October 16, 2020
Rabobank suggests expanding US beef packing capacity
To help return US cattle supplies and packing capacity to historical equilibrium, an additional 5,000 to 6,000 head daily beef packing capacity was needed.
According to Rabobank's analysis, this level of expansion would allow capacity to grow without a sharp contraction in beef cow numbers while still maintaining packer profitability.
A fire in 2019 at the Tyson Foods Holcomb, Kan's processing plant and disruptions during the COVID-19 pandemic posed challenges for the beef supply chain. These have amplified discussion surrounding the need for and feasibility of additional beef packing capacity.
The report explained that beef packing historically has been a break-even business. However, in recent years, cattle herd expansion has outpaced capacity and packers have been strategically positioned to capture record margins.
"While the Tyson Holcomb fire and COVID-19 created acute and unexpected massive imbalances between cattle numbers and the suddenly limited availability of labour and/or facilities, the course of events over the past couple of decades had already created a scenario of relative imbalance," the report said.
Rabobank believes that adding packing capacity over the long run would result in a larger beef industry and a more balanced profitability throughout the supply chain. If the US could avoid major herd liquidation in the current cattle cycle, the beef industry will be well positioned to capitalise on growing global protein demand.
"If such expansion can be achieved through in-plant technology improvement and new consumer demand-driven small and medium-sized plants, profitability will be more evenly distributed throughout the beef and cattle supply chain," Rabobank's animal protein analyst, Dustin Aherin, explained.
"More balanced profitability would prevent the US beef industry from shrinking and place it in a better position to capitalise on growing global protein demand," he said.
"Simultaneously, improved profitability and industry stability allows for more outward, consumer-oriented focus and investment, which is critical for the US beef industry's long-term success," Aherin said.
Rabobank said both established packers and new entrants have been reluctant to sacrifice the competitive leverage they have been experiencing and several other factors that discouraged expansion.
The cost of a building is first, with the new plant estimated at around US$100 million to US$200 million for every 1,000 head of daily capacity. Secondly, Rabobank said competing with established supply chain networks is difficult, even if a new plant was opened by an established packing company. Lastly, the report said the capital depth and longevity required to build and maintain a new plant through its first cattle cycle discourages most packers from investing.
Rabobank said additional capacity could be added through technology, such as robots or automation, which many packers have already been implementing due to labour challenges. It also allows packers to better manage costs and reduce product waste.
"Estimating current industry daily fed cattle slaughter capacity at roughly 100,000 head, even a 1% improvement in efficiency across all existing plants could add 1,000 head daily fed cattle capacity," Rabobank reported.
Rabobank suggested that small to medium-sized plants could be an option for expanding capacity but competing with the efficiency of larger plants would prove difficult.
However, if plants focused on a niche by specialising in a specific product or type of cattle, the value-added component could be enough to compete.