KAY'S korner

Feb 3, 2012

Shrinking herd dooms plants

Industry leaders have rightly focused on the shrinking U.S. cattle herd as one of the industry’s biggest issues. While a smaller herd means higher prices for cow/calf producers, it means small or negative margins for everyone else in the beef chain. And it’s not healthy for only one sector to be making money.

More significantly, the declining herd erodes the industry’s structure and forces consolidation that reduces options for everyone in the chain, from ranch to retail. Declining numbers means fewer cattle through livestock markets, feedlots and packing plants. This forces operators in each sector out of business. It also forces consolidation in the many allied businesses that supply cattlerelated products.

USDA’s annual cattle inventory report included two minor surprises. The first was that the herd on Jan. 1, versus a year earlier, was smaller than expected. Most analysts had a total just over 91 million head. USDA’s total was 90.769 million, down 2.1 percent. This was the smallest total since 1952’s 88.072 million head and the way the calf crops are declining, the national herd might shrink as low as that number before growing again. USDA put the 2011 crop at 35.313 million, down 381,000 head or 1.1 percent. The 2012 crop might fall by more than 800,000 head or another 2.3 percent, say analysts. That’s because of the 3.1 percent decline in the number of beef cows and because drought stress might force a lot of cows in southern states not to carry a calf this year.

The second surprise was that the number of heifers kept back for beef cow replacements was 730,000 head or 1.4 percent larger than last year. Analysts had forecast the number to be down. This is positive for arresting the decline in herd numbers. But it has a negative impact on markets, feedlots and packing plants because fewer heifers will go through these channels. Feeder cattle supplies might decline for another two or three years before they start expanding again.

With this in mind, I wonder where those folk who plan to open new or formerly closed beef processing plants think they will get cattle from. A new plant has been in the works for more than five years in Aberdeen, SD. Northern Beef Packers has spent in excess of $70 million to build the plant and reports keep suggesting it is closer to opening. The plant will supposedly have the capacity to process 1,500 head per day. To get to this level though, the plant will have to encourage cattle to remain in South Dakota. The state had 320,000 head on feed on Jan. 1, but these cattle all go to packers in neighboring states.

Meanwhile, there are plans to reopen a beef processing plant in Tama, IA, with a checkered history of closures. The former Tama Meat Packing plant operated most recently as Iowa Quality Beef in 2003-2004. It has been shuttered since then. Several other packers and entities looked at the plant before a Nebraskabased investment group bought it. Roy Wigg, who previously worked for Greater Omaha Packing, heads the group. The opening of the plant will be around June, he says. The group apparently told city officials that the plant plans to begin with a custom kill of 50 to 80 head per day and gradually expand to 800 per day and eventually hire 350 employees.

Tama Mayor Dan Zimmerman says people in Tama are happy but they’re also a little leery because the plant has been opened and closed so many times.

People should be leery.

Cattle supplies are declining both nationally and in the region. Iowa had 1.3 million cattle on feed on Jan. 1 in all feedlots, down nearly 6 percent from a year earlier. Far fewer cattle are being fed by Corn Belt farmer-feeders and there’s nothing to suggest they will feed more cattle this year, especially if the price of corn remains high.

The shrinking national herd means steer and heifer slaughter will likely decline 1.5 percent this year from 2011. This will make competition for cattle even more intense among longestablished packers. The Aberdeen and Tama plants, if they open, will only be able to buy cattle by bidding them away from other packers, i.e., pay more than the market average. But higher cattle costs means the plants will have to sell the beef at a premium. That’s virtually impossible to do in a plant’s start-up phase. In fact, a new entrant has to sell its beef at a discount to buy its way into the market and to account for the lesser quality products that start-ups produce because of inexperienced line workers.

All this makes plans for a new $100 million multispecies meat processing plant in west-central Nevada even more removed from reality. Walker River Meat Processing claims it will break ground this spring on a 300,000-squarefoot facility. When operating at full capacity, the plant is expected to process up to 2,000 cattle, 2,500 pigs and 1,000 sheep and goats per day, says CEO Vincent Estell. Estell seems unaware that multi-species plants went out of fashion 20 years ago and that cattle numbers are at their lowest level in 60 years. — Steve Kay

[Steve Kay is Editor/ Publisher of Cattle Buyers Weekly, an industry newsletter published at P.O. Box 2533, Petaluma, CA, 94953; 707/765-1725. Kay’s Korner appears exclusively in WLJ.]