A Few Thoughts: Capacity Utilization is Important to the Beef Industry
March 18, 2015
Last month, JBS announced a $75 million major upgrade at their Hyrum, Utah plant which included adding a ground beef facility and increasing slaughter capacity. At the same time, J.R. Simplot Co. and Caviness Beef Packers announced a partnership to build a new $100 million beef plant near Boise, Idaho. Last summer, Tyson Foods completed expansion of their Dakota City, Nebraska plant and also announced they would not close their Dennison, Iowa plant. This week, they announced a $47 million upgrade at the Lexington, Nebraska boxed beef warehouse. These announcements come close on the heels of plant closures over the previous two years as packers adjusted capacity to cattle supply.
Capacity is an often-discussed topic in the beef industry, mostly as it relates to packers and market concentration, but it concerns every sector of the industry. In the last couple of years, tight cattle supplies have pushed discussions of packer capacity more toward capacity utilization and which plants would close because there were not enough cattle. This question does not necessarily have an easy answer, as over the last decade, plants have been upgraded for food safety and efficiency notwithstanding the recent JBS and Tyson announcements. The closing of National's Brawley, California plant largely concerned cattle supplies, but at the same time, water was also becoming an issue. Cargill's decision to close their Emmpak plant in Madison, Wisconsin concerned the plant's age as well the decision to direct and consolidate activities to their other plants. Again, the dynamics of capacity across the industry are often not as simple as it would first appear.
Capacity and capacity utilization are critical issues in any industry. The economics create a very dynamic situation as adjustments are made to changing circumstances. In order to cover fixed costs, utilization of capacity must reach a given threshold. For example, the beef packing industry currently has the capacity to slaughter 28.6 million head of fed cattle or about 665,795 per week. Last year, with 8 percent fewer fed cattle, they used about 86 percent of that capacity on average. This year with fed cattle supplies expected to drop another 2 percent from last year, estimated capacity utilization would be 85 percent. These utilization levels are judged against an economic threshold of about 92 percent.
So, while packers have been generally operating well below an economically feasible level of utilization, increased cattle numbers are expected to be just around the corner, so packers are upgrading plants and adjusting capacity for increased efficiencies and producing products to best meet consumer demand rather than closing plants to reduce capacity.
I will continue this topic of industry capacity and it implications in my next article.