A Few Thoughts by John Nalivka: The prominent role of packer capacity in fed cattle markets
As cattle prices have risen sharply during 2023, there is one dominant and critical issue at play in the cattle market – available cattle numbers (both fed and cows) versus packing and processing capacity. Cattle numbers have declined significantly as the result of herd liquidation in response to the drought and thus, competition between packers for cattle has increased sharply in order to fill available capacity. Cattlemen know this – excess capacity means higher prices.
However, going the next step, capacity utilization is a key to the profit and loss statement packing plant. And, beyond slaughter capacity is processing capacity which has become increasingly critical with the production of value-added products. And in that regard, the complexity of the plant capacity and utilization equation is only further increased as the packer must buy cattle that are consistent (quality) with producing that value-added product.
So, a quick review on capacity in the beef packing industry is in order. We currently have annual fed cattle slaughter capacity of nearly 29.7 million head (Sterling estimate) which works out to 572,000 per week or 104,000 per day on a 5.5-day week. With weekly fed cattle slaughter averaging 487,000 through May 20 this year, packers have used on average of 85.2 percent of capacity on a weekly basis. This compares to 88.2 percent for the same period a year ago and 89.5 percent for all of 2022. This decline in supply is largely the result of a 5 percent drop in the number of steers in the slaughter mix with the number about equal to the same period in 2014. Heifer slaughter, through May 20th is about equal to a year ago but will also decline significantly as we progress into the second half of the year.
For 2023, I am estimating plant utilization in fed plants to average 86 percent and 82 percent during 2024. Assuming packers maintain current capacity, and that remains to be seen as a likely scenario, this low supply / capacity ratio will lead to strong packer competition for cattle support for fed cattle prices.
The capacity utilization issue in cow plants is even more dramatic as producers hold cows in response to higher prices and sharply improved forage conditions in most regions. Annual cow slaughter capacity is 8.2 million head (Sterling estimate) or 157,000 per week and 27,000 per day on a 6-day week. Weekly cow slaughter from Jan. 2 – May 20 averaging 131,000 / week leaves average utilization of cow slaughter capacity at 83.6% compared to 87.4 percent for that same period a year earlier. For all of 2022, utilization was 87.5 percent. I expect slaughter utilization in cow plants to average 80.4 percent for all of 2023 and averaging 65 percent for 2024 as new capacity is brought on line and close to the figure for 1994 when significant consolidation of capacity began.
The market equation is much more complex than just tighter cattle supplies. As these reduced numbers play into capacity in both the packing plants and feedlots, utilization becomes the key issue. Consequently, the goal of increasing capacity must be considered along with the question of how much current capacity will be retired and who will retire that capacity.