A Few Thoughts: Capacity, economic efficiency, and the beef industry outlook
“A Few Thoughts” – Capacity, economic efficiency, and the beef industry outlook
Tri-State Livestock News
February 22, 2017I am currently in route to Washington D.C. to give an invited presentation at USDA’s Outlook Forum this week. I was asked to speak on capacity in the red meat industry, a topic that I spend quite a bit of time tracking and analyzing as it concerns markets and strategic planning for clients. How often have you heard (or said) prices would be better if we just had another beef plant to increase competition for cattle? How many times have you read about new pork processing capacity coming on line over the next 24 months and how it is driving the building of hog herds? The answer is probably quite a lot. But there are also numerous times when new plants failed within in a short period because they didn’t have the financial where-with-all to compete in the market for livestock or product markets. Capacity is discussed often with regard to prices and there is either too much or not enough. Capacity and capacity utilization are important to the meat and livestock industry and in fact, most businesses for that matter. The recommendation to be more efficient and lower costs is not new to cattlemen or the beef industry for that matter and that endeavor begins with capacity utilization. At the ranch, it begins with balancing your seasonal grazing capacity with grazing units or cattle numbers. Sound ranch economics requires balancing the cost equation from the resource to the marketable product. That balance is driven by efficiencies that result from management, technology, science, and yes, experience. Packers and feedlots must also strive to achieve a capacity balance driven by efficiency. The entire U.S. beef industry has made gigantic strides toward that end.A statistic that I often repeat when giving presentations (the one on Friday included) is that in 2015, the U.S. beef industry produced as much beef as it did in 1975 with 43 million fewer cattle. Think about that for a minute. It is significant not only to you as a producer, but to the entire supply chain and to consumers both in the U.S. and in global markets as well. In the larger picture, it simply means we don’t need as many cattle to produce the same amount of beef and that leads to more efficient use of resources. That is good for ranchers but it creates a challenge for packers and feedlots. Both are by numbers not pounds with regard to capacity. Today, as the number of cattle is increasing as herd building, capacity utilization on the harvest end of the plant is economic. However, those cattle also generate more consumable product that must be sold at the other end of the plant – hopefully with a positive margin. Consequently, the gains in production efficiency will be increasingly critical to industry’s economic outlook – from the standpoint of both cost and revenue.