Should they do so with an open mind, they might decide to shelve their plans and save their investors a lot of money, for the industry has an overcapacity issue that will only worsen in the next two or three years. The decline in the beef herd that began in 2019 shows no sign of abating. Beef cow numbers will continue to shrink this year and there is still no sign of heifer retention. Cattle numbers are unlikely to start increasing until late next year at the earliest. When that begins, the number of cattle in feedlots and going to fed beef processors will get even tighter for a year or more until they expand again.

This likely scenario has beef processors increasingly concerned about their ability to make money for the next two years and the effect on beef demand if they force prices higher. Tyson Foods’ beef business eked out a small profit in the second quarter. JBS Beef North America had a similarly small profit in the same quarter. JBS management told analysts the outlook for beef in the U.S. is “not going to improve soon” and this is likely to leave beef processors with unused capacity. There is no doubt that cattle supplies will remain tight in 2024 and no doubt that companies will operate using less capacity, said JBS global president of operations Wesley Batista Filho. Profit margins at JBS’s North American beef operation will remain at “low single-digit” levels, with ranchers expected to withhold females as part of efforts to replenish the herd, he told analysts.

The catastrophic drought from 2010 through 2012 led to the closure of nine processing plants. Industry-wide capacity by 2016 declined to 125,500 head per day from 139,000 head per day in 2010, according to my data. But the capacity total has now increased considerably from that low. I calculate that the largest 71 beef processing plants in the U.S. currently have the capacity to process 134,705 head per day. Even using a more conservative estimate of maximum daily capacity of 128,000 head, it is clear the industry is saddled with excess capacity. The 128,000-head total would mean a maximum slaughter total of 640,000 head over five days or 704,000 head over 5.5 days.

Weekly slaughter totals so far this year have been far below the 704,000 total. The second week of January saw the largest total of the year, 660,740 head. In contrast, the first two weeks of August saw estimated totals average only 609,000 head. That is 95 per cent of the five-day capacity or 87 per cent of the 5.5-day capacity. Such numbers make it clear why Saturday slaughter levels are often below 10,000 head.

The current overcapacity in beef processing and little likelihood of any meaningful increase in beef cattle numbers for two years cast a shadow over 10 proposed new beef processing plants. The first was proposed three years ago and is now operating in Idaho. The 10 plants have an avowed capacity of 18,190 head per day. This includes a plan to build an 8,000-per-day mega-plant in South Dakota. It seems likely this plant will not get to the groundbreaking stage. The wider question is how many others will meet the same fate.

The post Overcapacity crunch time for beef processing plants appeared first on Canadian Cattlemen.

Closure of Western’s feeding operations, likely early in 2017 once its current cattle are sold, will make it more difficult for ranchers to find markets for their young cattle and pinch supplies for Alberta’s big beef packers, Cargill and JBS.

Feedlots buy young cattle from ranchers and fatten them to slaughter weight, then they are sold to packers.

Loss of the feedlot “takes out a material portion of demand for cattle across the Prairies,” said livestock industry analyst Kevin Grier. “To me, this is pretty big news.”

Canada is the world’s sixth-largest beef exporter, and Alberta raises more cattle than any other province.

Western’s holdings include feedyards at Strathmore, High River and Mossleigh, Alta., with combined capacity for 100,000 head of cattle.

The company said in a statement it would suspend its feedlot operations after the animals it now has on feed are marketed. Past that point, Western said, it will not buy any feed grain or feeder cattle, nor hire any employees.

However, the company said Wednesday, it will continue its other farming operations “for the foreseeable future.”

The Alberta Cattle Feeders Association has previously cited Western’s establishment at Strathmore, east of Calgary, in 1958 as the launch point for the province’s commercial cattle feeding industry.

Western’s owners made the decision voluntarily because of the high-risk, low-return environment in cattle ownership, and poor political and economic conditions in Alberta, Western CEO Dave Plett said in an interview.

“Our shareholders see the challenges facing the industry in the next few years are going to be greater,” he said.

Alberta, which last year elected its first left-leaning government in decades, no longer offers an advantage in business climate, Plett said, declining to give specifics.

Many of Western’s 80 staff will eventually be laid off, he said.

Grier said the loss of feedlot capacity is not surprising, given short Canadian supply and the high price of young cattle and the weak price of fed cattle.

Recent Alberta fed cattle prices of $125 per hundredweight are down 30 percent from a year ago, he said.

— Rod Nickel is a Reuters correspondent covering the agriculture and mining sectors from Winnipeg. Includes files from AGCanada.com Network staff.

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I watched this vilification of the packing industry with sadness, because it was clear that producers ignored two fundamentals: that supply and demand determine prices, not any behaviour by packers; that the evolving industry has led to more alliances and marketing agreements between cattle feeders and packers.

Many producers also ignored a third truth, that a vibrant, profitable packing industry is vital for the well-being of the entire industry. An inefficient beef-packing sector could not keep up with its pork and chicken counterparts to provide consumers with high-quality, affordable beef. Nor could it be able to invest the hundreds of millions of dollars necessary to satisfy increased government regulations and food safety standards.

