How COVID-19 and Demand Disruption is impacting the meat industry

Every week, I send out a "Notes from the Field" email to our company. It has now been rebranded as "Notes from the Attic"

Team, 

I wanted to write a bit today about the importance of projections, and how this pandemic is throwing everything into disarray, which unduly puts the pressure on the farmers.

FOR FARMERS 

I have talked a fair amount this year about the perils of being a farmer in today's economy, but this pandemic in particular has the potential to ruin farmers in this country. What is happening? Well, Farmers are in the business of growing animals; and those animals get to market weight at a specific time, there really isn't much a farmer can do to make that go faster or slower. And, with the exception of chicken, it takes a year plus to grow the animal. This year was supposed to be a reprieve for farmers. This year was supposed to finally see them make money on their animals, rather than losing money on every one. So farmers increased production. 

And now, two things have happened to demand that are crushing. I will explain using beef: 

1) The market for "middle meats" (tenderloins, ribeyes, NY Strips) has cratered. This is mainly because food service (restaurants) is non-existent; and the majority of steaks at food service are not being eaten. Check out this graph that shows the reduction in tenderloin prices since Covid ( I should mention that this is "conventional" beef, not what we sell, but since every cow starts out the same, we are wrapped into this as well). 

So, why is it important that the price of tenderloin has dropped in half? Well what happens when you harvest and butcher a cow is that you get a price for every piece of the animal. The tenderloin tends to be one of the places where you can get a lot of money that then makes the price of other cuts (like the chuck) much cheaper. If the tenderloin (and for that matter, the ribeyes, etc) aren't carrying as much, the price that one can get for the entire carcass goes way down. Which means the farmer gets way less. 

2) When a plant is forced to shut down (which has been all over the news), the farmer has to scramble to find a place to harvest their animals.. They can't just keep them, keep feeding them expensive grains, supplements, and water and wait it out. In the worst cases, they can't find another harvest facility; in the best cases, when they find another harvest facility to go to, that facility will dictate price, which then again hurts the farmer. 

Here are the current losses throughout the cattle chain. You are reading that right, on average, the farmer is losing $219 per cow. Imagine getting up every day to do a job where you knew you would never be paid what you put into it, but not having the control to be able to do anything else, and that is what being a farmer is right now. 

This is a one-two punch that is crippling farmers. And the stimulus bill ($16Bn) will not be enough. The good news is, we believe that this short term disruption presents a long term opportunity for farmers to look at bringing things "Back to Nature".. where we can commit to a price, they can raise the animal, and we can pay them a fair wage to do the right thing. This is the work that we must do if we are to bring grass fed beef back to this country in a big way. This is exciting work that is happening right now.

FOR OUR BUSINESS 

Demand planning is something that we have been doing a lot of lately. As I discussed in the last All Hands, we have been working hard to get a good understanding of what we believe the rest of the year will look like (at a time where there are so many factors that could change this). The team dug in, came together, and we have a marketing, operations, and procurement plan.  We are not yet 100% finalized on this because we are still making sure that we can handle the increase in volume... which means asking farmers to go grow animals for us, and only for us, asking our box manufacturers to put investment into new equipment, and asking our fulfillment partners to make investments in their locations... And if you read the above, you can maybe realize the leap of faith we are asking each of them to make... they are being asked to believe that we can do what we are saying we are going to do. 

For four years, I have been saying to vendors, farmers, and facilities, "you need to believe us, and I know that's hard to do because these numbers are crazy"... and many many times people have not believed us, and have been left flat footed. This time will be no different. Getting people to believe our demand plan, and getting enough meat, enough boxes, enough dry ice, enough investment into our shipping facilities is going to be the challenge of this year. 

If we are correct with our assumptions on pandemic behaviors, marketing this year will not be hard. In fact, the challenge of marketing will be hitting the plan exactly (not more not less), and doing what we can on experience and marketing to help balance the animals.. For example, for every 20lbs of a bacon there is 50lbs of ham to sell. There is currently xxx sell units (10oz packs) of bacon in our demand plan for the remainder of the year, and we don't sell many hams. 

Can we do it? Can we align on a marketing plan, get the meat, get the boxes, ship them out, actually sell the way we want, and keep our commitments to every farmer we do business with? That, my friends, is what we are asking you to believe in, and to work for. 

I continue to hold a dogged belief that this team, at this time, can Believe in Better and do things differently.... the industry needs it. The solution can be us.

Onward! 

-mike