Kay's Korner

Nov 1, 2013

How many of you have been inside the boxed storage facility of a large fed beef processing plant? If you haven’t, it’s well worth a visit because these facilities tell you a lot about the current state of the beef industry and its future direction.

I have visited many such facilities over the past 25 years and watched them evolve and grow. They’ve had to do so because beef packers have gone from putting out a few dozen types of boxed products to literally hundreds. The proliferation of product lines means that most large plants now handle 1,200 to 1,400 stock-keeping units (SKUs).

This means that boxed storage facilities, already highly automated, have had to be expanded and upgraded. Fed beef processors have spent hundreds of millions of dollars over the past decade on new systems. Cargill at the end of August announced it would spend $48 million to build a new boxed storage system at its Dodge City, KS, plant. Keep in mind that Cargill has already spent $780 million in capital projects in all its North American beef processing plants over the past decade.

The new system at the Dodge City plant will replace one that has been in use since 1980, so Cargill is probably overdue in replacing it. But it is looking to the future, as well. It sees that the beef industry will expect processors to continue to produce even more individualized product lines to satisfy customers’ needs at home and abroad. Other packers are doing the same thing as Cargill. They are replacing systems that were state-of-the-art 30 years ago but can’t now handle tomorrow’s needs.

Packers are prepared to make such huge investments because they want to satisfy customers’ needs and stay in business. This makes one of the ramifications of the new country of origin (COOL) rule even more unconscionable to them. USDA will start enforcing the rule Nov. 23, six months after the rule technically took effect. Retailers and packers waited until last month to start doing anything in the hope that the rule might somehow be stopped. But then they had to act.

The new rule does not allow any comingling of product. Instead, it calls for much stricter segregation of animals and products. Beef from an animal raised in Canada but fed and processed in the U.S. previously could have a label that read, “Product of the U.S. and Canada.” Now the label must read “Born in Canada, raised in the U.S. and slaughtered in the U.S.”

I shudder at how unsuspecting shoppers will react when they see the word “slaughtered” on their package of beef. Why USDA didn’t heed the urging that it use the words “processed” or “harvested” is beyond me. Maybe there were people within USDA who couldn’t care less whether beef consumption or demand is hurt by use of such a word.

More immediately impactful is that the new rule has started to alter the flow of Canadian feeder and fed cattle into the U.S. Packers who previously accepted both categories of cattle are now accepting one or the other, not both. That’s because accepting both the B and C categories (“Born in Canada, raised in the U.S.” and “Born and raised in Canada,” respectively) would potentially double the number of SKUs a plant would have to handle. Packers’ decision to accept only one category mostly involves Tyson Foods’ Pasco, WA, plant. It stopped accepting fed steers and heifers (C category) from Canada Oct. 16 and killed the last C cattle Oct. 18.

Tyson made it clear why it has had to do this. The new rule significantly increases costs because they require additional product codes, production breaks and product segregation, including a separate category for cattle shipped directly from Canada to U.S. beef plants without providing any incremental value to its customers, it said. Unfortunately, Tyson does not have enough warehousing capacity to accommodate the proliferation of products requiring different types of labels due to this regulation.

As a result, it has discontinued buying cattle shipped to its U.S. beef plants directly from Canada, it said.

Tyson told me it decided on B category Canadian cattle for Pasco to try and support Northwest cattle feeders. Its Pasco plant used to take about 2,200 Canadian cattle of both categories per week until mid-October. That’s the plant’s daily slaughter capacity. So Tyson has also been forced to reduce production at the plant to four days per week until numbers in the region build up again. I daresay ardent COOL supporters don’t care whether the Pasco plant survives or not, but they’d better lie low at any meeting of Northwest cattle feeders. They also probably don’t care whether Americans are turned off buying beef by reading the word “slaughter.” But they had better hope consumers don’t read the COOL label. That though would make COOL’s existence even more pointless. — 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.)