Supply Chain Disruption in Beef

“The farmer is the only man in our economy who buys everything at retail, sells everything at wholesale and pays the freight both ways.”

– John F. Kennedy


Despite the preponderance of farm subsidy programs, the late President’s point is that most operators in the agricultural industry, particularly those closest to the farm or ranch, are price takers. Unfortunately, price takers tend to face severe value destruction in the wake of a roiled supply chain.

Meat producers were baffled by surging retail prices at grocers and specialty shops in the depths of the COVID-19 crisis. Retailers were selling cuts of beef and pork at prices reflecting significant margin expansion. How could live cattle futures prices plunge 30% when steaks sold at the butcher were priced double or triple the levels of mid-January? The answer, normally derived by price elasticity formulas, was instead provided by the perfect storm of an exogenous shock to the beef supply chain coupled with an extraordinary change in demand from retail. Stay-at-home orders changed demand in the retail channel. That in turn changed the dynamics of and sent ripples up the supply chain. As a result of more people staying at home, the retail channel experienced higher demand while fewer workers at meat processing plants contributed to supply chain disruptions.

Production Bottlenecks

At the time, the bottlenecks at slaughterhouses and meatpackers had immediate effects on availability of product, on distribution and with boxing. According to Reuters, 30% to 50% of meatpacking employees were absent from their jobs in early June. The next question should be: to what extent will this permanently alter the dynamics of the beef and other meat processing value chains?

Source: barchart, CME Group


Shifting Demand Patterns

A luxury good like steak can be substituted for lower quality cuts such as brisket, rounds, and chuck. Price sensitive protein shoppers can still purchase red meat but in exchange, they move down the scale in quality. These same shoppers will substitute beef by putting pork or chicken in the shopping cart. In the extreme, a steak eater can cut out meat altogether by purchasing beans or plant-based substitutes. The demand for steaks is price elastic as slight changes in price at the counter can have marginally greater effects on consumption.

Traditionally producers supply the market with steady volume year over year. They consider the seasonality on the demand side of the equation, adjusting marketing tactics while maintaining strategy throughout the course of the year. Domestic consumer purchasing patterns are strong if not steady year over year Import demand has been more variable than export demand according to USDA data from the last 5 years. Ranchers can anticipate seasonal buying patterns from domestic and foreign markets because of seasonal demand. Deviations from headcount delivered by stockers, generated by feedlots or processed by slaughterhouses drive prices paid by participants along the value chain.

Sources: Ag Equipment Intelligence, Penn State Agriculture Extension, Duke University, Meat & Livestock Australia, United States Department of Agriculture, Abraxas Group


Excess Supply

According to Ag Equipment Intelligence, too many head of cattle were coming to processing facilities just as managers were scaling down capacity in April. Too much beef coming to market pushed prices down, cutting profitability. During normal market conditions, profitability at feedlots is most susceptible to grain prices. In 2020, supply chain bottlenecking hampered profits for all meat production from processing backwards with volume backups.

Value can be shared across the supply chain in the U.S beef markets but commodity risk tends to remain closer to breeding and ranching operations. On the other end specialty shops maintain pricing power with customers with more margin to give packers and distribution. Wholesalers like Costco and larger grocery chains can amortize costs across other perishable goods. Those using better inventory management systems and data processing will experience better margins on meat sales.


Source: United States Department of Agriculture


Delayed Reaction

Wholesalers have increasing visibility into the supply chain because of data. However, only a few grocers and retailers, such as Costco, Amazon and Walmart are analyzing large swaths of data. Big box retailers and specialists have proximity to the consumer. The use of data analytics provides them with better pricing power in the supply chain.

When futures prices for live cattle cratered in early 2020, it would be another one to two months before the boxed beef loads declined. At this time of year loads usually increase with anticipation of greater seasonal demand. Moreover, lower input prices usually provide greater incentive for processing plants to ramp production. Even with more finished product, these packers keep their prices of prime cuts firm knowing that specialty retailers are gaining pricing power over the high-end market. At the back end of the supply chain the operators are gaining power, particularly with insights into customer preferences.

COVID-19 changed the supply and demand dynamics of the market but only strengthened the position of players better situated along the supply chain. Slaughterhouses and meat packers reduced headcount, increased the space between workers, and cut shifts resulting in a total reduction in capacity utilization of capacity overall. It is estimated that pork processing plants lost 20% of production capacity while beef plants reduced by 10%, according to the Farm Bureau. Tens of thousands of restaurants closed, laying off millions of workers. Packers could not reconfigure operations on time or in a cost-effective way to keep grocers and specialty foods stocked as demand there soared. Pricing at retail not only remained robust but grocers and specialty operators increased prices to avoid stock outs.

Although shipped volumes have recovered since the nadir of early May, the supply of beef to the end market remains weak.


Price takers in cattle and other meat producers continue to see weak pricing for their heifers and steers. Some ranchers and stockers grumble about the need to capture more margin, either through vertical integration or by increasing their marketing budgets. They bear much of the commodity price risk and this scale has become further unbalanced during the global pandemic. Ranchers and processors can bolster their balance sheets by submitting for emergency grants and low interest rate loans during the interim. They may be cut off from a robust end market with this logistical and this market altering shock due to COVID-19, but specialty marketers and grocers will see better gross margins on their beef and pork purchases on lower sales volume. Even the best ranching marketers will have trouble when buyers keep processing capacity low. Direct marketing with bulk shipments of beef, keeping within state and federal guidelines, is one solution. However, cattle production will need to come down for markets to clear and for them to do better than break even at current volume. Price elasticity is not a friend.

Today, with the loss of thousands of restaurant demand and with the reduction in capacity of meat processing plants, meat producers placed COVID-19 on their most wanted list. Those with the capability to restructure or at least reconfigure should consider this a time to alter strategy to focus on the higher end market of beef connoisseurs.

About the Author

Brett Ladendorf is a Managing Director at Abraxas Group, a boutique advisory firm focused on providing transformational leadership to middle market companies in transition. He can be contacted at: