The cattle business is hard enough. But understanding the story after the feedyard can explain hard facts that challenge the industry’s ability to get a high-quality, safe product to our consumers.
Bill Rupp, who ran beef packing divisions at both Cargill and JBS, spoke recently at the annual Red Meat Club dinner at the National Western Stock Show. After being retired from JBS for several years, he and two former colleagues in operations and engineering decided to consult for groups proposing to build packing plants. Ten of 11 groups found their plans unrealistic when faced with the figures.
One startling revelation is that most of today’s big plants were built as 500-1,500 head/day plants in the ’60s and ’70s. The firms that expanded to big plants, like Conagra, Continental and others, had access to major capital. They sought value-added opportunities as opposed to beef as a commodity. Consolidation of packers over the decades was forced by recurring droughts, causing dropping cattle numbers. By the 2012-15 major drought, the cattle supply had been significantly reduced, and packer margins had shrunk for a longer period than in the past.
From the mid-1990s to 2008, Cargill assigned the beef unit a target of $30/head profit. In the 12 years Rupp was associated with the unit at a high level, they hit that target eight of 12 years. A couple of years they were under that figure, and a couple they were over.
Three years of the big drought from 2013-15 resulted in big losses for the packing industry. From 2016-20, the industry shed capacity, with smaller plants leaving and Cargill closing its big Plainview, TX, plant. The last three years, with lower packing industry capacity and growing cattle numbers, packers made much higher than historical margins—before the Holcomb fire and the pandemic changed the situation totally. Herds were rebuilt, but packing capacity was permanently gone, Rupp said.
Most of the big ’60s and ’70s era plants, designed for 500-1,500 head/day, had lines that had been cobbled together over time to harvest and process 4,500-6,000 head/day. The slaughter floors were relatively new, but the fabrication lines featured twists and turns for additional capacity, not necessarily efficiency. Building brand new from a clean sheet would yield much more efficiency. But the downtime and demolition of an existing plant would double the effective cost of a new plant.
In 2019, with the fire at the Tyson plant, 5,000-5,500 head/day capacity was gone overnight. There were many more cattle than shackle spaces, and fast expansion of lines was not feasible.
The pandemic’s effect on labor shortages was felt most in fabrication. Cattle supplies backed up, giving packers leverage. A “sell-off” mentality seized cattle feeders as they felt pressured to get slaughter slots.
There was little or no food service business for packers to sell to, but consumers were ransacking retail meat cases. Retailers responded to empty shelves with a “Tell me what I have to pay” attitude. Suddenly, packers used to a $30/head margin had a chance to make hundreds. Costwise, however, they paid bonuses to employees, acquired down-line firms in value-added sectors and shelled out hundreds of millions in increased costs to operate in a contagious pandemic.
Perspective is key for the overall industry. Rupp said when he cooks for guests, people like the beef so much they ask how he gets it, assuming he has an inside track. He explains he just buys out of the retail case. The product, including from the biggest packers, is that good today.
So how does a smaller plant coming on board today compete with the big packers? A 500 head/day plant starts out $250/head behind a 5,000 head/day plant on costs. Even a 1,500 head/day plant is projected to cost $325 million to build.
The processing cost for a 5,000 head/day plant before the pandemic was $225-250/head. Now, it’s more like $250-275/head. The big plants tend to ship out big primals and sell the rest of the carcass to further processors.
Rupp said small plants have to “dispose” of offal, product to be rendered and hides. The big plants get a drop credit of $140-200/head by utilizing those items themselves. Rupp said the minimum size for a plant to run its own rendering plant was 1,500 head/day.
Rupp said he doesn’t think the big packers will go back to $30/head margins—but hundreds will not last.
But consumers have shown they will pay more, and that’s a positive for the beef business. — Steve Dittmer,WLJ columnist
(Steve Dittmer is the author of the Agribusiness Freedom Foundation newsletter. Views in the column do not necessarily represent the views or opinions ofWLJor its editorial staff.)
