Goldman Sachs has a grim prognosis for livestock

By: Sundeep Goyal
Sundeep Goyal
Sundeep Goyal is an investor and trader in stocks, commodities and forex. He has professional accounting qualifications and extensive… read more.
on May 14, 2020
  • Goldman Sachs commodities research head says oil and livestock share supply chain problems
  • While grocery shelves and food banks are starved of meat, farmers are destroying unprocessed animals
  • Oil and meats are major inputs into inflation

Jeff Currie, head of commodities research at Goldman Sachs (NYSE: GS) says livestock is the only other commodity market “looking as precarious as oil.”

Speaking to reporters on a video call, Currie was referring to the major market imbalance in the U.S. food industry following the coronavirus pandemic.

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“We had a problem with livestock going into this … We now have a very serious problem,” Currie added.

The parallel with oil

The crude oil industry has seen unprecedented demand destruction following the virus outbreak resulting in prices falling to historic (even negative) lows. Demand for crude oil was crushed as countries across the globe implemented lockdowns and shelter-in-place restrictions to combat the spread of the virus.

The virus has also severely disrupted meat supplies in the U.S. after infections forced many meatpacking plants to suspend operations.

“They both share something in common: You do damage to the supply chain, it takes a while to bring it back online again,” said Currie.

In the U.S., the closure of meatpacking plants, a pivotal point in the country’s food supply chain, combined with the COVID-related shutdowns in the foodservice industry, led to a huge imbalance. Whereas packing and distribution of meat were geared towards foodservice customers, this demand vanished and was replaced with demand from groceries and supermarkets as more consumers were forced to cook at home.

The supply chain could not cope with this switch “on a dime,” so to speak. Meanwhile, the closures of meatpacking plants led to a huge backlog of unslaughtered livestock at farms, causing farmers financial losses.

Many have been forced to euthanize their animals, though ironically, meat is in short supply at retail outlets and food banks.

Similarly tragic scenarios are playing out in the produce and dairy sectors.

Financial losses could be irreparable

According to research from Bank of America Securities, livestock farmers in the country’s meat industry could suffer “tremendous financial burdens” from this crisis.

Many would likely go out of business, resulting in the permanent destruction of supply.

This may already be happening. Currie warned that both cattle and hogs herds had “tremendously reduced” in recent weeks. Vanishing supply, at some point, results in higher prices for consumers, wherever they are.

Reuters said leading fast-food burger chains like Wendy’s (NASDAQ: WEN) were warning that they may have to remove popular meat-related items from their menus due to supply difficulties. Already the Mexican meat industry is stepping into the breach – sales of beef to the U.S. has jumped 10% this month.

“And what do oil and meats have in common? They are big inputs into inflation in the emerging markets,” Currie observed. “These are going to be the two big commodity stories I think are going to be important as we look out into 2021 and beyond.”

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