Since the plant shutdowns and ultimate production slowdowns resulting from COVID-19 last March, available capacity as measured by daily slaughter has become a focus of the beef industry, with the 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 slaughter and processing, but coupled with other critical issues, they 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 encompassing all aspects and potential bottlenecks of a plant—is probably the best metric to estimate and track capacity in the red meat industry. However, one cannot lose sight of the fact 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 head for cow slaughter. On a weekly basis, fed slaughter is 574,974 head, or 104,541 per day on a five-and-a-half day week. Cow slaughter capacity is 146,190 head per week, or 26,580 head on a five-and-a-half 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 percent year to date (YTD) through Sept. 11. This compares to 84.3 percent last year for the same time period and 88.3 percent 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 percent. That was not only significant to the industry; it also posed a major challenge to every plant in the country. 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 percent or higher.
Improvement for capacity utilization in cow plants YTD through Sept. 11 has been substantially better than fed plants and has averaged 89.7 percent compared to 84.3 percent for the same period a year ago. It’s no wonder. Beef cow slaughter is up 10 percent YTD from a year earlier, while dairy cow slaughter is up 2 percent, and total cow slaughter is 6 percent higher YTD than a year ago. In 2019, for the same period, utilization of cow slaughter capacity was 85.3 percent and averaged 80.1 percent 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 percent. 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? — John Nalivka, president/owner of Sterling Marketing
