An Integrated Beef Market Offers Protection from Plant Closures
Post by Brendan McDougall
As scary as COVID-19 is, the potential for secondary consequences such as wide-scale food shortages are equally if not more terrifying. Throughout the pandemic, essential food workers have tirelessly fought to optimize supply chains, continue processing and keep grocery shelves stocked. COVID-19 outbreaks at two processing facilities in High River and Brooks Alberta and, more recently in Chambly, Quebec have brought on new conversations about the availability of beef, and meat more broadly, in Canada. While the issue is not yet critical for retailers, it is causing significant disruption for beef producers.
Limited slaughter and processing capacity can create a bottle neck in the beef supply chain. If the situation with North American beef processing becomes critical, cattle may stay on feedlots while retailers run out of supply. Furthermore, the mere thought of meat shortages could create a self fulfilling prophecy where nervous consumers rush to hoard beef products, creating the shortage they fear. Prime Minister Justin Trudeau stated, "We are not at this point anticipating shortages of beef, but prices might go up. We will of course be monitoring that very, very carefully." Trudeau said beef producers have assured the government they will focus on domestic demand before selling outside the country.
The declining value of the Canadian dollar due to the recent decline in the oil prices gives more buying power to foreign importers, like those in the US. Similar plant closures of pork processors in the US have created significant stress on American meat supply chains. If the problem spreads to beef, can Canadian producers really prioritize domestic demand, even in North America’s highly integrated beef market? If processing capacity is going to be limited in Canada, the last thing we want is to not have access to American beef processing capacity and retail beef.
Canada needs US slaughter capacity now more than ever. Canada is a massive producer of beef. 59,784 beef farms produce 10.67 million cattle and calves for beef production in Canada. This significant volume of production is coupled with a highly concentrated processing/slaughter sector. Three processing plants represent 95% of Canada’s beef processing capacity. Closures at Cargill High River, one of those three plants, and reduced shifts at other plants due to COVID-19 outbreaks among workers has resulted in significant reductions in slaughter rates. There is risk of there being insufficient room at slaughter facilities for beef coming down the supply chain. According the Beef Farmers of Ontario, total federally inspected beef processing in the last week of March was 66,200 head. That number fell 51% to 32,652 three weeks later. Reduction in capacity was driven by Western Canadian processing shutdowns, like that at High River. Western Canada processing was down 64% or 34,649 head, in the three-week period. The same time period saw an in increase in processing capacity in Ontario east, from 12,229 to 13,330, or 8%. However, the risk remains high in Ontario. A similar scenario in Eastern Canada (64% reduction) would take another 7,827 head of processing space out of the market.
Under normal circumstances, Canada typically exports large numbers of cattle to the US for processing. According to the UN Comtrade Database in 2018, Canada exported 1,188,933 market weight cattle to the US alone, 39% of Canada’s 2018 total slaughter capacity. Furthermore, Canadians bought 78.7 million kgs of beef back. Although US kill capacity has also been reduced due to COVID-19 impacts, it is to a lesser degree. According to USDA statistics, US kill capacity is down 25.7% from last week of March to third week of April. Canadian slaughter as a percent of American slaughter is at its lowest level in 2020, 6.5% in the week ending April 18th. Arbitrage tells us that Canadian cattle will start taking price reductions and seeking processing capacity in the US. This means that Canadian producers are being squeezed from both directions as cost increase as they hold cattle and prices decline as more cattle compete for limited slaughter capacity.
Canadian beef cattle need that slaughter capacity while Canadian plants come back online. To process Western Canada’s 34,649 head capacity deficiency, it would take Eastern Canada 2.5 weeks while the US could kill that amount 14 times in a week. This is not a great comparison but lends some understanding of the relatively massive US capacity. This capacity is likely to remain open. Plants are taking actions to reduce the risk of workers infecting each other. In an extreme case, the Trump administration appears willing to mandate that plants remain open under the Defense Production Act, even with risk of worker illness. It is not expected that the Americans would deny Canadian farmers access to American processors when its own processors are out of operation.
There are also some political implications to consider. We all remember when President Trump threatened to stop exports of 3M’s N-95 masks, a crucial piece of personal protective equipment for front line healthcare workers. "It would be a mistake to create blockages or reduce the amount of back-and-forth of essential goods and services, including medical goods, across our border,” said Trudeau in response to Trump’s threat. Imagine a scenario where meat exports to the US were halted to maintain domestic Canadian supply. Is it out of the realm of possibility to imagine policy prohibiting shipments of Canadian cattle to American processing plants in retaliation? You would be hard pressed to find a Canadian beef farmer who does not remember BSE, the last time the American market closed to Canadian beef cattle.
I am encouraged to see that discussions about the supply chain maintenance in agri-food are starting to become a more important in mainstream news, both in Canada and abroad. However, supply chains work best when they are unrestricted and fluid. Experts such as Dr. Mike von Massow at the University of Guelph do not foresee meat shortages in the Canadian supply chain despite problems at the processing level which cause significant disruption at the farm level. Keeping the North American market fluid and flexible will help the sector deal with capacity shortages, keep farmers profitable and ensure food on the shelves.
Recommended citation format: McDougall, Brendan. "An Integrated Beef Market Offers Protection from Plant Closures". Food Focus Guelph (85), Department of Food, Agricultural and Resource Economics, University of Guelph, May 11, 2020.