Commodities Corner: Here’s how cattle and hog futures have reacted to meat-processing plant closures

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Meat-processing plant closures in the U.S. weakened livestock demand and led to concerns over a possible shortage of beef and pork.

“It has been a roller coaster in the meat industry this year,” says Arlan Suderman, chief commodities economist at INTL FCStone. Demand surged when stay-at-home orders began as people stocked up on the products, and then fell because consumers tend to eat less meat at home than in restaurants.

That also created price volatility for cattle and hog futures. So far this year to Friday, futures prices for feeder cattle FCQ20, -0.18%, at 136.95 cents a pound, lost about 12% after posting four consecutive months of declines. They trade around 9% higher month to date. Lean hogs LHM20, -3.48%, at 61.70 cents a pound, are nearly 14% lower this year so far, but trade almost 5% higher this month.

The coronavirus pandemic led many meat-processing plants to temporarily close as employees fell ill. Live animal prices “plummeted due to a larger supply of animals versus processors to buy them,” says Suderman.

Tyson Foods TSN, +5.46% and Smithfield Foods both announced closures of facilities in recent weeks, some of which have resumed, or plan to restart, operations.

Read Barron’s:There’s a meat shortage coming. Tyson Foods looks like a good bet.

On April 28, President Donald Trump issued an executive order for meat-processing plants to remain open, raising prospects for reopenings.

However, Tyson President Dean Banks said in a May 4 earnings call that U.S. pork-processing capacity has been reduced by nearly 50%, as the pandemic pressured the supply chain and trimmed the industry’s overall profitability.

‘Consumers don’t want live animals. They want processed cuts.’

— John Payne, Daniels Trading

“Consumers don’t want live animals. They want processed cuts,” says John Payne, senior futures and options broker with Daniels Trading. “Without the packer, the supply of beef and pork has shrunk. That will create huge margins for those who can pack meat,” but the problem is that “many meatpacking plants can’t process meat now because their employees are sick with coronavirus.”

U.S. cattle slaughtered for the week ended on May 2 was estimated at 425,000 head, down 36.8% from the same time a year ago, while hogs slaughtered was at about 1.55 million head that week, down 34.7% from the same time a year earlier, according to the U.S. Department of Agriculture.

“We’ve seen a tremendous break in the slaughter here, which means we’re not producing as much pork, not producing as much beef” that will end up in the grocery stores, says Payne. In the short term, “there isn’t a lot of fresh product around.”

Shutting down operations means “less livestock head will be processed and…will cause a drop in demand and price for those livestock,” leading to regional shortages of consumer meat product, says Daniel Hussey, market strategist at Zaner Financial Services.

Stocks in cold storage may be enough to “buffer temporary shutdowns or slowdowns in regional markets,” he says, but there is enough meat in storage to last only a few weeks.

USDA data show that compared with last year, beef in U.S. cold storage as of March 31 was up 11% at 502.4 million pounds in all warehouses, while frozen pork supplies were 2% higher at 621.9 million pounds.

Fundamentals are “bleak” in the short term for higher futures prices, Hussey says, but “surprisingly good” longer term.

Demand for food, and American consumers’ taste for quality food, is “reason to have faith that the consumer demand will continue for meat products,” he says.

“The issue is with the supply chain’s inability to service that demand, and this makes for a unique opportunity for a longer-term bull market to begin from a capitulating event that is causing a temporary disruption,” he says.