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Want To Build A Packing Plant? Think Again

I got a call the other day from a university researcher looking for information about the beef-packing industry. She said she was helping to put together

I got a call the other day from a university researcher looking for information about the beef-packing industry. She said she was helping to put together a feasibility study for a producer group that wanted to build a packing plant that would process about 100 cattle/day. I provided some information about the size of the industry and number of plants. I also felt it might be of value to mention the difficulties of entering the business.

First, I told her that in my 35 years of covering the industry worldwide, I had seen dozens of feasibility studies eat up millions of dollars of taxpayers’ money, with hardly any new plants coming out of the studies. What was going to be different about this plant?

I next told her that North American cattle numbers are shrinking and are likely to do so for several years. Yet there’s already over-capacity in U.S. and Canadian beef processing. The result is that existing packers will compete even more strongly for every available animal, be it grain-fed, grass-fed or a cull cow.

Escalating costs. Then I told how the cost of building even a small plant has escalated in recent years. Steel and concrete prices have doubled over the past five years. I told her how equipment costs had increased, and how food safety has dramatically increased the cost of processing.

The biggest plants 20 years ago could slaughter and fabricate an animal for $60. Now the best do it for $150 or higher. JBS Swift is proud of the fact its processing costs have fallen to $164 from $212/head when it acquired Swift in July 2008. I told her that a small plant, without economies of scale, might have total processing costs of $250/head.

Let’s assume the plant gets off the drawing board. Who is going to lend anyone $10-$20 million to build a beef plant under current financial circumstances? If it’s all state money, then taxpayers should be up in arms. Without giving away the location, it wouldn’t be a question of bringing jobs to an area that needs them. So what would be the rationale to use public money? What private investor would risk millions of dollars? Lack of equity has been an issue for the meatpacking industry for 20 years. That’s why JBS’s investment in the U.S. is so important.

Then I asked her how the owners of the new plant would be able to compete with other packers in the region. How would the new venture attract people experienced and talented enough to start up and successfully operate a new plant? Would the plant have fabrication and rendering departments? If not, it would automatically be at a disadvantage.

Next, how would the new venture differentiate its beef to avoid being trampled on in the marketplace by other regional packers and the Big Boys who churn out commodity beef with the efficiency of Toyota? How would the venture make enough money to pay the interest on its debt?

The big question is: “Why?” For the life of me, I don’t know why producers want to build or own packing plants. There’s an inherent conflict right away. Producers want to get the most for their cattle. Packers want to pay as little as possible for them.

I have seen producer-owned meat companies fail in New Zealand, Australia and in the United Kingdom. They have largely failed in the U.S. and in Canada.

Alberta producers and cattle feeders poured millions of dollars into a new plant near Edmonton called Ranchers Beef. The plant lasted a few months before it closed. Other smaller plants in Canada that popped up in the aftermath of BSE have also failed.

U.S. Premium Beef (USPB) is the most successful producer group to enter the U.S. packing industry because it aligned with an existing packer. It took a minority interest in Farmland National Beef. Both were cooperatives so there was a mutual understanding of how to balance producer expectations with commercial reality.

USPB eventually became National’s majority owner. Even then, it realized that the risk of owning just a beef packer is considerable. So it accepted JBS’s offer to buy all of National. The reality is, succeeding in beef processing at any level is difficult and will get even tougher. New entrants, be warned.