“Where’s the Beef?”
The Emerging Risk of Limited Meat Supply for Local Alberta Restaurants
The COVID-19 pandemic has caused disruption in nearly every economy worldwide, but has taken a particularly heavy toll on meat supply chains in Canada and the U.S.
While food and meat supply lines have often been at the forefront of major news provider broadcasts, an aspect that has been seemingly underappreciated is the direct correlation between meat suppliers and local Alberta restaurants. Resulting changes to consumer preferences have the potential for long-term impacts that could have local restaurants asking their usual meat suppliers, “Where’s the beef?”
A Ripple Effect: COVID-19 Shuts down Restaurants, Impacts Meat Suppliers
Prior to the pandemic, an estimated 54% of Canadian consumers would eat in a restaurant at least once a week (Stats Canada 2019), a consumer trend that would come to a radical halt with the forced storefront closures in attempt to prevent the spread of the virus.
Many restaurants were able to re-focus their business plans towards providing more takeout services, but their efforts were not enough to combat changing consumer habits since most Canadian consumers, pre-covid, were dining out for convenience and socializing reasons (Stats Canada 2020), reasons that are much less applicable during a pandemic lockdown.
These sudden changes in consumer habits translated into an immediate and drastic dip in sales for food services and drinking places, with nearly every province and territory in the country seeing a more than 30% decrease in sales from February to March 2020, Alberta being no exception at -34.3%.
Being upstream of restaurants, a ripple effect of impacts were just as quickly felt by the meat supply chain. With restaurant closures, came a sudden stop in demand for the meat producers and processing facilities that supply them, a rather unwelcome shift for an industry still reeling from the impacts of the “meatless meat” substitute breaking into the market just last year (Evans 2019)
Concerned with potential price increases for meat on grocery store shelves, consumers started stockpiling their meat supplies at home, reducing the demand for higher value cuts of meats that are typically sold in restaurants and increasing the demand for wholesale (grocery) supplies.
“In March, consumer anxiety over COVID-19 and the freezer-stocking trend led to an immediate rise in wholesale beef prices, with the biggest weekly increase on record occurring between March 13 and March 23” (Stephenson 2020).
These shifting consumer habits, combined with the usual restaurant sales being virtually eliminated, caused smaller meat producers that would normally sell almost exclusively to restaurants and retailers, to shift their attention towards supplying directly to the consumer.
“Farms that had focused on selling beef to restaurants — most of which are now closed due to COVID-19 restrictions — have had to pivot, in some cases radically, to woo residential customers.” (Hun 2020).
This switch in consumer behavior was the saving grace that allowed many small producers to survive restaurant closures, as they were able to quickly and easily transition due to their established online order and delivery business models (Hun 2020)
The Ripple Reverses: COVID Shuts down Meat Suppliers, Impacts Restaurants
More turmoil was introduced to Canada’s meat supply chain on April 20th when Cargill temporarily shut down their High River Alberta meat packing plant, a facility that accounts for more than a third of Canada’s total meat packing capacity (Wu 2020) after being overrun by cased of COVID-19. In that same month, JBS meat-packing plant in Brooks, Alberta reduced operations to one shift per day (Neustaeter 2020).
The looming threat of additional increases to meat prices only exasperated the stockpiling behaviours of consumers, leaving grocery stores struggling to keep up, and ultimately needing to supplement their supplies with the same smaller meat producers that had previously only serviced restaurants.
“Canadian grocery store chains such as Loblaw, Sobeys and Metro scrambled to stock their meat aisles, instead buying meat from producers who normally supplied smaller stores and restaurants” (Hun 2020).
Fast-food chain giants, who had been able to maintain operations by switching to drive-thru only services, immediately felt the pinch of the reduced meat supply, and barely a week after the closure, McDonalds Canada announced their intention to start sourcing beef from outside the country (Wu 2020).
