The U.S. beef cow herd shows no signs yet of heifer retention or expansion, as analysts have written in recent weeks. The reasons for this are numerous, but key factors include continuing drought and economic drivers such as high input costs, interest rates and financial recovery.
Production costs for livestock producers rose sharply in 2022 compared to 2021, says a new report from USDA’s National Agricultural Statistics Service (NASS). Feed costs were up 18.5% from 2021, other farm service costs rose 10.8%, while livestock, poultry and related other expenses were up 10.1%. Labor costs were up 9.2%. Livestock farms saw expenses increase by 18.5% in 2022 to $219 billion. The average total expense for a livestock farm was $200,359, says NASS, as reported by WLJ.
This surge in on-farm expenses has undoubtedly made producers wary about expanding their herds. USDA’s midyear cattle inventory report confirmed that cattle numbers continue to get smaller and there is no significant indication of herd rebuilding so far, said Derrell Peel, Oklahoma State University Extension. Despite sharply higher cattle prices this year, there is no data to suggest heifer retention or enough decrease in beef cow slaughter to initiate herd expansion. The process thus far is considerably slower than the herd expansion after the drought in 2011-13 pushed cattle inventories to a cyclical low in 2014, he said.
Yet no less than 10 entities or individuals have announced plans to build new beef processing plants in the U.S. I sure hope they are looking at the current and future size of the U.S. beef herd and how much processing capacity the industry currently has.
Should they do so with an open mind, they might decide to shelve their plans and save their investors a lot of money. For the industry has an overcapacity issue, which will only worsen in the next two or three years. The decline in the beef herd that began in 2019 shows no sign of abating. Cattle numbers are unlikely to start increasing until late next year at the earliest. When that begins, the number of cattle in feedlots and going to fed beef processors will get even tighter for a year or more until they expand again.
This likely scenario has beef processors increasingly concerned about their ability to make money for the next two years and the impact on beef demand if they force beef prices higher. Tyson Foods’ beef business eked out a small profit in the second quarter. JBS Beef North America had a similarly small profit in the same quarter. JBS management told analysts that the outlook for beef in the U.S. is “not going to improve soon” and this is likely to leave beef processors with unused capacity.
There is no doubt that cattle supplies will remain tight in 2024 and no doubt that companies will operate using less capacity, said JBS Global President of Operations Wesley Batista Filho. Profit margins at JBS’ North American beef operation will remain at “low single-digit” levels, with ranchers expected to withhold females as part of efforts to replenish the herd, he told analysts.
The catastrophic drought from 2010-12 led to the closure of nine processing plants. Industry-wide capacity by 2016 declined to 125,500 head per day from 139,000 head per day in 2010, according to my data. But the capacity total has now increased considerably from that low. I calculate that the largest 71 beef processing plants in the U.S. currently have capacity to process 134,705 head per day. Even using a more conservative estimate of maximum daily capacity of 128,000 head, it is clear the industry is saddled with excess capacity. The 128,000 head total would mean a maximum slaughter total of 640,000 head over five days or 704,000 head over 5.5 days.
Weekly slaughter totals so far this year have been far below the 704,000 total. The second week of January saw the largest total of the year, 660,740 head. In contrast, the first two weeks of August saw estimated totals average only 609,000 head. That is 95% of the five-day capacity or 87% of the 5.5-day capacity. Such numbers make it clear why Saturday slaughter levels are often below 10,000 head.
The current overcapacity in beef processing and little likelihood of any meaningful increase in beef cattle numbers for two years cast a shadow over 10 proposed new beef processing plants. They have an avowed capacity of 18,190 head per day. This includes a plan to build an 8,000-head-per-day mega-plant in South Dakota. It seems likely this plant will not get to the ground-breaking stage. The wider question is how many others will meet the same fate. — Steve Kay
(Steve Kay is editor/publisher of Cattle Buyers Weekly, an industry newsletter published at P.O. Box 2533, Petaluma, CA, 94953; 707-765-1725. Kay’s Korner appears exclusively in WLJ.)
