Where's The Beef

The Bail-in

Wendy's “Where's the Beef?” commercial debuted in 1984 to proclaim its burgers had more beef than its competitors. This successful campaign led to a 31% increase in annual sales. In 2020, the rise in beef trimmings’ prices from $0.25 to $2.93 per pound over the past 5 weeks caused 20% percent of Wendy's restaurants to take hamburgers off the menu. What happened?

First, there was a multi decade industry consolidation, which resulted in the big four meat processors (Tyson, Smithfield Foods, JBS USA, and Cargill) controlling 80% of the beef, 60% of the pork, and 60% of the chicken processed in the US. While these consolidations enabled the US to provide consumers with some of the world’s lowest cost meat, this concentration means the system is less resilient when shutdowns are required.

Second, the COVID-19 virus caused a reported 5,000 cases and 20 deaths across 115 meat processing facilities. The shutdown of just a dozen plants in response to the outbreak resulted in the loss of 40% of the industry’s meat processing capacity. As a result, supplies fell and prices rose. Beef prices, shown in the graph below, more than doubled.

In a full page New York Times advertisement on April 26th, John Tyson, chairman of Tyson Foods, wrote ”the food supply chain is breaking” and warned that “millions of pigs, cattle and chickens will be depopulated because of the closure of our processing facilities.”

Two days later, the US Government ordered meat processing plants to reopen, prompting union outcries about worker safety. In the long-run, this will lead to more automated machine processing. In the short-run, Americans who do not have locally grown and processed meat are expected to face increasing shortages, rationing, and higher prices.

The prospective meat shortages are expected to vary by animal and market replacement time as shown in the table above. Breeder replacement time is shortest for chickens at 5 months and longest for cattle at 46 months. Chickens can be raised from day-old chicks to 6-8 pound broilers in 60 days. Cattle, on the other hand, need 30 months to grow from calves to their full slaughter weight. Adding these two factors together, the market replacement time is 7 months for chickens and 6.3 years for cattle. The decline in the price of feeder cattle shown above, caused by the closure of processing plants, means that ranchers face an uncertain future and will be forced to reduce their herds.

We live in an increasingly interconnected world where events can have cascading effects on supply chains. We believe that the world is moving from an era of declining prices and just-in-time inventories to a world of rising prices and larger inventories. There is a natural instinct to hoard whatever is in short supply. Earlier this year, consumers hoarded toilet paper, which left shelves bare and led to rationing. We are witnessing the beginning of an era of demand pull inflation, which is likely to become a significant factor beginning in the food industry over the next few years.

The opportunity here is in the development of locally grown and raised meat and produce along with the companies, products and services that support their development. Because of the 50% decline in the average nutritional value of foods over the past 50 years, we expect to see an increasing focus on organically raised foods as well as sustainable soils and farming practices. Hydroponics could easily become part of today's “Victory Gardens.”

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