Although within the announcement, McDonalds made it very clear that it is intended to be a “temporary adjustment until Canada’s beef supply stabilizes” (Wu 2020) the gravity of such a play should not be passed over lightly. Coming from a corporation that has “long touted its commitment to selling 100 per cent Canadian beef” (Stephenson 2020), it should serve as a warning sign, foreshadowing the meat supply challenges that could be faced by local restaurants upon re-opening, albeit without the leverage power of a McDonalds to just supplement with foreign meat.
“Although a large multinational company can absorb losses and make changes in its supply chain due to purchasing power, this news is difficult for all segments of the restaurant industry and marks another challenge for the smaller restaurant already facing closure of their in-house dining, reduction in staff and attempts to move to delivery-only or takeout models, while keeping their regulars happy” (Wu 2020).
What it Means for Local Restaurants
Even though the local economy has started to re-open in Alberta, initiating the recovery process for most local restaurants, they may be facing an uphill battle to reinstate their normal meat procurement routines.
Limited Supply and New Competition
Restaurants, who formally only competed with each other for small producer supply, will now be competing with resident customers and wholesale retailers as well. With predictions of “consumers’ preference for freezer-bound home deliveries to continue post-pandemic´(Hun 2020) and “meat shortages likely to continue for the foreseeable future” (Wu 2020), it is looking like it will be a long term issue for restaurants as producers intend to continue to cater to their new client base.
“Before the virus struck, the Enright Cattle Company in Tweed, north of Belleville, sold its beef primarily to about 60 restaurants between Toronto and Ottawa, says its owner Kara Enright. But Enright was able to enlarge the sideline of her business that made beef deliveries to families who ordered online, and it even bundles its meats with produce from several other farmers.” (Hun 2020)
Higher prices
Although the big players of Canadian meat processing have their facilities back online, the new safety and social distancing protocols are forcing them to run at reduced capacity, limiting the total supply of meat available and driving product costs up.
“Temporary plant closures are anticipated to be an ongoing challenge in North America. Operating costs are also expected to increase throughout the food system with added precautions for employees and production slowdowns.” (Seskus 2020).
Being asked to step up and fill the wholesale retailer void left by Cargill and JBS, small privately owned abattoirs are “booked for the next six months processing animals” (Hun 2020) an increase in demand that is adding upward pricing pressure.
Even if restaurants are successful in clinching procurement contracts, they are likely to pay a hefty premium in order to lock in supply.
Increased Labour
“The chicken industry is closely linked to the restaurant industry” (Henderson 2020), with chicken being the most popular source of protein in Canada, food service represents approximately 40% of the chicken produced in Canada (Henderson 2020).
The physical distancing measures implemented within chicken processing facilities, to battle COVID-19, are not only reducing output capacity, but are also changing the actual products produced.
“There has been an increase in bone-in, skin-on products being sold in grocery stores, and Bishop-Spencer said more whole birds are coming on the market as well, since it takes less “person power” to process whole birds” (Henderson 2020).
These “person power” costs are then passed on to restaurants who will need additional manpower to prepare birds for serving.
It all sums up to reduced margins and less profitability for local restaurants, most of which were already struggling through the reduced sales due to the COVID-19 closures.
With unemployment rates having doubled to more than 13% since the closure of non-essential businesses (Bartko & Gilligan 2020). Permanent closures of local restaurants could have dire impacts to the Alberta economy and its ability to recover unemployment rates.
According to data from Statistics Canada, shown in Table 2 below, the Accommodation and Food Services sector by far saw the largest decrease in employment from May 2019 to May 2020 than any other sector at -45.1%, even after a substantial recovery of +6.8% from April to May 2020 (Stats Canada 2020).
What are Alberta’s Options?
Reduce Meat Exports
One proposed solution would be to entice the Federal Government to limit the amount of meat exported to reduce to the risk of domestic supply shortages in Canada. According to the Canadian Cattleman’s Association website, approximately “45% of Canadian beef and cattle production is exported each year” (CCA 2019). Holding back some of those exports to ensure ample supply to Canadian consumers and would result in downward pressure on pricing.
