John Nalivka: Packing plants are not good investments for ranchers
September 27, 2016
The idea of ranchers owning a packing plant has come up many times and actually been brought to fruition with bricks and mortar many times as well, with one such an example in Aberdeen, S.D.
Another plant that went beyond the idea stage and actually involved bricks and mortar was the former Tama, Iowa, plant that was purchased by the Iowa Quality Beef producer group and of course, the Future Beef plant in Arkansas City, KS.
Then, there was the Mississippi plant (not rancher-owned) that started up in 2008 which in short order went broke and executives went to prison for fraud.
I often asked myself; why would a group of ranchers want to own a packing plant? They are a high cost investment that requires a tremendous amount of working capital. In addition, the costs are further escalated by volumes of regulations relating to food safety, animal welfare, worker safety, labor and immigration, the environment, and trade if the plant exports. While issues associated with these regulations can provide plenty of challenge to a large corporate packer with greater access to capital, the rancher-owned plant can easily become besieged by lack of readily available capital and regulations only to find relief in bankruptcy court. Oftentimes, the next investor or even the next one can't create a viable situation.
The packing industry is very sensitive to both the supply of cattle and the demand for their finished product. But even more so, the industry has become increasingly sensitive to and impacted by the media. This can be particularly troublesome to the industry and/or a particular firm when the media gives significant attention to a food safety issue whether the issue is real or perceived and facts have been distorted. This has been the catalyst to more than one plant closure and/or bankruptcy proceeding. Furthermore, a product recall resulting from a foodborne illness can be devastating to a single plant if the recall leads to an extended shutdown as can a fire.
I can understand the motivation to build a packing plant to capture more value and increase revenue. But, when the idea is tossed out, serious analysis and a thorough understanding should be the order of the day. There are many factors to consider not the least of which concerns human response to markets – both ranchers and consumers. Without experience and insight, capturing value-added revenue can quickly become a financial disaster.