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Packers Seek Private And Public Money

A North American view of the meat industry. Steve Kay is publisher and editor of Cattle Buyers Weekly

Cow killers want the federal government to cough up $26M ($31.70 per cow) annually to cover added costs of removing and disposing of SRMs (specified risk materials)

One of the least-understood facts about the beef processing industry is the enormous amount of money it takes to build and operate a plant. It’s virtually impossible to build a new plant in Canada or the U.S. for less than $20 million. Sure, small “locker” plants that kill only a few hundred cattle per week can be built for much less than that. I’m referring to plants that will be federally inspected and want to export some of their output to another province or another country.

I’ve watched numerous examples in recent years of producer groups who are convinced that, if they had their own plant, they would get more money for their cattle and the plant would be profitable. But the two goals are sometimes incompatible. A plant will struggle if it pays too much for fed cattle or cows relative to what it can sell the meat for. It will struggle if it can’t get enough cattle from within a reasonable distance. That’s one of the issues that has faced Quebec cow killer Levinoff-Colbex. Producers also underestimate the borrowings required to get a plant through its first three startup years. Then there’s the amount of working capital required to keep a plant operating.

The North American meatpacking industry has been starved for new equity for 20 years. That’s why the acquisition in 2007 by Brazil’s JBS SA of Swift & Company has rejuvenated the U.S. industry. JBS not only knew how to improve Swift’s beef business. It had the money to invest in improving it. JBS now intends to raise up to US$2 billion for JBS USA (which includes its Australian beef business) through an initial public offering (IPO) of stock. It will set the IPO price in the second week of January. JBS also expects to conclude a US$2.5 billion private share sale for its U.S. business by the end of this year. JBS looks set to be awash with cash to invest further in the business. It has already said it will spend US$500 million of the IPO money in capital improvements.

Canadian packers would love to be able to raise a fraction of these amounts. But short of attracting JBS to Canada, and that’s unlikely, packers’ only recourse is to turn to the government for help. That’s what they’ve done. Cow killers want the federal government to cough up $26 million ($31.70 per cow) annually to cover added costs of removing and disposing of SRMs (specified risk materials). Canadian packers have incurred larger SRM costs than their U.S. counterparts since Canada introduced an enhanced feed ban in July 2008. The added cost is one reason why the XL Foods cow slaughter plant in Moose Jaw, Sask., remains closed. It shut down this spring and was to have reopened this fall. A labour dispute with its furloughed workers is another factor.

Meanwhile, the federal government in helping prop up Levinoff-Colbex and Keystone Processors Ltd. in Winnipeg to the tune of up to $20 million in loans. Levinoff-Colbex is the only significant slaughter facility for cull cows for producers in eastern Canada. It processed 149,325 head in 2008 but the firm says it needs to process a minimum 160,000 cows to break even. This additional volume must come mainly from Quebec, it told its producer owners last February. It had to buy more cows from outside Quebec in 2008 than in 2007 to keep its kill levels up. Let’s hope its message for producers to send all their cull cattle to the plant has the desired effect. If not, the plant might have to close and the cull cow market will weaken considerably.

Cattle Buyers Weekly covers the North American meat and livestock industry. For subscription information, contact Steve Kay at P.O. Box 2533, Petaluma, CA 94953, or at 707-765-1725, or go towww.cattlebuyersweekly.com.

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A North American view of the meat industry. Steve Kay is publisher and editor of Cattle Buyers Weekly.

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