President Trump May Use Defense Production Act For U.S. Food Supply Chain

There is a tremendous amount of information and misinformation surrounding the current status of protein processing within the meat industry. Most of the misinformation comes from many people not understanding the total food supply-chain and how it works.

First, there is no shortage of meat protein products: beef, pork and chicken at the farm level. However, the problems arise within processing, manufacturing and more importantly binding legal contracts and liabilities within the supply-chain. Additionally, there are national and multinational aspects to the protein food supply.

Today President Trump remarked the White House and Dept of Agriculture are drawing up a plan for the president to invoke the defense production act as a tool to cut through some of the liabilities present within the supply-chain dynamic. Let’s use cattle to explain.

Because beef is a “graded” commodity, there are contracts for purchase within the supply chain. USDA Prime, USDA Choice and USDA Select are three well known grades of beef. However, there are eight grades total: prime, choice, select, standard, commercial, utility, cutter and canner.

Within the total food supply there are contracts for exclusive product purchasing in both the commercial and consumer side of the food supply.  Additionally, the commercial side breaks down into ‘food-away-from-home’ (i.e. restaurants), and manufactured food.

Large wholesale companies may contract with hotels, restaurants and other commercial entities to supply specific types of graded beef. High end restaurants, higher priced outlets, may demand only “prime” or “choice” cuts. Big chain restaurants may have a different contract for a different grade, perhaps “select” and/or “standard”.

Additionally, retail consumer outlets (supermarkets etc.) may also enter exclusive purchase agreements (or work through wholesalers) for their preferred grades based on their brand image and targeted market. Whole Foods may only want to sell “prime/choice”, whereas WalMart, due to price and volume, may contract for “select/standard.”

Meanwhile food manufacturers who make processed foods like soups, frozen dinners etc. may use “commercial or utility” grades; while pet food processors may use “canner” grades.

So you’ve got: (1) restaurants (high, med and low), Hotels (high, med, low), and other food-away-from-home venues; and (2) manufacturing/processing both in the commercial lane of the protein food supply.  Then we have (3) supermarkets (high, med, low), butchers, and other food-at-home providers in the consumer lane of the protein food supply.

Because the product is a limited supply commodity; and because each of the end-users needs a consistent supply; each of these outlets has different purchase contracts based on their individual need.  Many of these legally binding contracts are exclusive contracts with “first right of refusal” clauses to ensure their supply.

With the food supply chain completely disrupted all of those purchase agreements are now a complete mess.  Half of the commercial side is not working (restaurants); half of the commercial side needs more (manufacturing); and the consumer side (grocers) have an exploded demand.

U.S. farmers producing high-end cattle, top quality beef, have lost much of their market and cannot sell (restaurant/commercial lane closed).

Food processors of protein derivatives (soups, canners, frozen foods manufacturers, pet food manufacturers), specifically focused on the lower-price/grade-range of the commodity, need more and have legally binding contracts with foreign beef producers due to a lack of domestic supply (normal circumstances) for the grades they normally purchase.  Much of that type of industrial beef, pork and chicken goes into bulk frozen storage warehouses.

As a result U.S. farmers have excess high-end beef, but U.S. food manufacturers are contractually obligated, and financially dependent upon, low-end often imported beef.

Meanwhile consumer outlets like grocery stores have domestic purchase contracts, some with exclusive purchase agreements, that do not permit wholesalers to quickly add-on new suppliers without legal approvals.

On top of all that complexity, we have beef slaughter houses and processing facilities that are struggling with COVID-19 compliance issues; and the potential for employment liability due to their infrastructure not aligning with workplace directives around “social distancing” etc.

These types of food-supply workplaces cannot easily be modified AND they are designed for maximum productivity and efficiency.  Food security is national security. Ergo, the defense production act, and the extreme sensitivity around the food supply, can benefit these food processing stations by providing exemptions from the COVID-19 rules.

Additionally, the invocation of the DPA can, likely will, allow farmers who are contracted to specific suppliers, to legally break the contract and sell their supply into any market that will purchase their products.

Lastly, the DPA may -more tenuous application- allow purchasers to break contracts with multinationals and avoid being forced to import a product while there is a domestic abundance.  That multinational part gets a little tricky…

The food supply chain is a very complex dynamic that few really understand; and no-one has ever gamed-out this current situation as it has unfolded.  This is all new to everyone.

Think about this situation:

Prime and Choice beef going into ¹tube meats for grinds?  Yes; it’s possible.

Fancy Angus beef in dog food?  Yes, seems bizarre, but it’s possible.

This is all new folks.  However, the bottom line is don’t worry about the ability to find food; we are a net food exporter as a nation.  There is plenty of food product, we just need to shift it around… and the shifting ain’t as easy as it seems.

¹Most people are unaware that many lean ground meats (various levels of fat) do not come from trim lugs by the butcher any longer.  To ensure consistency and avoid running into issues with human decision-making in a field with lesser skilled labor, most retail markets are now purchasing ‘tube-meat’ to make their lean grinds.  The butcher trim lugs are used for more generic ‘market grinds‘ or family packs.

ADD: After publication of this article the White House provided more detail that provides some further information.  From the DPA Guidance:

SUPPORTING CRITICAL INFRASTRUCTURE: Closure of meat and poultry processing plants can quickly have an outsized impact on our Nation’s food supply chain.
* Given the high concentration of meat and poultry processors in a relatively small number of large facilities, closure of any of these plants could disrupt our food supply and detrimentally impact our hardworking farmers and ranchers.
* Closure of a single large beef processing plant can result in the loss of over 10 million servings of beef in a single day.
* Similarly, the closure of a single plant can eliminate more than 80 percent of the supply of a particular meat product—like ground beef—to an entire grocery store chain.
* Failure to process livestock could force millions of pounds of meat to disappear from the market, potentially leading to long-term disruptions in our supply chain.
* To combat this crisis and ensure the adequate availability of food for the American people, it is vital that these processors are able to remain operating at this critical moment, while also taking steps to prevent the spread of COVID-19 in their facilities.  (more)

— sundance at cth