Livestock prices are sensitive to the level of capacity utilization in the beef and pork processing sectors. Agricultural economists at Kansas State and Iowa State Universities found that livestock prices are reduced the higher the utilization of capacity.
The researchers also estimated the beef and pork processing industries were operating at greater than 100 percent capacity coming into the COVID-19 outbreak. The goal of the research by Glynn Tonsor and Lee Schulz was to “provide a big picture guidance on how sensitive cattle and hog prices are to ‘regular’ operation of packing plants.” Regular operation of packing plants has become a growing concern as the pandemic continues.
The graphs below show estimates of capacity utilization ratios for fed cattle and market hogs between April 2001 and February of this year. For both sectors, after reaching lows in 2015, the utilization of capacity grew and exceeded 100 percent beginning in 2016 and 2017. And both industries continued to operate at levels above 100 percent going into the COVID-19 outbreak. A model developed to estimate the sensitivity of livestock prices to capacity utilization estimated that each 1 percent increase in national beef packing plant utilization corresponds to a 1.32 percent reduction in fed cattle prices. In other words, an increase in the utilization of capacity results in lower prices for cattle as the packers have less capacity to process cattle and thus, less demand. The results are similar for pork. Each 1 percent increase in national pork packing plant utilization corresponds with a 1.82 percent reduction in hog prices. The Tonsor and Schulz findings reiterate the importance of ongoing operation of packing facilities during the COVID-19 outbreak. It also shows the negative impacts on livestock prices which could result from any disruption in packer operations due to the outbreak.
Figure 1. Beef & Pork Packing Plant Utilization Ratios
Source: Glynn Tonsor, KSU, and Lee Schulz, ISU, Assessing Impact of Packing Plant Utilization on Livestock Prices