Dozens of U.S. beef plants, notably cow plants, went out of business after USDA in 1996 declared E. coli O157:H7 an adulterant in food. These plants didn’t have the resources to invest in equipment and staff required to pass the new E. coli testing standards.

Some might decry the increased ownership of plants across North America by the multinationals (Cargill, JBS and Tyson). But they made decisions to invest in the industry on both sides of the border that others were unwilling to. Ironically, Tyson retreated from Canada and the Brooks, Alta. plant looked in jeopardy until JBS stepped in. One can be assured that Cargill and JBS will remain in Canada for a long time. Each has the vast resources spread across many businesses to not have to depend on the fortunes of a few plants in Canada.

JBS in fact reported that its operations in Canada improved during the fourth quarter versus a year earlier. Because of the strength of its Australian operations, it reported EBITDA (earnings before interest, taxation, depreciation and amortization) of US$325 million, up 78 per cent on the previous year. It had EBITDA in its U.S. Canadian and Australian beef operations for all of 2014 of $916 million versus $376 million in 2013.

• More ‘Prime Cuts’ with Steve Kay: What’s with USDA cattle numbers?

Beef packers though are currently struggling on both sides of the border to buy cattle to run their plants efficiently. Alberta’s two largest plants, at Brooks and High River, have on occasion reduced production to four days per week. U.S. fed cattle plants have at times this year run the equivalent of four days at 100 per cent of capacity.

The entire U.S. beef-packing industry currently has 66 plants, ranging in maximum daily slaughter capacity from 6,000 head down to 40 head per day. They have a combined daily capacity of 127,105 head. This is down from the November 2012 peak of 74 plants and 138,855 head of daily capacity. Steer and heifer slaughter capacity is 102,560 head per day or 512,800 per week. This is without including Saturdays.

U.S. steer and heifer slaughter the first eights weeks of 2015 totalled 3.433 million head, down 3.5 per cent on the same period last year. The weekly average was 429,000 head. Capacity utilization thus was 83.7 per cent. It dropped as low as 80 per cent the week ended February 21 and did not pick up in March as beef demand remained weak and cattle remained in tight hands. Market-ready numbers of fed cattle will pick up seasonally as the spring grilling season gets closer. But this might still be a month away. That’s a long time in the life of a packer.

The post Beef packers struggle for supply numbers appeared first on Canadian Cattlemen.

Forecasts for 2015 start with cattle numbers. The early prospects continue to be bright for cow-calf operators but not for cattle feeders, beef processors, those who buy beef and those who consume it. That’s because cattle numbers in Canada, the U.S. and Mexico were expected on January 1 to be down 835,000 head on a year ago. This would be a 9.6 million head decline in five years.

Canada’s herd total might decline to its lowest level in just over 20 years. The total on Jan 1 last year was 12.220 million head. Forecasts have it declining to 12.060 million or 11.950 million head (USDA’s number). Either number would bring the total back to 1994 or 1993 levels, respectively. USDA forecasts that Canada’s beef production this year will fall 40,000 metric tons from 2014’s estimated 1.050 million mt.

Cattle feeders and packers will thus have fewer cattle available to run their operations, and consumers will have to pay more for beef. USDA forecasts that consumer beef prices in the U.S. will increase 4.5 to 5.5 per cent this year from last. That’s far less than the 11 per cent to 12 per cent increase it forecast for prices in 2014 versus 2013. But those record prices caused beef sales to slow in the final third of 2014 and that trend will be evident at least the first half of this year.

• More ‘Prime Cuts’ with Steve Kay: Weighty matters for feed cattle

The decline in Canadian cattle numbers mostly reflects a decline in beef cow numbers. Analysts have well documented the reasons for the decline. One reason that needs to be re-emphasized is the labour shortage, especially in Western Canada. Many readers, I’m sure, know first-hand how hard it is to find someone to work on a ranch or in a feedlot.

Not surprisingly, three representatives of the Alberta Beef Producers (ABP) group pressed the labour issue at a series of meetings in Ottawa last November. Cattle farmers, ranchers, feeders and meat processors are having a hard time finding the skilled workers needed for the many available jobs in Canada, they said. Vacancies on farms and ranches include two or three spots at a time, with processing plants seeing vacancies in the hundreds.

The worsening labour shortage is most acute at the plant level, where it is hobbling production, especially of value-added products. The crisis has been mounting for some time. But the Canadian government exacerbated the crisis last June when it interrupted a temporary foreign worker program. The meat industry had been using the program since 2002 to help fill vacancies. The industry as of last November had more than 900 vacancies in nine processing plants across Canada, the Canadian Meat Council’s Ron Davidson told me. But the vacancy issue will get much worse. This is the most serious threat facing the industry in Canada. Nor is it confined to the industry. The rest of agriculture and other sectors of the economy like trucking face a similar crisis, he says.

