A Few Thoughts by John Nalivka: Reshaping the U.S. beef industry?
Did I miss something or has USDA made the decision the U.S. beef industry needs to be restructured? Perhaps, I have come to the wrong conclusion too quickly, but after USDA poured $35 million dollars into expanding packing capacity with small-to-mid sized plants with grants and loans through the Meat and Poultry Expansion Program, they announced on October 11th, a Notice of Proposed Rule Making regarding Price Discovery and Competition in Fed Cattle Markets. I may be misinterpreting the timing, but the two seem to be aiming toward an agenda of restructuring the beef industry with small-to-mid sized packers buying cattle on the spot market.
Though I am wary of the potential outcome of the two USDA actions, I am not one to say that USDA needs to go away. The Department provides needed services for U.S. agriculture and the beef industry including food safety, market news and information, research, trade, animal and plant health, nutrition programs, and farm lending. And yes, they do provide necessary regulatory oversight.
The packing industry, not unlike other sectors of U.S. agriculture is driven by economies of scale. That is to expand production capacity, which in turn will reduce costs of production per unit of output. Feedlots, ranches, and farms all have consolidated and grown larger to gain those same economies. Beyond agriculture, economies of scale are a driving economic force in other industries as well. So, then the question arises; has this principle created a non-competitive situation in the beef packing industry as packers increase the number of plants and the capacity of those plants to build a profitable and thus, sustainable business? Some in the industry would say the answer may be yes. However, closely related to capacity is capacity utilization and closely related to capacity utilization is competition. The packing industry is driven by throughput capacity and the utilization of that capacity. Packers compete for cattle to accommodate that capacity just as feedlots compete for feeder cattle.
Addressing the fed beef industry, I calculate the current capacity to slaughter and process cattle is 30.3 million annually or 583,000 every week. Given the current supply of fed cattle as the result of significant herd liquidation during 2021 and 2022, the utilization of this capacity in 2024 has averaged 82.5% year-to-date compared to 87.7% during 2022.
The USDA notice discussed valued-added cattle production and pricing. Together with economies of scale, the production and marketing of value-added beef drives today’s beef industry. Marketing cattle at the ranch with genetic merit will grow increasingly important to accommodate the demand for value-added production and together with economies of scale will increasingly drive the industry. All the while, production efficiency will continue to be a limiting factor to growing cattle numbers as in past cattle cycles. The industry has adapted structurally to changing economics. We need to be careful with any discussion that might take the industry backward.