that will set the prices beef producers receive.

That’s something impossible to predict comfortably today, Rude said, because the long-term impact on consumer incomes, in both North America and globally, can’t be known due to so many COVID-19, economic and financial wild cards still being dealt.

A “plethora of offsetting government programs” has affected the massive income hits that consumers in North America and other developed nations suffered as COVID-19 hurled millions out of work and shut hundreds of thousands of businesses, Rude notes.

In developing nations, the lack of those programs and the continuing effects of COVID-19 infections mean the income of middle class consumers is impossible to accurately predict.

This isn’t Rude doing the typical economists’ dodge of saying “it depends.” It’s a frank acknowledgement of the impossibility of reasonably assessing long-term consumer income trends when the state of the global economy is completely up in the air.

Right now, there’s a big debate between stimulus-spending hawks and doves in the United States and globally. Most central bankers and many economists think the world faces a massive economic slump if advanced economies don’t engage in huge government spending to replace the money that would have drained out of consumers’ pocketbooks if they were simply left to unemployment and business bankruptcy. To them, stimulus spending just keeps economic activity trotting along until the real economy can recover.

But some, most notably Lawrence Summers of Harvard University (and economic heavyweight of the Clinton and Obama years), think there is grave danger of creating runaway inflation by excess government spending. They think the stimulus spending is akin to an adrenaline shot that will overstimulate the patient.

Some see an imminent threat of economic slumping and deflation, while others see overheating and an inflationary spiral.

On April 1, an investment manager told me that he sees a serious threat of 1970s-like stagflation on the other side of the pandemic, something which is informing his arguments in favour of farmland purchases as long-term hedges against other asset classes.

Beef demand is based, largely, on consumers’ disposable income. The more money people have, the more they tend to spend on meat.

That’s true in advanced countries, where better economic times tends to lead to more purchases of expensive meats, such as bacon and the finer cuts of beef, as well as greater overall consumption of meat.

But it’s in the burgeoning populations of the developing world where the income impact on meat demand is most profound. There, hundreds of millions of people have been becoming “middle class” in relative terms, which means that for once they have the ability to buy substantial amounts of meat. That’s the first thing consumers tend to increase when they become wealthier and move beyond subsistence.

So, will those hundreds of millions in China, India, Southeast Asia, Africa, South America and elsewhere come out of the pandemic retaining their newfound middle class incomes and continue to rise up the economic ladder?

Or will be they be booted down a few economic rungs and fall beneath the increased-meat-consuming level, cutting their food spending as they cope with protracted income shortfalls?

That’s what’s going to determine the global demand for beef for the next half decade, and it’s a product of a future we can’t yet see.

But cow-calf producers and the rest of the beef industry are making decisions today that will affect their position in that coming market.

Do they expand herds, expand feeding places and tool up plants to produce more beef for the growing demand of the future, or do they carefully manage their capacity, focusing on carefully stewarding low-cost efficiency rather than pushing for expanded production? Those are big choices.

All farmers regardless of commodity face this situation to some degree. Growers not only seed a crop this year in the expectation of next year’s market, but make multi-year investments in machinery and land based on expectations of a few years out.

Hog farmers breed pigs today based on their view of the likely profitability of a pork market a year away, and they invest in barns with a multi-year outlook.

But nobody faces such long-run gambles as cow-calf producers and beef processors, for whom there are fewer short-term levers to pull.

Today, with slaughter plants in full production and demand healthy, things seem good. But where will they be as the pandemic’s second year, and its aftermath, replace the tumultuous first year of 2020-21?

That’s the dilemma that thousands now face.

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