Personal Finance Stocks Themes

Got beef? You may run out of meat; TSN favorably positioned

Underlying data from Bloomberg.

I previously wrote that there won’t be a toilet paper shortage and that oil storage won’t fill up. But I’m more concerned about the meat situation, where there may be a shortage coming in the next few weeks.

Slaughter rates are plummeting and prices are rising

What’s going on? Facilities around the country are reporting an increase in employee COVID-19 infections, leading to many plant closures, many of which are mega-size plants. Tyson closed Waterloo, Iowa, for example, which alone is 4% of the nation’s pork processing capacity. In total, Tyson has about 18% of capacity offline. Smithfield, JBS USA and others are closed as well.

And we’re seeing it in the daily slaughter rates reported by the USDA. Beef slaughter rates are down 31% and hogs down 20%, with the decline in the slaughter rates accelerating. As a result, beef wholesale prices are up 36% this year; as this continues they are likely to rise further. Also, this is the wholesale price; it’s possible the markup above this you pay as a retail consumer may make the increase even higher for you.

Exhibit 1: Slaughter rates fell sharply in April to down 31% for beef and down 20% for hogs

Underlying data from United States Department of Agriculture (USDA).

Exhibit 2: Zoom-in on daily slaughter rates for April-2020 shows it’s getting worse as we continue

Underlying data from United States Department of Agriculture (USDA).

Exhibit 3: Wholesale prices rapidly rising; beef cutouts up 36% this year

Underlying data from Bloomberg.

With fewer animals slaughtered, cattle and hog prices plummeting – this could lead to liquidation of the herd

With less effective slaughterhouse capacity given the shutdowns, fewer animals can be processed into finished meat. This means the slaughterhouses are demanding less cattle and hogs, which perversely, means the prices of a head of cattle or hog are falling. You will not see that benefit as a consumer; it goes to the meat processors (see below).

And those raising cattle and hogs will not see the benefit. In fact, they are on the verge of negative margins; the price for a hog has declined to about $50 from $80 recently. Smithfield and other growers of hogs may make the (hard) decision to euthanize the hogs. That would prolong the potential meat shortage even if slaughterhouses reopen because the grow-out of animals takes years.

Exhibit 4: Cattle and lean hogs prices have collapsed, putting pressure on growers

Underlying data from Bloomberg.

Do not rely on cold storage

Cold storage is a nice comfort, but the USDA hasn’t even released the data, which may indicate it is depleted. Even so, it’s just not that much in absolute terms; certainly not enough to feed a nation. Beef, for example, is about <2lbs per person. It only takes weeks to burn through these. This is not designed as a strategic reserve, but a simple mechanism to manage ebbs and flows. And that doesn’t include April-2020 as the USDA will not be releasing the next data until May 21, 2020, electing to skip the April-2020 release.

Exhibit 5: Cold storage data is delayed, but focus on the absolute values of the inventory, which are not high on a per capita basis

Underlying data from United States Department of Agriculture (USDA).

Already had a pending shortage due to African Swine Fever supply shock

This is beyond the scope of this post, but before coronavirus, there was African Swine Fever (ASF), which wiped out about 50% of Chinese hogs. It takes years to regrow them. This means, we started the year with a 5-15% global negative protein supply shock even before the above dynamics. In response to the ASF, US producers began to accelerate exports. So you have not just a US supply shortage, but a global one as well. See here for more details.

Meat producers like TSN (Tyson) beneficiaries

Meat processors buy cattle and hogs and slaughter them. They earn the processing margin, or the spread between what they pay for the animal and what they sell it wholesale (the cutout price). If they offer prepackaged foods, they may get a markup beyond that.

Exhibit 6: Processing margins for beef and hogs have exploded upwards

Underlying data from Bloomberg.

Let’s just quickly take TSN. They have lost 18% of their production capacity. But the beef packer margin is up from $37.20/head at the start of the year to $696.40/head at present. With that type of margin expansion, you could lose 95% of your production and still be better off. Now, there are still fixed costs burdens, so it’s not quite that extreme, but they are an obvious beneficiary.

Again, a reminder – oil has imploded, and while it will be volatile, marginal producers need to go bankrupt. And the consumer (70% of the economy) is under pressure already, and will be moreso with rising food costs.

Conference calls Stocks

American Airlines and their Black Swan Moment: What they said and what they did

 Quick version of American Airlines’ commentary

“…people would suggest we should be less levered, that is, in the risk of something, for risk protection…” American Airlines CEO – 2Q2018 earnings call

Airlines have received a good deal of attention lately related to their potential bailouts, with some critics noting they have aggressively been buying back shares rather than accelerating debt paydowns and shoring up cash for any unforeseen circumstances. Many airlines have repeatedly gone bankrupt over the years. Since the end of 2013, they have spent 96% of free cash flow on buybacks. American Airlines, in particular, repurchased almost $13 billion of stock. Bloomberg, The New York Times, The Wall Street Journal, Forbes, and Dallas Morning Times (AAL is based in Dallas), have all written about this.

I’ve taken a different approach in this blog post, by assembling American Airlines’ own commentary on debt and buybacks over the past couple of years to see if they were aware of the risks and what they said about it.

I want people to form their own conclusions, so please check out the above video summarizing their comments.

It’s a trimmed down video. For those who want to dig deeper, I’ve also assembled the longer video below with more complete comments.

And for those who would like to dig even deeper, further below are links to the actual full transcripts for totally complete comments.

Add your opinion on the subject to the comments below.

