Article: Meat industry on a knife-edge as Covid-19 disruption deepens

Global meat markets are being pulled in different directions as Covid-19 triggers a transformation in the way people buy food, while at the same time sickening workers, disrupting supply chains and complicating international trade.

So how have markets been developing across the globe and how do the world's leading processors view the situation going forward?

Meat and poultry prices in some countries have moved sharply lower, while in others they have stayed firm or even risen. Markets for different types of meat products are also uneven - with beef and pork prices weakening in many parts of the world but chicken and eggs tending to strengthen.

Meanwhile many of the world's largest meat processors have been keen to stress their commitment to supplying markets and preventing shortages on supermarket shelves. But in some cases, this is now being jeopardized by the spread of Covid-19 among the workers and inspectors who keep meat plants running - potentially bringing even greater disruption if the disease continues to spread.

Europe

These tensions and sectoral differences are all evident in Europe, where measures to control Covid-19 are reshaping the way people buy and consume meat. The closure of restaurants and fast food chains is adding to pressure on beef markets in particular - driving down prices and causing serious problems for producers and processors.

Pigmeat markets have been more mixed - partly because of developments in China, the EU's largest export destination. Pork exports faced some disruptions in February as Chinese disease control measures caused logistical problems at Chinese ports. These issues have now started to ease however - leading to optimism that China will once again help prop up prices and offset some of the disruption seen in Europe itself.

Overall, European pig prices have seen some ups and downs over the past month, but remain well up on year-ago levels. This is partly due to Covid-19 related issues but also reflects the drop in supplies seen in countries such as Germany.

Meanwhile, the poultry sector shows that all is not doom and gloom when it comes to Covid-19's market impacts. Unable to eat out, many consumers are buying more chicken breasts and eggs to eat at home. In many European countries, supermarket shelves have regularly been stripped bare of these items since Covid-19 lockdowns were first put in place. Average prices for broilers and eggs have risen as a result and now stand at their highest levels for several months.

Workforce concerns

Serious challenges remain however - not least because the meat and poultry sectors face potential labour force issues if Covid-19 spreads among meat workers.

In Northern Ireland, employees at a Moy Park processing plant walked off the job last week and unions are calling for more to be done to protect the health of their members.

South of the border, Irish livestock producers have been calling for support measures to help them through current turmoil, which has seen steep falls in prices paid for both cattle and sheep.

European governments are also being pressed to ensure that border closures do not disrupt supplies of animal feed and other inputs to farmers. At the same time, border delays have added to pressure on the live trade, sparking complaints from animal welfare groups and MEPs.

Although the industry is facing a number of supply chain challenges - there are signs that EU authorities are recognizing the need to address these issues in order to avoid food shortages further down the line.

In mid-March, the European Commission published guidelines on how to strike a balance between fighting the Covid-19 pandemic and protecting 'essential' supply chains from disruption. European governments are also looking at ways to prevent border delays and free up the movement of seasonal farm workers.

In another example, Denmark is taking steps to potentially allow meat plants to stay open for longer so that working hours can be staggered and employees given more space between them and their colleagues.

View from processors

European meat processor, Danish Crown, says it is adjusting to the shift in consumer purchasing patterns.

"We are confident, because basically, people still need something to eat. We have seen a big change in sales, because while sales for foodservice… have almost stopped, there is a marked increase in supermarkets. It keeps the market going, and we have a staff of employees who show an impressive readiness to change, so that's a situation we can handle," says Lars Albertsen, global sales director at Danish Crown Pork.

The company says it is aware that slaughterhouses may be affected by illness but says steps are being taken to ensure food supplies can be maintained.

When it comes to markets, Albertsen says there is no need to panic.

"In terms of prices, they have fallen in Europe, but there is nothing to indicate that the bottom is falling out of the market," he states.

