“The food supply chain is breaking,” Tyson Foods (NYSE: TSN) warned in April.

Prices for eggs, bacon and beef are already soaring. But this may merely be the beginning.

That most dreaded word – “shortage” – is flitting around. And a food shortage in the midst of a pandemic is the last thing Americans need.

For investors, we have to recognize which companies are going to suffer from this situation. And which are going to profit.

So, with what’s supposed to be the start of barbecue season (Memorial Day weekend) around the corner, the looming meat shortage is our focus for this week’s Making the Grade.

Where’s the Beef… and the Bacon?

Comedian Jim Gaffigan has made a career out of his love for bacon…
Of course, in the country where the bacon cheeseburger was invented and then mutated into the Baconator, few would oppose Gaffigan. Bacon is America’s ambrosia.

We live in a time when it’s quite acceptable to adorn one’s body with bacon or pig tattoos. And they’re practically a prerequisite for chefs and/or butchers.

But America’s COVID-19 nightmare is about to get a lot worse.

A bacon shortage might be in the cards.

Currently, there are 621 million pounds of frozen pork in storage across the U.S.

On the surface, that may sound like plenty for all of our breakfast, cheeseburger and bacon-wrapped needs. But the average American consumes 18 pounds of bacon each year!

And the amount of frozen pork in storage has dropped from March to April. Plus, it’s going to fall even further. Slaughter rates have tumbled 25%, and a backlog of more than 400,000 animals is waiting to be processed.

COVID-19 hasn’t just shut down office parks, elementary schools, movie theaters and restaurants. It’s shuttered nearly two dozen processing plants in the U.S.

And pork isn’t the only product affected.

America’s food supply chain wasn’t built for logjams. So millions of animals – cattle, chicken and pigs – are being culled.

CoBank, an agricultural lender, reports that beef production fell 24%, pork production dropped 20% and poultry production declined 10% during the month of April.

And these declines are having an impact on the bottom lines of the country’s largest processors.

Slaughterhouse Slaughter

The worst could be over.

The markets have rebounded from those dark days in March.

Still, the Dow Jones Industrial Average is down more than 17.5% in 2020. The S&P 500 is in the red 12.5%, and the Nasdaq is slightly underwater, down roughly 4%.

But meat and poultry processors are still feeling the effect of the cleaving their shares took. And many have returns far worse than the indexes year to date…
Sanderson Farms (Nasdaq: SAFM) is by far the best performer of the group. Shares are down merely 17% this year.

In part, that’s because chicken processing is more automated than beef or pork. Chicken processing has slipped just 5%, whereas beef and pork production are down double digits. And chicken prices are getting cheaper compared with the prices of other proteins.

Sanderson can process up to 13.6 million chickens per week. But that number has been reduced because of the coronavirus.

One of the world’s largest food companies, Tyson Foods, is one of the worst performers in the group.

Shares were slammed on Monday as it whiffed on second quarter results and withdrew guidance. And the overhang of the restaurant sector implosion doesn’t bode well.

In April, Tyson closed its pork processing plants in Waterloo, Iowa, and Logansport, Indiana. Together, these plants represent 7% of total U.S. pork processing capacity. And because of COVID-19, Tyson expects a decrease in volume to continue into the second half of the year.

Seaboard Corporation (NYSE: SEB) is the second-largest pig producer and fourth-largest pork processor in the U.S. In its most recent report, the company stated COVID-19 wasn’t having a material impact on results. But its pork exposure has investors fleeing the stock and preparing for the worst.

And finally, the worst performer of the bunch is Pilgrim’s Pride (Nasdaq: PPC). This company is the second-largest poultry processor in the U.S. But it has had a more somber tone than Sanderson, calling the chicken business “volatile” and “challenging.”

Pilgrim’s Pride topped first quarter estimates. But as with Tyson, its food service exposure to restaurants is a major drag on the overall business.

Buy These Instead!

We eat when we’re happy. We eat when we’re stressed. We eat when we’re bored.

And it’s the final two that have Americans packing on what’s popularly known as “the COVID 19.”

But that doesn’t mean those extra pounds are a bright spot for processors.

A great shift has taken place: We’re eating at home.

During recent earnings releases, we heard again and again that the increases in retail weren’t enough to offset the declines in food services.

Even though your freezer might be stocked with chicken, chops and steaks, thousands of restaurant walk-ins are bare. And many of those doors likely won’t ever open again.

For protein processors, that’s a serious headwind.

And the biggest winners will continue to be grocers as meat demand – and prices – increases.

Shares of Costco (Nasdaq: COST), Kroger (NYSE: KR), Sprouts Farmers Market (Nasdaq: SFM) and Walmart (NYSE: WMT) are in the green for 2020. In fact, Kroger and Sprouts are up double digits year to date.

Those gains are certain to continue, while I expect processor shares to struggle hand in hand with restaurants.

As Tyson stated, “The food supply chain is breaking.” COVID-19 has closed plants and forced millions of pounds of animal proteins to go to waste. And once the pandemic has passed – and businesses open their doors once again – restaurants won’t enjoy the same spending trends as before.

That’s why I believe investors should explore shorting the slaughterhouses and going long on grocers.

Here’s to high returns,

Matthew