The Food Supply Chain Is Breaking

The largest meat processor in the U.S. sounded the alarm over the weekend…

“The food supply chain is breaking.”

That’s what John Tyson, chairman and CEO of Tyson Foods (TSN), warned in an open letter on the company’s website on Sunday. Tyson also spread his message through full-page ads in the New York Times, the Washington Post, and the Arkansas Democrat-Gazette.

But Tyson’s warning didn’t stop there. As he also cautioned…

Farmers across the nation simply will not have anywhere to sell their livestock to be processed, when they could have fed the nation. Millions of animals – chickens, pigs and cattle – will be depopulated because of the closure of our processing facilities.

“Depopulated” is a fancy term that simply means “killed and wasted” instead of “killed and eaten” like we normally do across America. Eating animals means we value their lives. (Large industrial food operations’ cruelty to animals is a topic for another time and place.)

I (Dan Ferris) have a soft spot for all animals… but I’m no vegetarian. Humans kill animals for food. Many other species do the same. That’s life. It has been that way for millions of years.

But raising the animals and killing them without eating them is tragically sad.

What’s happening to our food supply chain right now is heartbreaking…

On Monday morning, I watched an openly emotional Canadian farmer as he spoke on Bloomberg TV about the awful decisions that farmers face in having to euthanize thousands of animals at a time. It was clear that he was only marginally talking about the lost revenue and investment so much as the thought of all those animals having lived and died in vain.

Meat-processing plants are “essential” businesses, meaning they’re exempt from coronavirus lockdowns. But many have closed due to active cases among their workers.

My colleague Corey McLaughlin touched on this topic in the April 13 Digest…

Coronavirus outbreaks started spreading through food-processing plants across our country’s heartland. And Smithfield Foods President and CEO Kenneth Sullivan said in a statement that we were getting “perilously close to the edge in terms of our meat supply.”

Since then, the situation has only gotten worse. As news network CNN reported this week…

The United Food and Commercial Workers International Union, which represents more than 250,000 meatpacking and food processing workers, said on Thursday at least 13 processing plants have closed over the past two months, resulting in a 25% reduction in pork slaughter capacity and 10% reduction in beef slaughter capacity.

As many Americans remain under stay-at-home orders, industry experts say the demand for meat has increased. At the same time, meat processing is on the decline. Beef processing in the U.S. was down 27%, and pork processing was down almost 20%, compared to this time last year, according to [U.S. Department of Agriculture] data.

With meat processing plants closing and reopening on a weekly, sometimes daily, basis, experts warn production will likely continue on this current volatile roller coaster, as long as COVID-19 outbreaks continue to plague the plants.

My biggest worry here is not about finance and investing. It’s about malnutrition and violence in the streets…

A food shortage will hit our nation’s poorest folks the hardest…

To paraphrase an old saying, “When the rich catch a cold, the poor die of pneumonia.” Well, when the rich pay higher prices for food, the poor starve to death.

You and I won’t starve. But those Americans less well-off than everyone reading this Digest are at risk for malnutrition and other health threats from a lack of food.

Even worse, large numbers of people facing malnourishment will eventually get frustrated enough to take to the streets…

It’ll happen in individual cases at first. They’ll steal what food they can, where and when they can, perhaps even at gunpoint.

That’s bad enough… But when they take to the streets in bigger numbers, things could get way out of hand. I could easily imagine episodes of mass violence leading to martial law.

If you think I’m being overly dramatic, I hope you’re right. I hope I’m just having trouble seeing around the next corner. I hope and pray every day that we get back to something approaching “normal” soon. I would be happy to be the guy who “cried wolf” on this one.

Our way of life is breaking down to a point beyond which it will be difficult to return…

You can see this in the fossil-fuels market, which lies at the heart of the global economy.

The shutdowns across the world have destroyed demand, causing a huge global glut of crude oil. We’re running out of storage space (as we discussed in last Friday’s Digest)… And massive tankers filled with crude oil now line the coasts of every continent.

Hey, no problem, right? Once the spread of the coronavirus slows down and we get things going again, we’ll just crank up production and the world will motor along once again.

Not so fast… A recent Wall Street Journal article suggests that it’s unrealistic to view crude-oil production like a kitchen faucet that can easily be switched on and off.

According to the Journal, offshore producers have begun shutting down wells in the Gulf of Mexico and might not return for years. Low oil prices hit offshore producers harder because they need higher pricing to cover the extra expense of transporting oil to onshore refineries. As Tim Duncan, CEO of offshore producer Talos Energy (TALO), explained to the Journal…

In offshore, we don’t shut in fields, we shutter them. You begin the process of leaving them forever.

Forever is a long time.

Offshore companies accounted for a record 15% of U.S. oil production last year. If enough of that production capacity disappears, we could quickly move from massive global oil glut to a shortage… and in turn, from ultra-low prices to much higher ones.

Nobody is thinking about that right now, of course. But I promise you… if a barrel of oil can start the year at $61 and drop as low as negative-$40 within four months, it can soar back to $61 or higher just as fast.

Once things go badly out of whack in one direction, it’s a good bet that they’ll eventually overcorrect in the opposite direction. An interconnected global economy is a delicate balance. We’ve thrown it off-balance with COVID-19, and it’ll take a lot to stabilize it again.

Food and fuel are essential businesses exempt from shutdown. So it’s possible to observe the huge gyrations in price and disruptions to the supply chain that we’ve identified.

But businesses deemed ‘nonessential’ have been shut down, and they’re teaching us an all-important lesson…

There is no such thing as a nonessential business.

