Closure of US meat plants raises more concerns over long-term corn feed demand

A slew of temporary shutdowns at meat-producing plants in the US to control the spread of COVID-19 is raising more concerns on long-term corn feed demand, analysts said.

In the 2019-20 marketing year (September-August), feed and residual use is likely to account for nearly 46% of the domestic corn demand in the US, according to the US Department of Agriculture's latest World Agricultural Supply and Demand Estimates report.

Some of the major meat production units that have suspended operations include JBS USA's pork processing plant in Minnesota, Smithfield Foods' plant in Sioux Falls and Tyson Foods' Iowa plant.

"The primary obstacle for the animal protein industry today is the disruption at the plants due to COVID-19. The loss of a plant for just a few days is manageable, but these extended closures are exceptionally disruptive, not only to the processors but also the producers that supply those plants," Christine McCracken, senior animal protein analyst with Rabobank, said.

Total red meat production under federal inspection for the week ending April 18 is estimated at 898.1 million lbs, down 6.9% from the previous week and 12.8% lower than a year ago, according to the USDA's Marketing Service.

The week's figures on cattle and hogs slaughtered in the US are also expected to be down from the year-ago period.

NEAR-TERM DEMAND

The USDA in its latest WASDE report raised its estimate for corn feed and residual use to 5.675 billion bushels for 2019-20 from 5.525 billion bushels projected in March.

"As it's the processors that are closing to cause the reductions [in meat production], that means there are actually more animals to feed in the feedlots that can't get to the slaughterhouses. Those animals will need to be fed longer than usual," said Pete Meyer, head of grain and oilseed analytics at S&P Global Platts.

Moreover, amid the lack of dried distillers grains with solubles production with 50% of ethanol plants closed, feedlots need to replace DDGS with corn, Meyer said.

LONG-TERM DEMAND

At the same time, corn producers said this is not beneficial in the long run.

"Growers will continue to feed animals in the short run, but it's not an ideal situation. The system is basically just in time, so when there's a bottleneck at the packing level, it almost immediately causes problems throughout the chain. It's possible we see growers depopulating operations soon," said Collin Watters, Director of Exports and Logistics, Illinois Corn Marketing Board.

"If plant closures are extended, producers will be under considerable financial strain and they would likely liquidate breeding stock," said Rabobank's McCracken.

Based on the current outlook, Rabobank expects a modest decline in chicken and pork production year on year in the US from the previous outlook for low single-digit growth in 2020, McCracken said.

Apart from meat plant closures, the supply chain has been upended by the lockdown as most packing plants are set up to serve retail and food service.

"With the near complete loss of the food service sector, those packing plants can't just pivot to 100% retail," Watters said.

ETHANOL MAYHEM

The concern about demand loss for feed corn comes at a time when the sector is already facing challenges of unprecedented demand destruction from the ethanol industry.

The ethanol industry in the US has collapsed due to the drastic fall in oil prices, along with the stay-at-home orders in the US to contain COVID-19, which has restricted movement, curtailing demand for the grain-based fuel.

In the US, roughly 40% of the corn produced goes into ethanol production.

The USDA has cut its 2019-20 estimates for corn used for ethanol by 375 million bushels in its latest WASDE report, to 5.05 billion bushels. However, many market participants anticipate a bigger drop, with Platts Analytics estimating the expected corn use for ethanol to be at 4.85 billion bushels.