The post-COVID-stimulus hangover continues. After nations injected an estimated US$18 trillion into the global economy, inflation remains sticky. The increased money supply continues sloshing around commodities, real estate, and even equity markets. Surging costs have pressured companies large and small to rethink how they can protect margins. And the apparent answer is: supply management.
Not to be confused with Canada’s government/industry quotas on dairy and poultry production (though similar in outcome), this flavor of supply management is an economic response to margin pressure. Farmers recognize the adage “low prices fix low prices, and vice-versa”: prolonged losses lead to liquidation and reduced output, which then raise prices and turn margins back positive. This is the model being adopted broadly across the global economy.
Consider this analysis comparing the 2023 monthly average to the 2015-2019 monthly average. The number of U.S. domestic airline flights remain down –8% from the pre-COVID (5 year average) levels. Yet average ticket prices are up 7% nationwide (my SLC ticket prices are up +22%). Automobile sales have averaged -10% below the pre-COVID (5 year average) levels in 2023. Yet the used car and truck price index is now averaging +36% higher than the pre-COVID (5 year average levels). U.S. oil rig counts are down -36% by the same metrics, even as gas and diesel prices have surged +22% and +50% from pre-COVID (5-year average) levels.
Get the point? The economic response to inflationary cost surges is to throttle back production and allow scarcity to raise prices (and re-allocate the resources). We are seeing this emerge as the new post-COVID business model. Smaller production, higher prices. And the highest bidders get the goods.
So how does this play out for global proteins? This same pattern is underway but for various reasons. U.S. beef prices are surging on drought-induced herd reductions; next year will see tighter supplies and higher prices. U.S. hog farmers are shifting into liquidation mode as hog prices have been unable to cover surging cost inflation (feed, labor, fertilizer, equipment). EU hog inventories have fallen sharply over the past two years as surging energy and feed prices (as well as animal welfare and climate policies) have pressured margins negatively. Brazil’s aggressive slaughter rates as they sought to supply China have likely cut into their heifer supplies, suggesting tighter supplies ahead.
For a number of reasons, global protein producers are responding to inflation similar to airlines, auto makers, and oil companies. Tightening supplies will spur prices back to profitability eventually. The production cuts will be allocated by dollars with the world’s poorest consumers being priced out. Eventually positive margins would lead to increased supplies, so long as punitive policies and regulations (GHG, animal welfare) can be kept at bay. Labor remains the real problem with no solution. As of August, 86.5% of Americans aged 21-54 were participating in the labor pool, the highest in over 20 years. That combined with a 3.5% unemployment rate suggest that employment is near full.
Persistent inflation is shifting global margins and business models. Consumers ultimately bear the pain. Consider where your business fits into this equation and adjust accordingly. – Brett Stuart