A Few Thoughts by John Nalivka: A Few Thoughts – Beef packer capacity – enough?
The beef packing industry currently can slaughter and process 29.3 million fed cattle and 6.4 million cows annually. Based on Sterling projections, packers will utilize 88.5 percent of fed capacity and 90 percent of cow capacity in 2017. With no change in capacity and again using Sterling supply projections, fed cattle utilization will increase to 90 percent and cow slaughter utilization will increase to 94 percent in 2018. Those figures suggest capacity is ample. But the question of capacity isn’t that simple.
Packer/processor capacity is a driver in the red meat industry. It always has been and often is at the forefront of the discussion as herds are expanded with the question, “do we have enough capacity to slaughter and process all the cattle and/or hogs? The question, what are we going to do with all of this kill (or should I say harvest) capacity when herds shrink doesn’t seem nearly as important at the coffee shop. That probably has something to do with the relationship between excess packer capacity and prices.
In analyzing capacity, I would first submit that new capacity is not the result of packer’s desire to accommodate livestock numbers. The cause-effect relationship is actually just opposite of that. The decision to build new capacity starts on the demand side of the equation centering on the question – is demand growing and will it support future profitability across the industry and ultimately, industry growth? If the answer is yes, the next step is looking at current capacity and future competitiveness. Certainly, building new plants or modernizing existing plants to accommodate food safety, worker safety, and animal welfare are all considerations. Growth could entail building new plant capacity or buying existing capacity. A packer cannot build a new plant simply because producers are currently expanding herds. Herd building could end before the plant comes on line. There are plenty of plants that barely started up before closing the doors.
In addition to putting demand to the forefront of the analysis plant ownership and location of plants relative to livestock are key considerations. So, while we tend to look at annual slaughter capacity on a national basis and judge that against livestock numbers, any sound analysis concerning changes in that capacity must go much deeper into the numbers.
The U.S. pork industry is a great illustration of how new capacity if driven by demand growth and profitability can be a boom to the livestock and meat industry and consumers. New hog plants coming on line this year were driven by demand growth. Herd growth is filling that new capacity. The stars may not be aligned quite as well for the beef industry, yet.