Packing Capacity Presents Challenge

9/7/2013 7:00 AM

The capacities of U.S. packing plants will likely have a significant effect on economic conditions for livestock producers over the next few years.

Ideally, the collective capacity of the processing sector will be well-matched to the number of animals that it is asked to process.

Such a match would optimize efficiency and provide the highest level of support for farmers and the lowest level of costs for consumers. But there is nothing to force a match, and there lies the rub.

The competitive forces of excess capacity eventually drive packer margins low enough that someone is forced to cut back or leave the business.

That action, of course, puts capacity in balance again, reducing the level of competition for livestock and allowing margins to grow to sustaining levels.

The opposite is also true — tight capacity allows packers to realize better margins, thus providing incentives to expand, again balancing capacity with numbers.

The process is far from precise, however, since animal numbers can generally be changed much more quickly than packing capacity.

The beef and pork sectors present very different scenarios for packing capacity. The directions of these industries, in terms of numbers, are almost opposite.

Hog numbers, though lower than their record levels of 2008, are growing again and are expected to challenge those records in 2015, depending on what feed costs do between now and then.

On the other hand, cattle numbers are hitting their lowest levels of the past 50 or so years. Ranchers are trying to expand the cow herd and increase numbers, but that effort has been slowed by drought.

The result is tight capacity in the pork sector and growing slack capacity in beef packing.

Lower feed costs, higher profits and expansion will challenge that pork capacity quickly, and there is no additional capacity currently under construction.

Several companies have expressed interest in double-shifting plants, but even that would take 12 to 18 months to accomplish.

The beef situation is just the opposite: Total packing capacity of the top 30 beef slaughter firms — which represent about 98 percent of total capacity — has stayed relatively steady as cattle numbers have fallen since 2008.

That has not been good for margins, and the pressure is likely to grow as the diminished calf crops of 2012 and 2013 — and perhaps 2014 and 2015 — work their way through pastures, background lots and feedlots.

Pennsylvania Center for Beef Excellence Inc. with information from the CME Report, Cattle Buyers Weekly and other resources. For more information, call 717-705-1689.

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