German processor Tonnies says it is well equipped to deal with the current pandemic - promising to keep the German market fully supplied with meat and sausages. At the same time however, it says export demand has been hit by international uncertainty, especially with regard to transport logistics. As a result, pig carcasses cannot be fully utilized as some parts of the animal only find buyers in overseas markets.

For its part, Netherlands-based Vion says Covid-19 is creating 'major uncertainties' in 2020.

"The turnover of convenience meat products, such as minced meat, is increasing in comparison to more luxurious products. These shifts have a major impact on meat values, causing the relationship between purchase and selling prices to shift as well," the company notes.

Although the disease has caused some disruption to sales in Asia, Vion says the continent continues to offer opportunities in 2020, in part due to the persistent African Swine Fever outbreak there.

Meanwhile, the British Meat Processors' Association (BMPA) says a shift in demand for minced beef has left a glut of other cuts, such as steak and hind quarter, which processors can't sell on.

Even if it is frozen, or retailers buy these other cuts to sell on promotion, the association says it will be at a lower price that makes it unprofitable to continue processing, unless the price of livestock is reduced.

"In this scenario, the problem will end up at the farm gate, with farmers struggling to sell their animals at a price that covers their costs," the group warns.

North America

Similar tensions are apparent in North America, where meat and livestock prices have been volatile in recent weeks as markets react to the rapid spread of Covid-19.

As in other countries, prices of poultry have been pushed up as consumers rushed to stock up their freezers. After an initial uplift however, prices of some other types of meat have begun to soften as markets factor in how rising unemployment and economic recession could harm demand going forward. The impacts of this would be made more serious by the fact that US meat production is at record high levels.

Prices for livestock are also showing signs of weakening as traders worry that supplies could back up if more processing plants are forced to close because of Covid-19 outbreaks among workers.

Canada's Olymel recently said it would shut a hog slaughter and cutting plant for two weeks after nine workers tested positive for the virus.

Canadian pork plant halts operations after nine workers catch Covid-19

JBS USA then announced it would be temporarily downsizing production at a plant in the US for similar reasons.

These and other processors are attempting to keep workers on board by offering bonuses but if large numbers of workers get infected, more plant suspensions can be expected - causing further disruption to markets.

Quizzed on Covid-19's impact on consumer buying patterns, André Nogueira, CEO of JBS USA, last week said the group would have little difficulty adjusting to the switch away from food service as restaurants close and consumers eat more at home.

"The change is very simple - very few lines cannot be immediately used for retail - maybe some, but it's so small as to be irrelevant - we can change pretty much 100%. There is no impact on margins overall - so long as total consumption doesn't change," he added.

South America

Brazilian processors were initially bullish about Covid-19 impacts - playing down concerns over exports and highlighting how the world will still need to buy Brazilian meat even in the face of a pandemic.

This view was supported by export data which showed Brazilian pork, beef and poultry exports performing well in February despite logistical issues at Chinese ports.

A rise in the number of Covid-19 cases in Brazil itself has subsequently seen restaurants close - with consumers buying more in supermarkets. This has caused some volatility - though prices have held up better than in many other countries. This is partly because high feed costs have discouraged producers from expanding too fast - meaning supplies of most types of meat are fairly tight.

At the same time, South American suppliers have benefited from recent currency shifts, with sharp drops in the Brazilian Real keeping cattle prices competitive and making low-cost beef accessible to global markets.

Minerva, the country's third largest beef company, has suspended operations at some of its Brazilian plants. But market leader JBS has vowed to do all it can to keep markets supplied with meat. The group says it is well prepared to face the challenges posed by Covid-19 and expects Chinese demand to remain strong over the months ahead.

Argentina and Uruguay appear to have been worse hit by logistical problems at Chinese ports - with exports suffering in February as a result. But as the situation improves in China, exporters from these two countries now appear more worried about the situation in Europe, where the closure of restaurants and hotels is hurting demand for high quality Hilton beef cuts.

As in other countries, the spread of Covid-19 could trigger plant closures in South America. However, unions in Uruguay are divided over whether they should urge workers to walk out over safety concerns - or instead support efforts to keep facilities open to limit the risk of food shortages.

