Capacity: Is it really the issue?

Packing capacity. Those words were all the rage before and during the pandemic when feeder cattle and fed cattle prices were plummeting while packers were racking up record profits.

Many noted industry professionals have warned the industry in recent years that the cause of the six-year or more market downturn is because the packing sector doesn’t have the shackle space or “capacity” to drive demand (and prices) higher for live cattle.

The federal government offered up $200 million this summer to help increase beef and poultry packing capacity. Among other things, the grants can be used for to acquire land, build or expand facilities and modernize equipment in an existing plant.

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The deadline to request the first round of funding ($75 million) was July 25, 2022 and USDA says the second round of funding ($125 million) will be made available in recent months.

In a June Drovers story, Greg Henderson reports that at least seven new plants are being talked about, with one scheduled for possible expansion. The total additional capacity would be in the neighborhood of 18,700 more head per day than the current slaughter rate, if every one of those plants eventually operates at full intended capacity. That, of course is unlikely, but theoretically would add almost 20 percent additional capacity to the current steer and heifer slaughter numbers which hovers roughly in the vicinity of 500,000 head per week.

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Derrell Peel, Oklahoma State University livestock marketing specialist tells TSLN, however, that physical capacity in the packing industry isn’t necessarily lacking right now, especially not in light of recent sell-downs due to low prices and drought. The real limiting factor, he said, is labor.

As far as “how much shackle space do we really need,” Peel said that figure is a “moving target.”

“You can kind of fix a number in the past relative to where we fell short,” he said. Adding that capacity probably won’t be an issue for the next four to five years.

Because cattle numbers are fluid and cyclical, and infrastructure is “very long term in nature,” he said it’s difficult to find te perfect middle ground. He added, though, that if cattle numbers exceed what they were in the past few years – and he thinks they could eventually – more capacity will likely be needed.

Was tight capacity really the problem that cause the market crash following the 2019 fire in the Holcomb, Kansas Tyson plant? “I don’t think capacity was the major part of the problem. We were straining, but it probably wasn’t part of the pricing problem until the pandemic, or close to it,” said Peel.

“We were right at the limit – we were bumping up against it in ’16, ’17 and beyond, but it wasn’t until we combined that with labor issues due to covid in the pandemic that we really experienced the real squeeze that came from absolutely not enough capacity (due to labor shortages) and not enough ability to adjust to meet needs.”

He explained, “In 2020, we simply couldn’t run the plants we had. That was a major part of the issue,” he said. A period of about seven to eight weeks at the height of the worker shortage due to covid, was the most pronounced in terms of difficulty getting cattle processed.

Will more capacity be the answer we need to prevent another “pandemic crash?”

Peel says no. “What happened in 2020 would have happened if we’d had more packing plants. Labor has been an issue for a long time in packing plants. It got more critical when we also reduced physical capacity,” he said.

How to fix the labor issue?

“For the forseeable future, the labor issues are going to be there,” he said, adding that the packing industry has always relied on immigrant labor to a certain degree. “That’s a broader issue,” he said.

He added that the worker shortages this country faces are likely even more severe in the packing industry. “It’s not a glamorous profession. It’s tough, grueling, physically demanding. The workers don’t stay if they don’t have to,” he said.

The covid worker shortages did indeed boost packer profits by tightening supplies of beef and growing the supply of cattle, but it wasn’t intentional, said Peel.

“They did make more money during the pandemic, but their costs skyrocketed, too,” he said.

Peel said the packers did “make more money on a per head basis and have had larger margins since 2020,” but he predicts “they are going to give a whole bunch of it back in the next two years.”