The 900 vacancies included 320 at Cargill’s High River, Alta., beef plant and 150 at JBS’s Brooks, Alta., beef plant. These plants need more than 2,000 workers each to operate at the level they want to. It’s little wonder then that John Masswohl of the Canadian Cattlemen’s Association warned last November that a corporate headquarters outside Canada might do the math and decide it was not worth operating a plant in Canada. Let’s hope the government was listening.

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

The post It’s all about the cattle numbers appeared first on Canadian Cattlemen.

‘In attempting to say a few words to you perhaps I should first of all refer to the unfortunate, ill-advised and unnecessary six-week packing house strike last autumn. When negotiations opened in the early summer of 1947 the Companies made every effort to reach a settlement. However, quite early in the negotiations it became apparent a strike could not be averted. The head of the packinghouse Union was reported in the Globe and Mail of Toronto as making the following statement from a public platform on May 27, 1947:

“There is no other course than a strike if the Government sticks to its provincial policy. The packers will use it to force the use of a conciliator in every province. We cannot afford this. We will reject any proposal.

“I do not think that the Federal Government will move, but I think we can win a strike. I only hope the packers realize the same thing, but I am not too hopeful.”‘

• More ‘History’ on the Canadian Cattlemen: The last buffalo?

Click on the image below to open a fully-readable PDF (a new window will open, the page may take a few seconds to load).

Comments and suggestion are welcome. You can reach us via the editor at gren@fbcpublishing.com.

The post Producer packer relationships appeared first on Canadian Cattlemen.

Cline started out his career by earning a teaching degree from Brandon University before collecting an MBA and heading to Japan to teach English and learn Japanese. After three years in Japan he joined Cargill in High River as a sales account manager and five years later transferred to the Cargill Beef’s headquarters in Wichita, Kansas where he is now the senior program manager, international beef, for Cargill.

A large portion of his talk dealt with variety meats (a nicer term for offal) and the role market access plays in his attempts to maximize the value of every carcass that comes out of the eight plants that Cargill operates in North America. They also market Australian beef through a joint venture with Teys Australia.

North Americans may turn their noses up at variety meats but in many parts of the world offal is sought after and can drive profits. Far from being the leftover bits, variety meats are a large and vital portion of the export business but it takes some management to gain the maximum value from this portion of the carcass. You can’t just throw it in a box and expect top price for it.

• More with Gren Winslow on the Canadian Cattlemen: Grading beefs

Take tongue for example. Traditionally the highest-value product per pound among the variety meats, tongue also offers numerous opportunities to add value in processing. You can trim the tip off or skin it to produce a product that looks nothing like tongue when it is presented to a Japanese consumer in the supermarket.

Cline says tendons provide a good example of how access to multiple markets can leverage up the value of a beef product. There is demand for tendons in many countries but it isn’t a large market. If Korea, say, was the only market open for beef tendons Cargill alone could easily flood the market. But with access to Korea, Japan, Hong Kong and the U.S. they have buyers scrapping for a shrinking supply on this particular product. As a result the world price has gone from $1 to $2 and more recently $3 per pound. To gain that value though you must have the labour available at the plant to trim the tendons properly and in a fashion that suits the buyers in different countries. In Japan, for instance, consumers like to see them laying out straight like a cucumber.

Large intestine presents a similar marketing challenge where the return for the extra labour required has to be carefully assessed in each market. In Japan, for example, they need to be split and laid flat in the box. In Korea there is a market for inverted intestine to put the fat on the inside, so it almost looks like a sausage.

This is another of those products where demand and supply must be carefully managed. Cline learned that lesson the hard way when they had a Korean customer offer to take all the inverted intestine they could produce. They did, for six months, then had to call a halt because they had a two-year supply on hand.

“If I put one extra load of intestines into Korea that’s going to crash the market and what does that do to the 20 people at the plant who are producing that product. It’s just so sensitive,” he explained.

The small intestine is used in soups.

Abomasum, the fourth stomach, looks good on the grill in Japan and Korea. Honeycomb tripe, the second stomach, is an attractive product that displays well, and is popular in many cultures.

Omasum, the third stomach, is popular in Hong Kong and China and is starting to rival tongue, fetching close to $6 a pound, more than AA ribs or steaks.

Taken together with the rumen the stomachs can add $20 to $25 to a carcass if they are in good shape. With a burned-out rumen that value is lost. Add the liver, another organ that can be damaged by poor feeding management, and you strip $35 or more from the value of the carcass.

Each of these products puts certain demands on the staff in every plant that Cargill operates which comes with a cost that must be factored into Cline’s marketing plan. Net return is the measure he uses when targeting markets. With high-value cuts and offal the rule is the same, it goes to the highest net return.

In assessing the bigger picture for Canada Cline expects our shipments to the U.S. will shrink some more with time. Japan is probably the quickest win for Canadian beef as we are still running well back of our pre-BSE share of this market, and he thinks we need to target the manufacturing side of the market to regain that share. Focusing on Japan may slow down the growth of our Hong Kong and China business. South Korea will take more time but it will become a major market for years to come.

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