The longer video

Long version of American Airlines’ commentary
From public filings.


1Q2018 (4/26/2018)

2Q2018 (7/26/2018)

3Q2018 (10/25/2018)

4Q2018 (1/24/2019)

1Q2019 (4/26/2019)

2Q2019 (7/25/2019)

3Q2019 (10/24/2019)

4Q2019 (1/23/2020)


Fun Personal Finance Stocks Themes

Toilet Paper Economics: You can now stop buying TP and may want to stop buying TP stocks

The Toilet Paper Curve

Uses Nielsen weekly TP sales data and Statista data on per capita consumption.

The empty shelves and scarcity of toilet paper (TP) we are witnessing are not frenzied consumer buying, but rational behavior. It’s not obvious, but we consume a lot of toilet paper when we’re at the office/jobsite (where we spend a lot of our day). With quarantines in place, this means you use more toilet paper at home – 40% more, in fact, per Georgia Pacific (large TP producer). Thanks to Will Oremus at Medium for cluing us in on this.

So, a key driver of the surge in pandemic-buying is we all began to overnight basically consume 40% more TP. The second driver is that Americans typically hold about 2 weeks of TP inventory at home (so you don’t have to run out and buy the bulky packages or have them delivered so frequently). Recent trends suggest with the uncertainty/desire to leave the house less, people are targeting about 4 weeks of supply. This seems like rational behavior.

How does the data stack up? When we model actual TP demand in the recent period and compare it to what we should see if people are consuming 40% more TP and seeking to expand their in-home inventories to 4 weeks from 2 weeks, it seems like the American consumer has done a fantastic job. So good job everyone.

When does it stop? Right now, we estimate the average person is sitting on 3.85 weeks of supply (assuming the increased consumption rate) versus the targeted 4 weeks – pretty darn close. Now, retailers’ inventory is depleted, and it takes time to convert the commercial production lines at TP plants to domestic use (office TP comes in giant rolls and are thinner). Given this constraint and assuming quarantines remain in place, we model that TP in-home inventory will dip to ~3.3 weeks in May-2020 from 3.85 weeks currently as we wait for this converted capacity to come online, then gradually rise to 4 weeks in July-2020. Importantly, the TP curve above assumes the quarantines remain in effect all year; if they end, consumers shift back to consuming some TP in office and lowering inventories, and we’ll see a decline in purchases sooner.

So, we’re close, but people will look to replenish their inventory, and it’ll take some time to get to a full average 4 weeks of in-home inventory. But you’re not going to run out.

Which countries use the most TP and which have sold the most recently

Americans consume more TP per person than any other nationality

TP-usage is correlated with how developed is a country, so it’s not surprising that we see the U.S., Germany, U.K., and Japan at the top of the list. But what is surprising is French people use half the amount of TP as Americans. This could be because of bidets. If you want to learn more (I don’t), here’s a BBC article on the topic.

Data from Statista.

Italy has seen the largest increase in TP purchases

Not surprisingly, countries hit hardest by the pandemic have seen the largest increases in toilet paper purchases, especially highly developed countries where the consumer may be more financially able to stockpile. What is surprising, however, is the French have stockpiled the least despite quarantines in place. Maybe since the bidet is infinite capacity, they don’t need to? Again, check out the BBC article, and maybe add a comment below explaining it (but I don’t really want to know).

Data from Statista.

A brief history of TP

For those interested in the 1973 Great Toilet Paper Scare, here’s an archived New York Times article on the topic…because history is important.

Key items from a passionate Orlando local reporter.

May want to stop buying TP stocks (WMT, PG, KMB) just for TP exposure

People react to crises in different ways. I have made the decision to exit the market entirely as I view this as such a shock to the system that conventional wisdom is out the window. Here’s my post on that.

Others have sought to strategically profit from stocks, including TP stocks, which may benefit from the crisis. I have no moral problem with that whatsoever, but I think it’s mistaken: First, the shortage is largely over – people have already built inventory; it’s prudent to get in front of news, not follow on after; we already have March-2020 Same Store comps data. Second, it’s not clear they even benefit (they may even be harmed) TGT and DLTR both had negative March-2020 sales reports despite the stockpiling as their discretionary, higher margin products are not moving off the shelves (people are buying essentials like TP and holding off on other purchases). One could argue that WMT is less discretionary than TGT, or that it’s better to own upstream TP producers like PG and KMB, but I believe this is trumped by the fact that overall TP consumption is not changing; maybe it’s front-loaded to last quarter and this quarter, but it will not change annual sales, and we’re already hearing companies talk about the costs associated with converting manufacturing and expediting shipments are rising; balanced against this is they are reducing SKU’s and mass producing essentials (which can lead to efficiency gains) and in some places, they are the only ones still open for business (e.g. more market share).

Overall, I think it’s too obvious a trade, we’ve passed the stockpiling window, annual consumption is unchanged, the stocks have already risen (outperforming the XLP staples group), and the cost side of the equation is far from clear. Now, if you want to own these stocks as a hiding place given strong balance sheets and a semi-defensive staples sector or if you know them really well and have reasons to own them, go ahead by all means (though I’d be curious why them and not the XLP), but you may want to stop buying them for just TP and wipe the stocks slate clean, lest you feel the burn (intended as a possibly inappropriate pun).

Data from Bloomberg; stocks indexed to 100 at start of year.

On a more serious note…

There are some who did not have the ability to stockpile TP; we’re talking averages here. If you want to help those less fortunate source some TP, check out

And that’s a wrap.