The COVID-19 Pandemic Disrupts
Food and Beverage Supply Chains in the U.S.
- In recent weeks, major food manufacturers, particularly meat packaging and processing companies, temporarily halted operations due to high numbers of confirmed COVID-19 cases amongst employees. Related measures put in place to prevent the spread of the virus have affected food and beverage production and prevented facilities from operating at full capacity.
- On average, meat processing and packaging plants were closed for about 11 days, with 44 percent of all closures lasting up to 14 days and 28 percent lasting 15 days or more. The most impacted plants are located in leading meat processing states, such as Iowa, Minnesota, Pennsylvania, Indiana, and Illinois.
- The beverage sector has been facing CO2 shortages, associated with low production rates and closure of ethanol plants in the U.S. due to the pandemic, resulting in a corresponding challenge for the industry.
- The bottlenecks in meat processing are likely to cause an increase in prices for consumers, with some products being more susceptible to price hikes than others.
- Beyond domestic consumption, meat processing and meat exports play an important role for the U.S. economy. Pork exports in March 2020 have continued to increase with strong demand from China, while exports to Mexico, Japan, and Canada have also increased significantly.
- Beyond the retail impacts of food supply chain disruptions, logistical bottlenecks arising from changes to food cargo guidelines is an important consideration. Similarly, an imbalance or even a shortage of equipment at ports, including of reefer containers, can also make it difficult to offset domestic demand through imports.
- The plant closures have led to the increase of wholesale prices and the decrease in livestock prices, which have only begun to normalize around mid-May. The industry is likely to face long-term challenges in neutralizing the disruptions experienced during the COVID-19 pandemic.
In recent weeks, threats to food and beverage supply chains in the U.S. in the wake of the COVID-19 pandemic have dominated headlines. Major food manufacturers, particularly meat packaging and processing companies like Tyson Foods, JBS, Hormel, and Cargill, had temporarily halted operations due to high numbers of confirmed COVID-19 cases amongst employees. COVID-19 related restrictions and measures put in place to prevent the spread of the virus have affected food and beverage production and prevented facilities from operating at full capacity. With plants remaining halted for 11 days on average, effects have been and are expected to be seen on the food market including possible short term shortages and price increases. While the meat processing market reportedly has ample supplies of livestock, it is experiencing bottlenecks in processing and packaging.
Beverage and food manufacturers have been also exposed to other challenges stemming from the COVID-19 pandemic. One such example is a shortage of carbon dioxide due to lowered ethanol production levels, resulting in higher carbon dioxide rates and associated disruption to beer and soda manufacturers.
This report provides insights on how the COVID-19 pandemic has impacted the meat and beverage sector in the U.S., areas that have been the most impacted and the challenges to anticipate when planning and ensuring smooth supply chain operations.
Impacts on production at meat processing and packaging plants
The working conditions at meat processing and packaging plants have led to the spread of COVID-19 among employees, directly impacting about 40 percent of the pork slaughtering and 25 percent of beef slaughtering capacity in the US, according to The United Food and Commercial Workers International Union (UFCW). Working conditions where production lines run at full speed require a large number of employees to be working side by side, which can be a hotbed for the transmission of COVID-19. The rate of infection at meat processing plants can be particularly evident in states such as Nebraska where nearly one in every six confirmed cases is a worker in the meatpacking industry, or in Iowa where, in mid-April, 261 out of 389 single day confirmed cases originated in meatpacking plants, according to an Iowa Department of Public Health press release on April 19. Higher production line speeds, which have been authorized by the USDA at 16 poultry plants to increase speeds from 140 birds per minute to 175 birds per minute, are likely to further challenge the success of social distancing measures at the plants.
High numbers of infections among skilled workers, who aren’t easily substituted, have been reported at major U.S. food manufacturers, including Tyson Foods Inc., JBS, Hormel, Smithfield Foods, Cargill Meat Solutions, and others, which forced these companies to temporarily close factories. Everstream Analytics data shows that nearly half of all temporary plant closures have occurred in Illinois, Iowa, Minnesota, Pennsylvania, Indiana, and Kentucky and have lasted up to 22 days in some cases.
On average, meat processing and packaging plants were closed for about 11 days, with 44 percent of all closures lasting up to 14 days and 28 percent lasting 15 days or more. The Tyson Foods plant in Perry, IA had reopened in one day after cleaning and disinfection, while other Tyson Foods plants in Logansport, IN; Columbus Junction, IN; and Waterloo, IA remained closed for two weeks.
