Processing capacity is not the issue

Prime Cuts with Steve Kay

Beef processing capacity and plant capacity utilization are two different subjects. So I have been fascinated in recent months how some in the U.S. beef industry have equated the two. Their argument is that temporary plant closures and slowdowns in April and early May revealed that the industry needs a lot more capacity, mostly through new plants.

The COVID-19 pandemic did indeed cause massive disruptions to beef plant operations. Weekly slaughter level reached a record low of 438,614 head the week ended May 2. This was 64 per cent of available capacity, using a maximum capacity of 685,000 head per week. But slaughter levels improved dramatically after that, returning by the end of June to normal levels.

Related Articles

This did not stop some people from insisting that the industry needs more capacity. Several state governments went so far as to offer financial inducements to individuals or companies to build new, small plants in their state. Nowhere, however, did they mention that they would also ease the path through the thicket of planning, environmental and other regulations required just to get approval for a plant site.

Then in early October, Rabobank released a report that claimed that additional daily packing capacity of 5,000 to 6,000 head of fed cattle could restore the historical balance of fed cattle supplies and packing capacity and still allow for positive packer margins. So argued Rabobank analyst Dustin Aherin in a report entitled The Case for Capacity.

Aherin’s report, however, offers no examples of when packing plant capacity encouraged U.S. cow-calf producers to expand their herds. Had he asked me, I would have told him that producers expand or contract their herd for two main reasons: profits or losses, green grass or drought.

Spurred by the Rabobank report, prominent Canadian market analyst Kevin Grier set out to analyze the question of the balance between the U.S. supply of fed cattle and fed beef processing capacity. The real question is when and how there will be the historical balance, says Grier. Based on my annual listing of U.S. packers in Cattle Buyers Weekly, the top 30 companies in the U.S. had a maximum daily slaughter capacity of 126,400 in 2019, says Grier. It is likely modestly higher in 2020. With the addition of new plants and expansion, the industry should be at about 128,000 by 2022. Even with this expansion and organic growth, capacity will be much less than 10 or more years ago, he says.

Grier notes that CBW’s top 30 listing is for all cattle, not just fed cattle. Taking 80 per cent of the top 30 total can be used as a gauge for fed cattle slaughter capacity, he says. The next step is to examine capacity against fed cattle supplies. The ratio of steer and heifer inventory on January 1 compared to the annual top 30 slaughter capacity from 2010 to 2017 was about 97 per cent. That means that fed cattle supplies to start the year were about three per cent less than annual capacity. The ratio of the inventory to capacity in 2018-20 was 102 per cent, he says.

Grier expects to see steer and heifer inventory down about three per cent in 2022 from the January 2020 total. Coupled with the increase in capacity at two existing companies, this should get that supply-capacity ratio down to 98 per cent, he says. Cattle feeders will finally regain leverage over packers by then. In conclusion, Grier’s analysis suggests that the balance between supply and capacity fluctuates according to the U.S. cattle cycle of expansion and contraction and is not the issue that some think it is.

About the author

Contributor

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

Steve Kay's recent articles

Comments

explore

Stories from our other publications