Plant closure could help even out markets

Jan 25, 2013

Cargill Inc. announced two weeks ago that it will close a Texas processing plant due to dwindling cattle supplies caused by drought in the central U.S.

While the announcement sent the markets on a roller coaster ride, the news was not totally unexpected and analysts predict it may play a role in evening out the markets.

“The idea of closing one or more of our major beef processing plants is not a big surprise,” said Derrell Peel, with Oklahoma State University’s agricultural extension service. “It’s been a matter of who blinks first.”

Peel forecast U.S. beef production to decline 4.8 percent in 2013, the second largest year-over-year decrease in 35 years. Peel attributed the decline to a combination of mostly steady carcass weights and a projected 5 percent or more decrease in cattle slaughter. Beef production in 2012 decreased by approximately 1.1 percent compared to 2011 with a 3.3 percent decrease in slaughter, which was partially offset by a 2.3 percent increase in carcass weights.

The announcement was no surprise to industry analyst Steve Kay, Cattle Buyers Weekly.

“Given the historic low cattle supplies in the Plains region, there was excess processing capacity. Tyson and JBS each have two plants and Cargill had three plants that rely on fed cattle in this region. Supplies that are said to be down between 500,000 and 700,000 head because of drought,” Kay said.

“The closure of the Plainview plant now gives the three largest packers an even number of plants in this region—two each,” Kay said. “This will no doubt be a benefit for Tyson and others for the next six months to a year, ensuring they have enough cattle to run their businesses at decent capacity.”

Tyson Foods´ shares rose to a 52-week high following Cargill’s news, closing at $21.23, up 3.76 percent.

Cargill said the company will close the Plainview, TX, plant this week, affecting as many as 2,000 employees. Cargill’s Plainview employees affected by this decision will be provided support as well as assistance finding and filling open positions at other Cargill locations or with other employers.

“The decision to idle our Plainview beef processing plant was a difficult and painful one to make and was made only after we conducted an exhaustive analysis of the regional cattle supply and processing capacity situation in North America,” said John Keating, president of Cargill Beef, based in Wichita, KS. “While idling a major beef plant is unfortunate because of the resulting layoff of good people, which impacts their families and the community of Plainview, we were compelled to make a decision that would reduce the strain created on our beef business by the reduced cattle supply. The U.S. cattle herd is at its lowest level since 1952. Increased feed costs resulting from the prolonged drought, combined with herd liquidations by cattle ranchers, are severely and adversely contributing to the challenging business conditions we face as an industry. Our preference would have been not to idle a plant.”

Cargill said it will preserve the plant’s infrastructure so that it could possibly reopen when cattle supplies rebound, but the company is not expecting that to happen any time soon.

News of Cargill’s move sent U.S. live-cattle futures spiraling down Jan. 17 by their exchange-imposed daily limit of 3 cents. Live cattle futures for February delivery were down almost 2.3 percent at the Chicago Mercantile Exchange, at $1.255 a pound.

According to a Cargill press release, the company will continue to honor its community support commitments at Plainview for 2013. The company’s remaining beef cattle processing plants in the region, at Friona, TX, Dodge City, KS, and Fort Morgan, CO, will receive cattle that were previously destined for processing at Plainview. The company’s regional beef facilities at Fresno, CA, Milwaukee, WI, and Wyalusing, PA, as well as its beef plant in Schuyler, NE, and two beef plants in Canada, will not be affected, according to the company.

“Given the over-capacity that exists with four major beef plants in the Texas Panhandle and a dwindling supply of cattle in the region, idling Plainview will allow Cargill to operate its other beef plants in Texas, Colorado and Kansas more consistently on a five-dayper-week basis to meet our customers’ requirements while helping us maintain our position in the U.S. beef sector,” explained Keating. “Our long-term commitment to U.S. beef production is unwavering. Over the past 10 years, we’ve invested more than $766 million in our U.S. beef plants to ensure they remain best in class in the industry.”

Cargill’s decision did not come lightly, according to Keating.

“We delayed the decision to idle Plainview as long as possible, due in part to our outstanding team and ongoing excellent support from the community. We were also hoping the drought would break, pasturelands would be restored, cattle ranchers would retain heifers, and the national herd trend of declining numbers over the past few years would be reversed,” stated Keating. “Unfortunately, the drought has not broken, feed costs remain higher than historical averages, and the herd continues to shrink. The industry has experienced this cycle in the past, although this one is longer and more severe than most. Nevertheless, we are optimistic about the long-term prospects for U.S. beef demand from American and international consumers, and that the drought in Texas and the Southern Plains will become a memory.”

Lubbock’s First News interviewed Plainview Mayor Wendell Dunlap. In the interview, Dunlap points out that it is not just Cargill employees that would be affected, but other businesses in Plainview and surrounding communities would feel the effects of the plant’s closure. While the plant’s closure was something the city knew was possible, Dunlap hoped they would never see it. — Traci Eatherton, WLJ Editor