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The high cost of high efficiency

Reduced meat processing capacity due to COVID-19 has left farmers stuck with market-ready hogs and cattle.

May 27, 2020

6 Min Read
Hogs in pen
DISRUPTION: The sharp slowdown in the meat packing industry due to COVID-19 and worker safety is hurting livestock farmers and rural communities. Farm Progress

You are about to read the main points of a recent discussion I had with longtime friend John Otte, economics editor at Farm Progress for many years. John is now retired, and I miss walking down the hall and asking him to share his thoughts about various dilemmas facing farmers and the ag economy. We both grew up on family farms raising livestock. We’ve seen big changes in hog and cattle production — but nothing like what’s happening today with the coronavirus situation sickening packing plant workers and significantly reducing processing capacity.

By the way, when John and I talked recently, we both practiced social distancing. We easily met the requirement for standing at least 6 feet apart. He was in Brazil and I was in Des Moines. The topic John and I talked about in late May was the tremendous financial hit livestock producers are taking today. COVID-19 fallout is bringing unprecedented losses on hogs and cattle. Reduced slaughtering capacity forces farmers to hold livestock beyond market-ready. Pigs and hogs are being euthanized to make room for younger animals coming into overcrowded feeding facilities.

Farmers, processors, manufacturers and retailers will all tell you that larger volume spreads fixed costs of investments in equipment and facilities over more units of output. In short, bigger is more efficient.

As the old saying goes, the bigger they come, the harder they fall. COVID-19 taking down a relatively small number of large meat packing plants crippled the U.S. meat processing sector. Prices to livestock producers have tumbled as live animal supplies far exceeded operational packing capacity. Consumers are facing higher retail prices and meat shortages as packers scramble to divert products aimed at the collapsing hotel, restaurant and institutional market to retail channels.

Costs in terms of human lives and dollars have far exceeded anything anyone could possibly have imagined prior to COVID-19.

Fewer small, local lockers today

From the 1940s into the 1970s, the U.S. had a thriving local locker plant sector. Small slaughtering plants handled several head per day. This was before many people had in-home freezers. Processors typically stored customer-owned meat in lockers in a cold room at the plant. Hence such facilities were called locker plants. Many remain today. They typically slaughter animals for farmers who no longer care to slaughter animals on-farm or who don’t have facilities to process the meat. Many also process “freezer beef” for customers who buy live animals directly from producers.

Suppose such operations still dominated the meat processing business. Having six, eight or even a dozen such plants go down in a relatively small geographic area would not disrupt the supply chain to the extent the few packing plants that went down did this spring. Could the U.S. return to smaller, more widely dispersed packing operations? It may be possible, but not likely.

Handling relatively small volumes means such meat processors typically have higher costs. That’s why they operate predominantly in niche markets. Demand for their services surged with COVID-19. Today in Iowa, if you want to get an animal processed in a small independently owned locker plant, you’ll be on the waiting list for several months.

Locker plants function well in rural areas. But most Americans live in urban areas. Complicated logistics aside, complying with inspections and regulations to ship meat across state lines to urban areas costs money. Companies need to spread those costs over more meat. That points to volume.

Changes in packing industry

Meat processors are rapidly making adjustments such as plastic barriers separating line workers in the packing house. Still, the meat packing sector almost certainly will not return to the way it was before COVID-19. We can’t predict all the adjustments the sector will make, nor can we predict how packing plants will look in the future. Adjustments will boost per unit costs. Meat prices to consumers will likely be higher. Economics still call for spreading costs over more units of output. That suggests larger facilities will still have an edge. But the sector will certainly be different.

At least part of higher meat packing costs will get passed on to consumers. In 2018, Americans spent an average of 9.7% of their disposable personal incomes on food — divided between food at home (5%) and food away from home (4.7%), according to USDA. Even if retail prices rise somewhat as we recover from COVID-19 the share of disposable income Americans spend on food will still be among the lowest in the world.

Controlling the food supply chain from farm to fork offers some other advantages besides efficiency. One is traceability. For example, if an E. coli outbreak occurs, companies that control the entire supply chain can rapidly identify the source. Being big enough to capture economics of scale and control the supply chain also has a downside. An E. coli event that requires a massive recall over multiple states is costly in terms of product lost and risk to consumer health.

More options for small processors

State-inspected meat lockers in Iowa are smaller than federally inspected meat processors, but they are held to equal standards. On May 20, the Iowa Department of Agriculture announced an agreement with USDA to enable small meat and poultry processors to sell their products across state lines. Thus, eligible processors can apply for admission to the Cooperative Interstate Shipment agreement. Iowa has 68 of these smaller meat lockers that could participate in this program.

To qualify for CIS certification, a meat processor must have fewer than 25 full-time employees and comply with all federal food safety, sanitation and facility regulations. Individual livestock producers can’t apply to the CIS program, but they can sell their meat and poultry products across state lines if they are processed at a CIS certified facility.


Closures, slowdowns will persist

Hardship for livestock producers has continued, even as meat processing plants in Iowa and neighboring states began to reopen. To ease the financial burden on farmers, Iowa lawmakers are leading an effort for a payment program to assist farmers forced to depopulate livestock herds. But it will take time to restore meat processing capacity.

Iowa State University economist Chad Hart estimates U.S. meat packers in late May were running at between 60% and 70% capacity, an improvement from a few weeks prior when 45% to 50% of plant capacity was off-line. While improvement is welcome, livestock farmers are still stuck with market-ready animals they cannot sell. Matching livestock production to processing capacity and demand going forward will take time. Hogs take about 10 months from breeding to market and cattle about 18 months. “Farmers can’t change the number of animals they have or their growth rate quickly,” Hart notes. “Rebalancing animal supply to packer capacity will take months, or possibly years.”

In the near term, most industry analysts expect processing plants will rotate between open and temporarily closed as they address COVID-19 outbreaks. Overall packing capacity will remain reduced. Hart is encouraged by how quickly some plants have come back online. But he says June will be a critical point. “It will tell us about our country’s ability to reopen with the virus. If our nation is able to effectively manage reopening both meat processing and the general economy, it would bode well for farmers.”




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