The U.S. cattle herd declined slightly more than expected in 2022, with a slightly larger decline in beef cows than expected. However, the 2022 calf crop was slightly larger than expected. USDA’s annual inventory report confirmed what had been widely forecast, that the U.S. herd had its fourth consecutive year of decline in 2022. USDA reported that all cattle and calves in the U.S. as of Jan. 1 totaled 89.27 million head, 3%, or 2.8 million head, below the 92.07 million head of Jan. 1, 2022. The average forecast of analysts was a decline of 2.9%, with some forecasting a 2.6% decline.
The report also confirmed that cattle numbers might not start increasing year-on-year until 2025. That’s not my forecast, but that of senior protein analyst Lance Zimmerman at Rabobank. The U.S. beef cow herd will not make meaningful rebuilding progress until 2025 at the earliest, he wrote in a new report.
My immediate question after the inventory report’s release was “Where on earth will the cattle come from to allow new plants in the planning pipeline to be able to even start up, let alone gradually fill their avowed capacities?” As I’m sure you know, more than seven new groups over the past 18 months announced plans to build a plant, spurred by the perceived lack of slaughter capacity during the worst of the COVID-19 pandemic.
There’s one huge glitch, however, in their thinking. The U.S. beef industry never had a capacity shortage. I calculate that the largest 70 beef processing plants, ranging in capacity from 7,000 head per day to 20 head per day, currently have the capacity to harvest 134,00 head per day. That is well above current slaughter levels of 124,000-127,00 head per day.
I wrote during the worst of the pandemic of dramatically reduced slaughter levels that a sudden labor shortage caused the reductions, as workers tested positive for the virus. Packers also had to lower their chain speeds because of the many protective measures they put in place. This labor shortage took nearly two years for staffing levels to recover to near-normal. Even today, daily slaughter levels have not topped 130,000 head, and Saturday slaughter levels have seldom risen above 40,000 head per day.
So back to the question of where these new plants, if they open, will get their cattle from. Whether herd rebuilding starts this year and continues next year will ultimately determine whether the proposed new plants succeed or not. I calculate that the new plants, plus an expansion in capacity at three existing plants, would add 11,740 head per day to current capacity.
This total does not include a highly ambitious plan by two entities to build a $1.1 billion, 1 million square-foot food processing facility in western South Dakota. The plant would have an 8,000 head-per-day capacity and would process beef and include a specialty bison line, said the entities in June 2022. Observers at the time wondered how such an ambitious plan could possibly come to fruition.
Some investors though seem undaunted by, or perhaps ignorant of, the supply difficulties that new plants will face. A Florida equity real estate firm recently said it is investing $150 million in a proposed new plant in Iowa. Cattlemen’s Heritage Beef Co. is moving along with its plans to build the plant in the wake of the investment from Karis Capital of Naples, FL. Des Moines-based Cattlemen’s Heritage expects to break ground on the facility later this year. It will eventually offer beef processing capabilities that will keep 400,000 cattle in Iowa for harvesting and processing, it says.
Rabobank’s Zimmerman makes a good case for no expansion before 2025, and he’s also skeptical about new plants’ chances of success. While there are relatively predictable supply shifts and price moves in each 10-year period of the cattle cycle, the next cow herd expansion will face more headwinds from elevated U.S. protein production, higher interest rates, increased feed costs and demographic factors, he says. These defining characteristics will increase production risks and price risks for cattle producers and beef processors. This will limit the responsiveness of market participants to cattle and beef price signals over the next several years, he says.
The beef supply chain is already ramping up for the next herd expansion with a few new entrants already established in the packing segment and four larger regional processing plants in some phase of fundraising or construction, says Zimmerman. But the payoff for those investments is still years away. Significant reductions in cattle slaughter and beef production are coming as the industry waits for the shift, he says. — 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.)
