A Few Thoughts – Supply chain issues are impacting capacity utilization in the meat industry

Since the plant shutdowns and ultimate production slowdowns resulting from COVID last March, available capacity as measured by daily slaughter, has become a focus of the beef industry with government seemingly designated as the chief problem solver. However, as I have stated many times, capacity is not the critical issue, but rather capacity utilization and that issue largely centers on plants with processing and further-processing. In fact, labor constraints are not just noted in the slaughter and processing, but coupled with other critical issues are creating bottlenecks across the supply chain, from packaging to trucking.

Let’s take a look at beef industry slaughter capacity and utilization. I have calculated and tracked these figures since 1988 and I do think that slaughter, while not in-compassing all aspects and potential bottlenecks of a plant, it is probably the best metric to estimate and track capacity in the red meat industry. However, one cannot lose sight of that other plant components can have an impact, i.e., further-processing and cooler space. My estimated annual figure for fed cattle slaughter capacity is 29,796,000 head and 7,602,000 for cow slaughter. On a weekly basis, fed slaughter is 574,974 or 104,541 per day on a 5½ day week. Cow slaughter capacity is 146,190 per week or 26,580 on a 5½ day week.

Is there enough capacity? As I said earlier, to answer that question, the analysis must shift to utilization. This is true of any aspect of the industry whether it be packers, feedlots, or grass when talking about cow-calf capacity. It’s not total feedlot pen or bunk space but rather the utilization of that space and with grazing capacity, the unencumbered utilization of existing forage.

I look at weekly and annual capacity utilization. So, utilization of fed plant capacity has averaged 87.3% YTD through September 11. This compares to 84.3% last year for the same time period and 88.3% in 2019. This comparison illustrates the impact of plant closures and line slowdowns due to COVID in 2020. In fact, during April and May 2020, utilization of capacity in fed beef plants averaged 67.2%. That was not only significant to the industry, it posed a major challenge to every plant in the country and that’s an average for the industry and does not show the significance of the problem for some plants. A target is to consistently week in and week out operate at 90% or higher.

Improvement for capacity utilization in cow plants YTD through September 11 has been substantially better than fed plants and has averaged 89.7% compared to 84.3% for the same period a year ago. It’s no wonder. Beef cow slaughter is up 10% YTD from a year earlier while dairy cow slaughter is up 2%, and total cow slaughter is 6% higher YTD than a year ago. In 2019, for the same period, utilization of cow slaughter capacity was 85.3% and averaged 80.1% for April and May 2020.

Reduced cattle numbers in 2022 through at least 2024 coupled with a continued tight labor supply for packing plants will further aggravate this issue of capacity utilization holding capacity unchanged. My estimate of average fed plant capacity utilization for 2022 is 85.3%. So, the question is – if capacity is increased against a declining cattle supply and reduced capacity utilization, how could a new plant carrying large debt coupled with working capital compete?