COVID-19 is not only impacting the animal protein sector in the United States but in most major markets around the globe, including our North American neighbors, according to Christine McCracken, executive director of Animal Protein with Rabobank.

"I look at the impacts on the Canadian swine industry who has also seen labor disruption at the plants, the same foodservice shutdowns that we've seen, and at the same time a drop in demand for their feeder pigs," McCracken says. "What's going to happen with their sow herd in the longer term and what does that mean for local supplies? Could they restructure?"

McCracken, who spoke Tuesday during a National Pork Board COVID-19 webinar, says Rabobank analysts are also seeing severe supply chain disruptions in Mexico due to the virus.

"They were already dealing with a very tough economic situation and this made it a lot worse," McCracken says. "They're suffering from a drop in oil, which is a big part of their economy as well as the loss of tourism. Their restaurants have been closed roughly the same six weeks that we've been shut and that's really hit their protein sector hard."

There has even been a shift back to some of the commodity wet markets and more of their chicken sales are shifting back to the lower cost live bird markets, she says. Mexico is also dealing with a 21% drop in the value of the peso, which has increased their cost of imported feeds.

"While their plant disruption issues haven't been as severe as they have been in the U.S., the protein sector is seeing a massive squeeze in margins," McCracken says. "They did have a pork plant burn down in the middle of all of this, which just added to the supply chain issues. The entire protein sector is really struggling and may take several months before they fully recover. It will likely limit our exports into Mexico over the next few years."

Back home, Rabobank analysts are examining how the structurally higher costs will impact the competitiveness of U.S. pork going forward.

"We've raised wages in these plants, but are we going to be able to reduce them, once all of this is over? We are also considering whether we will see a new round of government involvement in the packing industry," McCracken says. "Normally when we add new programs and regulations it also adds a lot of cost to the system. If that becomes an issue, it could make us less competitive in the long run."

McCracken says they are also evaluating long-term demand for protein and how quickly the food service sector can get back up and running and at what capacity. Will demand be affected from the negative media attention around packer employees, sicknesses and plant shutdowns? Will there be more competition from plant-based proteins in the market?

"Finally, what does all this mean for trade, because the effects of the coronavirus are a global issue," McCracken says. "Fortunately, we're not the only market dealing with these long-term challenges, but as we look at the cost structure, I think there are some big long-term questions to ask in terms of how U.S. pork is going to be positioned in the long run."

What is clear is that the United States has a severe backlog of hogs on farms — now close to 2 million.

"I do see harvest levels normalizing sooner rather than later. Most packers that we've talked to obviously have the labor to harvest. What they don't have is enough people to harvest, de-bone, trim, work the Cryovac and get it all in a box and to the retailer in a form that they want," McCracken says. "This doesn't seem to be getting a lot better and I don't think it necessarily will in the short run."

Retail markets may look a lot softer in the short run than expected only because the plants will not be able to supply enough pork in the right form, which may curb demand, she says. At the same time, a lot of these plants have added a lot of costs.

"They spent hundreds of thousands of dollars on temperature scanners, barriers, PPE and extra cleaning and sanitation just to keep the plant open so while prices may be higher, it may not translate into better margins for the packers in the short run," McCracken says. "That is a concern obviously, as we think about the cutout and how product values might affect hog prices."

McCracken says they are seeing some liquidation. Sow slaughter capacity is limited and while weekly volumes are up 15% versus a year ago, she says it's going to take months to get that back in balance based on what analysts are seeing today.

"It's also worth considering what impact this has on productivity. We are taking out the least-productive animals, barns with ongoing disease issues. I do think there will be a move to even higher productivity, that will offset some of this early liquidation that we've seen," McCracken says. "I do think it's reasonable to assume we will see another round of consolidation, but maybe not like we would have expected."

She doesn't expect to see many packers anxious to buy additional production assets or international investment in the sector.

As far as exports, McCracken says U.S. pork is still a good source of low-cost protein but expects export demand to be softer over the summer months, especially to China. "Their foodservice demand remains pretty weak and they have built up quite a bit of inventory, so they just won't need as much pork from the U.S. Longer term, we expect China to remain an important market for U.S. protein."

While China is working on bringing in some genetics and working on rebuilding their herd lost due to African swine fever, they will still be unable to meet internal needs for the next several years, she says.

"Exports, bottom line, will be slower in the near term, but will remain a very consistent driver of growth for the industry going forward," McCracken says.