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Meat Matters

Adding More Value Is Packers' Only Recourse

Adding More Value Is Packers' Only Recourse

Grand plans and meatpacking are like oil and water. They don’t mix successfully.

Remember Future Beef Operations (FBO) completed in 2001, its plant in Arkansas City, KS, included the most technologically advanced beef processing systems in the world. There was only one problem. Some of them didn’t work. FBO poured at least $100 million into the plant. But after seven months of operations, it filed for bankruptcy and closed a few months later, having lost more than $200 million.

FBO’s fate is a cautionary tale for anyone dreaming of starting a meatpacking plant. Yet some people somehow still feel they can succeed where many others failed. Take a proposed beef processing plant in Aberdeen, SD.

Plans for the South Dakota facility first emerged more than five years ago; $70 million or more later and the plant is yet to open. Meanwhile, another entity a few weeks ago unveiled plans to build a $100-million, multi-species plant in Nevada.

The Aberdeen plant (Northern Beef Packers) is designed to process 1,500 head/day. The Nevada plant claims it will process up to 2,000 cattle, 2,500 hogs, and 1,000 sheep and goats/day. I have one question for those involved in both enterprises. Where on earth will these animals come from? Haven’t you heard that the U.S. cattle herd has declined by nearly six million head in the past five years and the beef-processing industry has shrunk accordingly?

These folks are also ignoring other realities. 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.

Do they realize a new beef plant loses money for at least two years before it breaks even? How are these plants going to bid away livestock from long-established packers? How are they going to sell their meat at a premium to pay for those livestock? How are they going to attract the labor and experienced management to operate the plant?

Also missing is any reference to what’s happened in the real world in recent years. After a flurry of concentration in the mid-1980s, the market share of the top beef packers has remained the same since 1995. There’s a simple reason for this –lack of expansion in cattle numbers.

Instead of growing, packers have consolidated their operations. In 2005, Tyson Foods had 10 slaughter plants with a combined capacity of 36,000 head/day. Today, it has seven plants and a capacity of 29,000 head/day. My annual survey of the top 30 beef packers reveals this group hasn’t changed its capacity (134,000 head/day) in the past year.

Another factor is the increased cost of doing business. Food safety costs head the list but everything from wages to energy to packaging costs has risen sharply. Beef packers have spent several billion dollars on food safety interventions alone since 1993’s Jack-in-the-Box tragedy linked to E. coli O157:H7. Now, they’ll have to spend even more money testing (starting in March) for six additional strains of the pathogen.

The only way existing beef packers will stay in business is to add more value to the fewer carcasses they process. That’s been the foundation of National Beef Packing’s success the past five years. Its value-added sales in fiscal 2011 were 36% of its total sales.

National’s owners in December agreed to sell 79% of the company to investment firm Leucadia. One issue for Leucadia is how National will increase its earnings. The shrinking cattle supply and lack of plants to buy likely means National will have to keep adding value.

That, however, takes enormous experience and skill. I wonder if the folks with plans to open the plants in South Dakota or Nevada have any idea how to do this.

Steve Kay is editor and publisher of Cattle Buyers Weekly ( Catch his weekly market roundup at every Friday afternoon.

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