Australia

Until recently, Australian cattle prices were bucking the downward trend seen in many other parts of the world. Prices rose sharply between early February and mid-March but have slipped back over the past couple of weeks, suggesting that markets are beginning to suffer from some of the uncertainties prevailing elsewhere.

On the plus side, Australian red meat exporters have seen their competitiveness boosted by a weakening of the Australian dollar against its US counterpart. They should also benefit from the recent easing of logistical problems at Chinese ports.

However, some exporters are vulnerable to the grounding of planes as certain meat products are normally sent as freight that piggy-backs on passenger liners. Although the bulk of red meat is still sent as sea freight, planes are critical in servicing certain markets and customers, which have developed supply chains and marketing channels geared to quick-delivery chilled product - particularly for lamb. These business models are now facing significant challenges amidst a fast-evolving procurement landscape.

Australian red meat air-freight exports were worth USD823 million in 2019 - more than three times the value recorded in 2009, according to Meat and Livestock Australia. Sheepmeat, particularly the chilled lamb carcass trade to the Middle East, accounted for almost half of that export revenue.

China and India

China, where Covid-19 first surfaced, is further ahead on the curve and can maybe give some indications as to future direction of markets.

The initial impact of the disease was compounded by the fact it clashed with Lunar New Year, which is typically the peak season for red meat consumption. Government lockdowns hit ports and processing facilities - disrupting local meat production as well as imports.

The situation has since improved, with businesses gradually reopening as the number of new Covid-19 cases declines.

China's WH Group, the world's largest pork processor, says there are early signs that government measures are helping spur a recovery in Chinese pork production. With Covid-19 adding to complications caused by African Swine Fever (ASF) however, the company remains cautious and says it will expand its poultry operations to reduce its exposure to problems in the pork sector.

"In 2020, the overlay effects of sluggish global economic growth, risky geopolitical relations, continuation of ASF and outbreak of coronavirus disease 2019 will bring us unprecedented challenges. In China, the impact of ASF is expected to endure," the company explains.

"We believe that pork products are consumer staples, the impact of Covid-19 on the Group will be manageable under current assessment. Yet we are highly cautious about the latest development and the later implications of the epidemic," the group adds.

Meanwhile, markets in India have been infected by misinformation on Covid-19. Rumours that the disease is linked to poultry consumption sparked a sharp fall in demand for chicken and eggs, which caused prices to plummet. India has also seen exports of buffalo meat collapse as orders dry up in countries affected by Covid-19.

Conclusions

Forecasting what will happen on global meat markets is particularly difficult at the moment as much will depend on efforts to bring Covid-19 under control. If China manages to prevent a second wave of outbreaks, it will once again help absorb supplies and limit any downside to prices. ASF remains a problem and Covid-19 is setting back efforts to rebuild China's own production capacity. This should sustain Chinese import demand for all types of animal protein in 2020.

How markets develop elsewhere in the world depends on their own specific supply situation. The US has been ramping up production of animal protein, leaving it more vulnerable to demand-side shocks. In contrast, Brazilian producers have kept a lid on expansion - leaving them less open to potential problems of oversupply.

US exporters will also be disadvantaged by recent exchange rate movements, which have seen the dollar strengthen against the currencies of rival suppliers in South America and Australasia.

As always, any future global recession will affect poultry less than competing meats due to its relative affordability. However, further disruptions to global trade could make it harder to find outlets for parts of the bird not favoured by consumers in Europe and North America. In the same way, pork and beef exporters could find it hard to maximise carcase balance if sales to Asia are interrupted again.

For now, however, the industry will be focused on keeping workers healthy and preventing further shutdowns of meat processing plants, while at the same time pressing authorities to keep supply chains moving so that meat can continue to reach supermarket shelves.

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Posted 31 March 2020 by Max Green, Senior Analyst, Meat and Livestock, S&P Global Commodity Insights