Every business puts a roof over someone’s head and food on his table. They’re all essential… and they’re all interconnected.

Just look at the restaurant industry…

Restaurant owner Alan Van Dyke’s recent opinion letter in the Journal titled, “Bad Government Is Killing Small Businesses,” emphasized the interconnectedness of all businesses.

Van Dyke and his three children own two brewpubs in Grand Rapids, Michigan. With 59 full- and part-time employees (before COVID-19), they spent $120,000 a month on payroll and another $130,000 on vendors. The Michigan state government ordered them to shut down on March 16. They kept takeout and delivery open until they were ordered to shut that down, too.

They had to throw thousands of dollars of perishable inventory in the trash (more heartbreaking food waste). Now, with zero revenue, they’re still on the hook for $50,000 per month in rent, utilities, and other fixed expenses. Van Dyke noted the “chain-reaction impact on their employees, vendors, landlord, and lenders.” And as he concluded…

The old nursery rhyme says that for want of a nail, a shoe was lost, for want of a shoe a horse was lost, and so on until a kingdom was lost. Let’s not lose the nail.

An economy is an interconnected web of nails, shoes, horses, and much more.

The “essentialness” of all those businesses is a law of nature. You can’t break that law, but you can break yourself and everyone around you if you try to violate it. We’re doing that right now… inflicting untold pain on hundreds of millions of people worldwide.

That brings me to the classic statement on the interconnectedness of all businesses…

I’m talking about Leonard E. Read’s must-read essay, “I, Pencil.” Read, who founded libertarian economic think tank Foundation for Economic Education in the 1940s, wrote dozens of books and numerous essays. But this essay is one of his best-known works…

Writing from the viewpoint of the pencil, Read shows that no single human being knows how to make a pencil. You might think it’s a ridiculous statement… until Read lays out all the various operations required to make one. For example, he starts his description of the pencil’s “innumerable antecedents” with the wood needed to produce the pencil…

My family tree begins with what in fact is a tree, a cedar of straight grain that grows in Northern California and Oregon. Now contemplate all the saws and trucks and rope and the countless other gear used in harvesting and carting the cedar logs to the railroad siding. Think of all the persons and the numberless skills that went into their fabrication: the mining of ore, the making of steel and its refinement into saws, axes, motors; the growing of hemp and bringing it through all the stages to heavy and strong rope; the logging camps with their beds and mess halls, the cookery and the raising of all the foods. Why, untold thousands of persons had a hand in every cup of coffee the loggers drink!

It continues in similar fashion through every step of the production process until Read points out…

If you can become aware of the miraculousness which I [the pencil] symbolize, you can help save the freedom mankind is so unhappily losing.

Given the coronavirus lockdowns, we’d have to change that last bit to read, “the freedom mankind has unhappily lost and desperately needs to regain before it’s too late.”

Read provides some insight as to how we could all be OK with the government shutting everything down…

Once government has had a monopoly of a creative activity such, for instance, as in the delivery of the mails, most individuals will believe that the mails could not be efficiently delivered by men acting freely.

That’s why people think only governments can build roads… even though that’s clearly not true. Likewise, lots of people mistakenly believed that only a government-mandated shutdown could properly address the threat of the coronavirus.

I know… because I made that mistake. As I wrote in the March issue of Extreme Value…

If the world’s governments act quickly and decisively enough, we’ll likely be able to slow and stop the spread of COVID-19… and we’ll see a global recession. If they don’t, the outcome will be many preventable deaths and societal chaos in some locations, followed by a somewhat worse recession as more draconian measures will be needed to get back on track.

I said something similar on a recent episode of the Stansberry Investor Hour podcast. One of my guests, money manager Kevin Duffy, called me out on my flawed thinking with a very thoughtful e-mail. I thanked him for the whack on the side of the head and freely admitted the mistake of assigning government such a role.

The truth is the exact opposite of what I first suggested…

Societal chaos will result from not allowing people to choose their own actions based on their own levels of risk tolerance. (Porter’s recent Digest hit this nail on the head.)

It might look like rigidly mandated order from the government. But in fact, it’s a system for breeding chaos, including the real potential for widespread violence. And in turn, that would inspire even more heavy-handed government response… making the situation even worse.

Read finishes his essay with a lesson…

Leave all creative energies uninhibited. Merely organize society to act in harmony with this lesson… Have faith that free men and women will respond… I, Pencil, seemingly simple though I am, offer the miracle of my creation as testimony that this is a practical faith, as practical as the sun, the rain, a cedar tree, the good earth.

Our reliance on big government doesn’t make us strong. It makes us weak and exposes us to large systemic risks. The more centralized a given system is, the more vulnerable it is to extreme “tail” events. (By that, I’m talking about extreme events deemed unlikely by standard probability analysis, but which are in fact much more likely based on historical precedent.)

We need less faith that only government can fix certain problems and more faith in the ability of free men and women to organize themselves voluntarily in search of creative solutions to problems.

In the final analysis, government-mandated lockdowns are merely exaggerated versions of the horrible damage that governments do every day by prohibiting voluntary interactions. The coronavirus lockdowns are different only in degree, not in kind, from normal government policy throughout the so-called developed world.

It’s as if the government suddenly started waging wars on eating, drinking, exercise, shopping, worshipping, and live entertainment by closing restaurants, bars, gyms, malls, churches, synagogues, sports, and concert venues.

It’s identical to the government’s insane wars on drugs, guns, and cash that oppress (mostly poor) people every day.

That’s not life. That’s the opposite of life. It’s a path to societal death… too clearly resembling the paths of so many heavy-handed failed empires of the past.

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