Packing Plant Fool's Gold

 

By Greg Henderson, Opinion, Drovers††

June 16, 2022

 

Cowboys have worked themselves into a frenzy over U.S. packer capacity since the Tyson fire temporarily shuttered a giant plant three years ago. Monday morning packers are convinced the solution to low cattle prices is more carcass hooks. Support for that theory grew exponentially with the COVID black swan.

 

All packers Ė not just the Big 4 Ė fell into crisis in spring 2020 as workforces shrunk and safety protocols forced spacing between employees. Predictably, cattle slaughter slowed (Sterling Marketing estimates beef packer capacity utilization fell to 64% by mid-April 2020), feedlots were forced to hold ready cattle and cash prices for fed and feeder cattle dopped sharply. Oh, and packer profit margins skyrocketed.

 

Those are facts. Interpretation of those facts, however, is often disputed and has led some stakeholders to consider a perilous business endeavor. Iím referring to the caravan of folks lining up to build new beef packing plants. Exaggerated packer profit margins lures ranchers, feedlot managers and others into a venture most know little about.

 

Itís packing plant foolís gold. Thatís an opinion, but one based on facts.

 

For instance, the most successful new plant in 2025 would be one that was built and operational in mid-2020. There are none of those. Whatís proposed are at least seven new plants with capacity of 10,600 head per day, with an eighth proposal of a massive 8,000 head per day plant on the fringes of cattle feeding country. Only one of these new plants have moved dirt yet Ė though the expansion of the Tama, IA, plant by National Beef was into construction but was recently paused due to rising costs.

 

Veteran industry observers claim we donít need additional packing capacity Ė other than a few local plants that can help service niche marketers. Last week, for instance, the industry saw steer and heifer slaughter total 523,698 head, a number that put packing capacity utilization at 91.1%. Capacity utilization of the plants currently operating will trend lower the next few years as cattle numbers recede. Would an additional 8% to 10% capacity lead to higher cattle prices?

 

If built, the proposed new plants would come online in 2025 or 2026, at a time when cattle numbers may be at historic lows...

 

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