Ideally, this solution will only be needed temporarily, however, a longstanding impact to trade relationships may be unavoidable. Upwards of 74% of Canadian beef exports ship to the U.S. (CCA 2019), a country that has been facing their own shortages due to meat packing plants being overrun with COVID-19. With the current volatility of trade relations in the U.S., the risk of engaging in a trade war and other political consequences to withdrawing exports will likely outweigh any immediate economical benefits.
Government subsidies
Governments could provide subsidies to local restaurants to compensate for increased meat prices, preventing them from passing these price increases on to the consumer.
But can we afford it? Government subsidies have already been committed to the front end of the meat supply chain via an Alberta and Federal joint funded aid package for the cattle industry amounting to a total of $42M ($17M Alberta + $25M Federal) (Bennett 2020).
Because the supply chain breakdown occurs in processing the animals, and not a shortage in animals themselves, a backlog of livestock waiting to be processed is compiling, increasing costs to farmers, “150 feedlots in Alberta have between 1,000 and 5,000 head of cattle ready to go to slaughter. Many are putting animals on maintenance rations to slow their growth, but they still need to pay for them” (Graveland 2020).
This increased cost to produce risks upward pressure on meat pricing downstream. The intent of the Alberta and Federal join funded aid package is to subsidize producers to hold onto and feed cattle for up to nine weeks to match reduced processing capacity (Bennet 2020).
Add More Processing Facilities
Another popular solution is to diversify the supply chain and reduce dependency the few large processing plants. This could be done by opening several, smaller animal processing facilities nationwide.
The issue with this solution is that it is very capital intensive and depending on the geography and size of the animal producers considered, may not provide a pricing benefit. Beef farmers in Manitoba, for example, currently rely on processing facilities in Ontario or Alberta (Gowriluk 2020). Having smaller, in-province slaughter-houses would mean that farmers would avoid the freight costs of shipping animals, a service that currently runs a bill of about 10 cents per pound (Gowriluk 2020), trickling down a cost reduction to the consumer.
For large producers in Alberta, however, where freight costs are a non-issue, the additional cost and logistics of multiple facilities would be seen as a hindrance, outweighed by the increase in cost for smaller, less efficient processing plants.
“It is cheaper to process large numbers of animals in one big facility than it would be to kill the same number in smaller sites across the country” (Gowriluk 2020).
This is why existing mega-producers, like Cargill, are unlikely to make any changes to their plant sizes and numbers. Increasing the number of facilities would require new market entries and greenfield projects.
More plants would likely mean slightly higher prices, a trade-off for eliminating the vulnerability that comes from an ultra-concentrated supply chain that could lead to long term price stability.
Invest in Innovation
A favorable path forward solution, that doesn’t seem to be getting its share of deserving attention, would be for Canada to invest in new innovation and technology that reduces the risks to the few large facilities we depend on.
“That might include automation, which would reduce the density of people in such facilities” (Collins & Seskus 2020).
Government research grants could be made available to encourage large corporations to seek out new technology to streamline their labour lines and increase manpower efficiency. Technology that is commonly used in other industries could also be applied to improve the processed in meat packing facilities. Optical optimization technology, for example, could be applied to the production line to provide quality assurance in lieu of additional workers on the floor.
Improvements in technology would not only reduce the risks of closures from future pandemics, but would also improve the working environment for laborers and limit the food industry’s dependence on temporary foreign workers, reducing the risk of strikes and labour shortages as well.
But this too requires significant capital…
Unfortunately, the fluid nature of the pandemic causes too many unknown variables to accurately predict the longstanding effects, making it nearly impossible to select a single “correct” solution. The best decision right now, is not necessarily the best decision possible, and a solution applied today could easily turn in to a problem tomorrow.
References
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