By late-April, beef production suffered a 25 percent drop year-over-year, while pork production experienced a 15 percent drop year-over-year, according to the United States Department of Agriculture’s weekly report of April 27. Meat stocks were expected to become tight following the processing plant closures. Frozen food inventory, which is often used as a food shortage buffer, has also seen a 4 percent decrease from February to March, prior to the shutdown of plants, and is the most significant drop since March 2014, according to the United States Department of Agriculture. Moreover, the bottlenecks in processing are likely to cause an increase in prices for consumers, with some products being more susceptible to price hikes than others. Items that need to be produced at special facilities, such as grass-fed or organic meats as well as products that need to go through additional steps such as flavoring, are likely to see higher price increases. The impact on different types of meat is also likely to differ as breeding times for some animals, such as pigs, are shorter than others, such as cattle, which simplifies the adjustments that need to be made to production levels.
Upon the discovery of positive COVID-19 tests at several meatpacking plants and their resulting shutdowns for testing and sanitation, U.S. President Donald Trump issued an executive order on April 28 that designated meat processing plants as essential infrastructure which can remain open with appropriate Centers for Disease Control and Prevention (CDC) and Occupational Safety and Health Administration (OSHA) compliance.
Despite the order, some meat plants continued to close, albeit in the context of new infections requiring disinfections and plant preparation for CDC and OSHA compliance. Some plants have been able to reopen with these measures in place, while others remain closed. An additional challenge posed by the plant shutdowns was the accumulation of livestock that couldn’t be brought to market, increasing the risk of livestock depopulation if processing plants were unable to open at a correspondent and profitable rate.
On May 9, President Trump announced a USD 3 billion (EUR 2.7 billion) purchase of surplus livestock, along with dairy and produce, under USDA’s Farmers to Families Food Box program as part of a USD 19 billion (EUR 17.59 billion) relief plan announced the month prior. Despite the executive order being signed, several plants across the country still struggled to remain operational due to workers safety. Some had reopened facilities with stricter social distancing measures in place, while others remained closed due to the high number of affected workers.
Carbon dioxide shortage threatens the beverage industry
A shortage of carbon dioxide, which is a gas widely used in sparkling sodas, beers, and other non-alcoholic drinks, has similarly raised concerns for the beverage industry. The gas is also used in temperature-controlled supply chains, transport, and logistics. As ethanol production capacity decreased in the U.S., mainly due to low ethanol demand during the COVID-19 pandemic, output volumes of its by-products have also been in decline. Products most impacted so far has been beer, soda, seltzer as well as fresh and preserved food manufacturers which rely on a steady supply of the CO2.
Sources suggest that CO2 production is likely to fall further to 50 percent in the coming weeks, following an already recorded 20 percent reduction. This potential reduction could interrupt production in a way that could reverberate into a multi-day or week-long disruption of final product preparation, thus delaying its time to market.
The beverage market has also seen increased customer demand as sales of non-perishable goods increased, due to preparations and stocking-up before and during the COVID-19 pandemic. But in order to satisfy these demands, manufacturers have had to act immediately and adapt to the situation. For instance, for coping with shortage of CO2, manufacturers had to increase on site CO2 storage capacity, find alternatives such as nitrogen, or switch to other available suppliers. These ad-hoc changes have also led to higher costs and unplanned supply challenges.
Significance of the meat industry
The meat and poultry industry forms the largest segment of U.S. agriculture, with a significant presence of livestock and poultry slaughterhouses. Some of the most crucial locations for the meat processing sector are located in the West and East North Central regions as well as the South Atlantic region.
As evident by President Trump’s executive order to keep processing plants open, meat plays a significant role in the U.S. economy and reportedly accounts for USD 1 trillion (EUR 882.7 billion) in total economic output, which is about 5.6 percent of the U.S. GDP, according to a study by the North American Meat Institute. According to Kansas State University’s department of agricultural economics, meat helps sustain the feed crops market, as well as sustain rural banks. Moreover, the industry and its nearly 1.9 million employees pay over USD 43.9 billion (EUR 38.7 billion) in property, income, and sales taxes.
Meat exports on the rise amid trade deals
The U.S. is a large producer of high-quality, grain-fed beef for domestic and export use, and an importer of grass-fed, lower quality beef for processing. According to the U.S. Meat Export Federation, pork exports in March 2020 have continued to increase with strong demand from China, while exports to Mexico, Japan, and Canada have also increased significantly. Pork export volumes in March increased by 38 percent compared to 2019 levels, standing at over 291,000 metric tons (for March) and topping the previous level set in December 2019. In the first quarter of 2020, pork exports increased by 40 percent to over 838,000 metric tons with a value of USD 2 billion (EUR 1.7 billion). Average pork export values in the first quarter have reportedly also increased by 40 percent from the previous year, reaching USD 64.66 (EUR 57.26) per head.
