Photo Credit RaboResearch
Q: What triggered “The Case for Capacity” report to be conducted?
A lot of attention was drawn to the beef supply chain after the Tyson plant fire in Holcomb, KS and since the Covid-19 pandemic. These events led me to take a deeper look at the balance of packing capacity relative to cattle supply to observe how that has evolved over the years.
Q: Can you elaborate on the economic incentive for packing capacity expansion?
Major droughts that occurred in the late 2000s and early 2010s drove the majority of inefficient plants out of business since they had to compete for tight cattle supplies. The U.S. cowherd has been expanding since 2014 and that has shifted the balance to more cattle in general relative to packing capacity. This shift has created profitability at the packing level during the last 4-5 years, whereas the decade before, packers were often times operating at a loss or breakeven at best.
Q: Why haven’t we already seen packing capacity expand?
Packers have just now regained leverage in the supply chain and are hesitant to give up that leverage and potentially expose themselves to another cycle of tight cattle supplies.
Another hurdle is the expense of expansion. We estimate it costs between $100-$120 million to build new capacity for 1,000 head of daily added capacity. On top of that, any kind of expansion is regulation complex.
Q: Will the small to mid-sized plants we see popping up find themselves in a profitable situation by the time they are able to process cattle?
Any new capacity, particularly new build capacity, needs to have the depth of capital to survive a full cattle cycle and get through some potentially tighter supplies in the next couple years.
We are currently experiencing the best opportunity to expand packing capacity that we’ve seen in decades. There is profitability in the packing sector and we have the best export market access that we’ve possibly ever seen. Additionally, both domestic and international beef demand is growing. All of these factors combined, barring major drought, sets up the next cattle contraction to be shallower than we’ve seen in the past. Most likely we’ll be able to capitalize on those growing demands for beef on the other side of this current contraction.
Q: Does Rabobank have any projections for beef cow numbers in the coming years?
Rabobank projects that beef cow numbers will bottom in 2022 somewhere around 30.5 million head. This will be considerably less dramatic than the last time we went through a herd reduction.
Q: If additional packing capacity is added, what will be some of the main benefits for the cattle industry?
Additional capacity would help distribute profitability across the entire beef cattle supply chain from the packer to the cattle feeder down to the cow calf producer.
It would also allow us to put more focus on consumer demands and consumer preferences.
Q: Is your report, “The Case for Capacity,” accessible to producers?
The best way to access this report is to reach out to a Rabo AgriFinance relationship manager. A local representative can be found at http://www.raboag.com.