John Nalivka: Pork packer capacity — motivated by economics
August 10, 2017
There is always plenty of discussion concerning packer capacity and more often than not, capacity is discussed with regard to livestock prices. Capacity is important to market performance in agriculture regardless of the industry or the sector being considered and is tied to economies of scale which in turn directly impacts per unit costs. The interaction of pork packer capacity and hog supplies over the past year has been a great example of the workings of a competitive market driven by the profit motive and sound business decisions.
In a short one and half years, the industry has gone from the capacity to harvest and process 116.2 million hogs annually to being within earshot of bringing that annual figure up to 130.4 million. Six percent of the increase will be reality next month with the Clemens Foods plant opening in Michigan (8,000 head / day) and the Triumph-Seaboard Foods plant in Sioux City, Iowa (10,500 head / day).
By second quarter 2018, Prestage Foods will open a new plant in Wright County, Iowa (10,000 head / day), Clemens will bring capacity up to 10,000 head / day in Coldwater, and Triumph-Seaboard Foods plant add a second shift in Sioux City bringing the total plant capacity 20,000 head per day.
While this rapid capacity increase may be a story in itself, I think the more instructive aspect is that this 11 percent increase in harvest capacity has likely represented half of the incentive to expand the hog herd so rapidly over the last 2 years. Producers know that new capacity increases demand for their finished hogs. The business motivation is to build herds into that capacity. And while it may not always be the case, both the sharp increase in packer capacity and herd building are occurring when both packers and producers are profitable. We can attribute that largely to sharp gains in export demand. But, at the same time, capacity utilization for the pork packing industry has been running on average about 98% this year as hog numbers surpass capacity before the new plants come on line. This is clearly an advantage to packer margins.
So, the question arises on how this discussion regarding this recent buildup of pork packer capacity applies to or perhaps more importantly, affects the beef industry. In many respects, the economics are the same and the best example would be the new CS Beef cow plant in Kuna, Idaho owned by Caviness Packers and Simplot Company. However, as a general statement, the differences in production and industry structure are vast and these differences are compelling as new beef packer capacity comes on line. I would submit, adding this much capacity to the beef industry would lead to a different outcome than I have described for the pork industry. F