Operating a beef processing plant is far tougher than people realize. Just ask the owners who have closed more than 100 plants since 1977. Whether they were fed-cattle or cow plants, all were unable to surmount the many factors that have reshaped the U.S. beef processing industry over the past 35 years.
These factors include: the replacement of the carcass trade with boxed beef; the demise of slaughter-only fed-beef plants; a shift in cattle feeding from the Midwest to the High Plains; a need to have plants closer to cattle supplies; the age of plants and an unwillingness or inability to upgrade them; uncompetitive labor costs (such as in Los Angeles); a huge increase in operating costs, including added food safety costs; beef recalls due to E. coli O157:H7; and a decline in U.S. cattle numbers over the past 15 years.
Another factor that currently plagues the newest entrant to fed-beef processing, Northern Beef Packers (NBP) in Aberdeen, SD, is a lack of working capital. Plants require an enormous amount of money to operate efficiently. Many small companies, especially family-owned operations, have succumbed because of this.
My list of steer and heifer and cow-bull plants that have closed reveals that 61 such plants closed between 1977 and 1990 inclusive. Another 42 plants closed from 1995 until this February, taking out 30,565 head of daily fed slaughter capacity and 11,930 head of non-fed slaughter capacity. I’m sure there were more plants that closed from 1991 to 1994.
Another of my lists reveals that the largest 24 plants currently have 97,850 head of daily slaughter capacity; the next 25 plants have 30,585 head of capacity; and another 23 plants have 4,870 head of capacity. In other words, the industry is dominated by plants with capacities of 2,000 head or more per day, with a handful of midsized plants, and an equal number of tiny plants.
Two midsized plants (each with about 1,500 head of daily capacity) were in the news recently. The first was NBP, which began operating last October. I wasn’t surprised to hear in April that a lack of working capital forced it to lay off 108 of its 420 employees. As I wrote in my January 2012 column: “It’s one thing to find investors to finance a new plant. It’s quite another to generate the working capital required to pay for livestock and payroll, and to keep the plant operating.”
NBP says it needs to raise about $20 million to run efficiently. Even if it does this, it could burn through this money pretty quickly. Taking the average live fed-steer price the week ending April 27 of $128/cwt. and using an average live weight of 1,350 lbs., each animal NBP bought would have cost it $1,728.
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Running at a full capacity of 7,500 head/week would involve $12.96 million in cattle purchases each week. At only 1,000 head/ week, it would involve $1.728 million/week. NBP admits to a dilemma facing many startups — it needs more working capital to process more cattle and run more efficiently. Yet, there’s no guarantee that will mean any profits in the first two years.
The second plant was Sam Kane Beef Processors in Corpus Christi, TX. This family-owned plant has struggled in recent years due to liquidity issues. Some south Texas cattle feeders and ranchers feared it would close, so they bought the company, promising to secure what they called a “vital element of the south Texas cattle industry.”
That’s not an overstatement. For years, Sam Kane has offered the only realistic marketing option for area cattle feeders. The new owners have big plans to revitalize the business, such as offering grid pricing for fed cattle, and launching a branded beef program. I wish them the very best.
Steve Kay is editor and publisher of Cattle Buyers Weekly. See his weekly cattle market roundup each Friday afternoon at beefmagazine.com.
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