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Meat Processing Disruptions, Price Inflation to Continue

Meat Processing Disruptions, Price Inflation to Continue

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Rebecca Scheuneman: So we've had a lot of people ask us if there's going to be meat shortages. There's been a lot of concern about that. A lot of reports in the media about that. And there's definitely been significant disruption in the meat processing supply chain. And the reason for this is that the process is very labor-intensive; it's not very automated. So you have employees standing in close proximity to each other, and therefore there's been a lot of problems with contagion of the coronavirus. So, you know, due to that, there's been a lot of disruption production of--especially beef and pork is down from normal levels. And we do expect that this will cause inflation with meat, and we're already seeing that, in fact, especially with beef and pork. So we do expect that that's likely to continue. And we do expect that, as these manufacturers seek to increase production by simplifying cuts, that consumers will also have less variety to choose from, but I don't think that the disruption will be so severe that there will be empty meat cases. So you don't need to worry about that.

We expect that this production disruption will be limited to meat. You shouldn't see it in packaged food companies, as packaged food manufacturing is significantly more automated, with employees standing pretty far away from each other. So it should be just limited to meat. If you have any interest in trying plant-based meats, this summer will probably be a great time to do that. These companies such as Beyond Meat and Impossible Burger are taking advantage of meat inflation, and they're planning some great promotions and discounts for the summer to try to encourage consumers to try their products. So it'll be a great opportunity to do that.

We do think that it's very likely that restaurant sales have bottomed. The food service suppliers have all reported that the last week of March marked the bottom in restaurant sales, with sales down about 60% year over year. So definitely severe declines, but as consumers and restaurants have adopted curbside pickup and delivery options, we're seeing steady improvement from that level. And for the first week of May, restaurant sales were down about 45% year over year. So definitely still pretty severe but heading in the right direction.

We do expect that most likely several restaurants will close permanently as a result of the pandemic. And these will probably be more concentrated into the local and independent restaurant chains, or independent restaurants, but don't worry. We don't think that we'll be left with just the big chains. We do expect that once traffic patterns normalize that new independent restaurants and concepts will open up because consumers have exhibited a strong preference for local restaurant concepts. So we expect that those will come back with a vengeance once everything normalizes.

We do think that US Foods, which is a food service distributor that supplies the restaurants--those shares are very attractive currently. They're trading at about a 50% discount to our fair value estimate as there's been share weakness as there's been a lot of concern about the pandemic and its impact on US Foods' business. But we think that US Foods is a very strong company. They've got a great balance sheet and a lot of liquidity, and they'll weather the storm, and that they'll bounce right back as soon as traffic patterns formalized.

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