Beef exports have also seen an increase in March, driven by demand in Japan, where American beef is currently benefiting from reduced tariffs under the U.S.-Japan Trade Agreement, as well as in South Korea, Mexico, Canada, and Taiwan. Exports have increased by 9 percent compared to figures in 2019, standing at over 115,000 metric tons in March. As for the first quarter, exports stood at 334,703 metric tons, with a value of USD 2 billion (EUR 1.7 billion), while the per-head export value for the first quarter increased by 2 percent, standing at USD 317 (EUR 280)vii.
In March 2020, out of the 291,000 metric tons of pork exported, estimated to be about 31 percent of U.S. pork, over 100,600 metric tons were destined for China. First-quarter exports to China have seen a 231 percent increase in volume and a 321 percent increase in valuevii, according to the US Meat Export Federation. Demand for beef and pork in China has increased due to the spread of African Swine Fever (ASF) and the associated increase in Chinese pork prices. The African Swine Fever resulted in a loss of 120 million hogs over the past two years, out of more than 310 million hogs in China, leading to Chinese authorities reportedly paying more for U.S. meat than other countries. Moreover, the U.S. and China have signed a new trade deal in January 2020 where China has promised to increase purchases of U.S. farm goods over the 2017 level of USD 24 billion (EUR 21 billion). This is an increase of at least USD 12.5 billion in 2020, totaling to USD 36.5 billion (EUR 32 billion), and at least USD 19.5 billion in 2021, totaling to USD 43.5 billion (EUR 38 billion).
Logistics bottlenecks may exacerbate production challenges
Beyond retail impacts of the COVID-19 pandemic, logistical bottlenecks may be the next item to consider when planning supply resilience, which necessitates monitoring of food cargo guidelines and their amendments. The earliest clarifications on the status of food cargo shipments to and throughout the U.S. were made around March 13, upon institution of the travel ban applied to the EU, where cargo was given an explicit exception. Since incumbent USDA regulations mean that this wouldn’t provide an avenue for foreign meat imports to impact domestic processing facilities due to a pre-processing requirement for exports to the US, the explicit exception means that disruption to retail supply has the potential to be offset by imports should domestic supply be compromised.
The earliest clarification of federal policy for foodstuffs logistics came in the form of the ‘Memorandum on Identification of Essential Critical Infrastructure Workers during COVID-19 Response’ of March 19 from the Cybersecurity and Infrastructure Security Agency (CISA). The memo cited the President’s mention of “food supply” in the Coronavirus Guidance for America, to specify a Food and Agriculture category incorporating all phases of the food production process as well as the logistic requirements that necessitate nation-wide distribution. As states have issued their own unique guidelines for quarantine and lockdown, the CISA memo has served as an overarching guideline in ensuring an uninterrupted supply of foodstuffs across and within states.
Early on in the crisis, a disruption to trans-Pacific sailing led to a deficit of 40-foot reefer containers required for perishable shipments. The same phenomena on the west coast has led to an excess of ultra-light container vessels, which some shipping lines have elected to relocate in order to proportionally meet needs in markets requiring them. An imbalance or even a shortage of equipment can therefore make it difficult to offset domestic demand through imports.
As a result of the disruptions related to COVID-19, the meat industry could face losses of up to USD 20 billion (EUR 17.6 billion). The industry has been impacted by over 20,000 workers being infected as well as by a loss of demand at restaurants and schools as COVID-19 restrictions were imposed on the general public. The related plant closures have led to the increase of wholesale prices and the decrease in livestock prices, which have only begun to normalize around mid-May. The industry is likely to face long-term challenges in neutralizing the disruptions experienced during the COVID-19 pandemic.
In addition, the beverage sector has also felt an impact from the pandemic, especially at the manufacturing level, with increased CO2 prices and limited availability. However, it is expected that the easing of COVID-19 lockdown restrictions across the U.S. will increase the demand of petroleum which will bring operations at major refineries and ethanol plants back to normal capacity, increasing corresponding supplies of CO2 as a side product.
With a majority of meat processing and packaging plants have already reopened and have resumed operations at reduced capacity, mid- to long-term impacts can be expected. Temporary food shortages, especially for meat and other processed products and beverages, are likely but remain open to a rapid recovery with operations up and running again. Price increases and limited selection in supermarkets are likely to be seen in the coming weeks. According to the Bureau of Labor Statistics, the price of groceries increased by 2.6 percent in April, making it the largest one-month increase since 1974. Beef prices reportedly increased by 3.3 percent, pork by 3 percent, chicken by 5.8 percent, and processed meat such as hot dogs increased by 5.7 percent.
Overall, the U.S. domestic food supply chain demonstrated resiliency during the worst of the pandemic in Q2, albeit with reverberations on the retail and occupational health & safety sides. The long term effects, however, remain to be seen beyond the Q2 economic results and the retail impacts. The possibilities for a future disruption of food supply chains in the event of a COVID-19 recurrence remain.