COVID-19 is causing uncertainty throughout the agriculture industry, and cattle producers are feeling the strain as unprecedented unemployment and consumer uncertainty have rattled the financial markets.
“We’ve all been impacted, and we’re in uncharted waters,” said Michael Looper, professor and head of the Department of Animal Science for the University of Arkansas System Division of Agriculture.
Looper and other experts with the Division of Agriculture and the Arkansas Cattlemen’s Association recently connected with nearly 200 cattle producers in an online webinar to discuss the impacts of COVID-19 on the cattle industry and offer guidance for navigating an unpredictable future.
Mirroring financial markets
For the most part, cattle futures have taken cues from outside markets, with losses in cattle futures correlating with losses in the broader financial markets.
“The short-term markets are being whipsawed right now,” said John Anderson, head of the Department of Agricultural Economics and Agribusiness with the Division of Agriculture.
Live cattle contracts lost 25 percent of their value between mid-January and the third week of March, with most of drop coming after mid-February.
“The bigger issue this spring with COVID-19 was behavior of the cattle futures market,” Anderson said. “Money was running scarce, and live cattle futures were caught up in that dynamic. When you have futures prices dropping more rapidly than the cash price, that puts feedlot managers in a poor negotiating position.”
Market fundamentals were also worse than expected in the first quarter, even without the pandemic. According to USDA figures, beef production was up 6.7 percent in the first quarter compared to a 7.9 percent increase for pork and 8.3 percent for broilers.
“If the COVID-19 outbreak has abated in the next month or so, the rebound in markets could be relatively quick, especially if support from the supply side of the market does materialize in the latter half of the year,” Anderson said.
Panic buying drains supply chain
COVID-19 spurred panic buying as consumers rushed to stock up on meat and other staples, draining the supply and causing a run-up in wholesale prices.
“Panic buying is not the same thing as an increase in demand,” Anderson said. “It might look like it, but it’s really not. Essentially, it is pulling demand from later periods ahead to today. It creates a short-term shortage.”
That shortage has been seen at grocery stores as well in disruptions to the restaurant trade, which accounts for about half of beef consumption.
“Retailers and packers are working hard to refill the supply chain after this spate of panic,” Anderson said. “Processors are thinking ahead to what will happen with supply chain disruptions if people can’t work, if the supply chain shuts down, or if we can’t get workers in place.”
If restaurants reopen, the market could rebound. If closures continue for another few months, consumers will need time to rebound financially and recover from drawing down their savings.
“It’s all highly dependent on how long we stay closed,” Anderson said.
In times of uncertainty, people spend less and save more due to perceived risk. With jobless soaring, Americans are experiencing unprecedented loss of income.
“The numbers are sobering to look at,” Anderson said. “This is the kind of thing that will contribute to negative impacts on the industry.”
In downturns, consumers tend to seek products at the lower end of the price scale. Beef, however, doesn’t have extensive low-cost product offerings.
The second half of 2020 is expected to fare better in supply, but beef production overall is expected to be down a couple percentage points, Anderson said.
Options for beef producers
Jody Almand, senior credit analyst with Farm Credit of Western Arkansas, said producers have some options if they find themselves in a financial shortfall:
•Extend a payment for a period of 30, 60 or 90 days. A payment extension is usually a one-time occurrence and is sometimes the best fix for a short-term problem.
•Re-amoritize a payment. A re-amoritized payment, or REAM for short, lets a producer make a partial loan payment with the difference added to the end of the loan. In some instances, the maturity can be extended in exchange for lower payments.
•Rebalance the loan. Similar to a refinance or debt restructuring, a rebalance spreads debt over a longer term, lowering payments if needed.