Coronavirus outbreaks at meat plants compound ag banks' problems

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Ruth Kuchynka wishes she could hire 40 more cutters for the processing plant she owns, Quality Meats in Miles City, Mont.

Her slaughter schedule is fully booked through January 2021 as bigger competitors in the state were forced to close their crowded floors and overhaul operations while the novel coronavirus swarmed across U.S. ranchlands. In some cases, ranchers are having to euthanize animals.

Even as some plants have reopened, production has slowed to a crawl as workers who do come back are spread out across the cutting floors. Despite the temptation to add more capacity, Kuchynka has kept to just four cutters working at different tables and only 10 employees working 40 hours a week in her plant to minimize their risk of getting sick.

“Everybody’s panicking about it,” Kuchynka said in an interview. “In Montana, we have more beef than people. It’s a temporary lull in the processing system. The processing has to catch up.”

The disruption in the meat industry has agriculture lenders scrambling, especially community and regional banks that cater to smaller processing plants and ranches. In many cases they are having to pause collections on loans to ranchers with nowhere to send their herds. The coronavirus pandemic has become yet another squeeze for ag banks that have been helping farmers and ranchers limp through years of low commodity prices and trade wars.

Novel coronavirus cases at meat processing plants

Animal protein producers are expected to lose roughly $25 billion this year as a result of lower prices and losses of cattle, hogs and chickens, according to an estimate from CoBank, a $158 billion-asset company outside of Denver that specializes in ag lending.

That loss estimate includes 7 million hogs that are expected to be euthanized in the second quarter alone, or roughly $700 million by historical price averages — but it’s lower than the cost of housing and feeding the pigs.

“The cash margins we are seeing for cattle feeders and independent hog producers are some of the worst the industry has experienced in a number of years,” said Will Sawyer, lead economist at CoBank.

Calves in Montana are hitting the ground this spring and will be bought and shipped to wheat fields in Kansas to be raised in the fall. They will then be sold to feed lots in Texas, Oklahoma and Nebraska for fattening and from there head to processing plants before ending up in supermarkets.

But ranchers are feeling the financial pressure as excess livestock crowds the supply chain up ahead of them and squelches demand for more. There were an estimated 600,000 fewer head of cattle slaughtered in April than originally projected before the plants began closing, according to industry tracker CattleFax.

The result is ranchers will have a hard time making mortgage payments on empty barns they borrowed to build, said John Blanchfield, an industry consultant at Agriculture Banking Advisory Services. This will mean more troubled assets for ag lenders.

“Many cattle feeders will go broke,” Blanchfield said. “Ranches will be lost.”

More than 7% of the roughly 1,300 ag banks that report to the Federal Deposit Insurance Corp. were unprofitable in the fourth quarter — before the pandemic hit the U.S., according to the agency’s latest available data.

“It is very bad right now,” said Bill Bickle, chief credit officer for Stockman Bank of Montana, a roughly $4 billion-asset bank in Miles City, Mont., near Kuchynka’s plant. “The cattle that were not harvested in April are still in the food chain, reducing the ability of feed yards to take delivery on replacement cattle" and "affecting cash prices currently being paid for feeder cattle.”

Bickle said bank officials are bracing for a difficult selling season ahead.

“We, like most industry observers, expect it will take a long time to work through this situation and markets will be very challenging through 2020,” Bickle said.

On the other side of the bottleneck, however, demand has not gone away like it has for other commodities like oil and gas. Those still sheltering at home and venturing out to stock up on groceries will likely find meat shortages later this year and as a result higher prices.

Some ag bankers are offering forbearances on debt payments for ranchers until they can get a higher price for their livestock when the shortage hits.

“Banks are willing to work with them on that,” said Heather Malcolm, vice president of the $157.5 million-asset Bank of the Rockies in White Sulphur Springs, Mont., and the oldest bank in the state.

Malcolm said she is optimistic that most ranchers can make it through the closures as long as processing plants find a way to safely get back online.

“I think we’ve already seen the lowest part in the market if the cattle guys can hold on a little longer,” Malcolm said.

Kuchynka said the big meat processing plants will have to settle for lower production quotas in a safer environment in order to get employees to feel safe cutting meat again. Fewer workers, she said, are better than none at all.

“The big packers may have to make some changes,” Kuchynka said. “They may have to recognize that their employees are more important than their production quota.”

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Commercial lending Agriculture industry Coronavirus Credit quality Risk management Community banking Regional banks