Barnard: Meatpacking Isn't Rocket Science

Janette Barnard is the author of Prime Future, a newsletter for innovators in livestock, meat, and dairy. Read more by subscribing to her newsletter.

It's weird how often people/media say that meat supply chains broke during COVID.

Were supply chains stress-tested? Absolutely.

Did supply chains bend? Yep.

Did supply chains break? I don't think so.

Consumers being forced to settle for a flank steak because the ribeyes are cleared out does not mean the supply chain broke, nor does being forced to settle for bone-in chicken thighs instead of boneless. These are objectively #firstworldprobz.

For those whose worldview says that supply chains broke, the go-to solution seems to be more localized, regional supply chains. To these folks, the cohort of soon-to-be-built processing plants looks like a golden next era of the meat business.

Then there are those who see packers as the source of all evil in the livestock value chain, those wretched keepers of the margin. To these folks also, the soon-to-be-built processing plants might also appear to mark the beginning of a golden era.

All that to say, there are a lot of folks cheering on the development of these new regional plants. As am I, if for no other reason than because competition makes everyone level up.

And yet, there's a phenomenon that has played out across the US beef industry for a few decades. Here's how it goes:

1. The cattle cycle swings margin to packers
2. Cattle producers think “hey, they can't have all the margin”
3. Cattle producers think “meatpacking isn't rocket science, we should buy/build a plant and capture some of that margin ourselves”
4. Cattle producers pool their money and buy/build a plant
5. The cattle cycle swings margin to cow-calf producers & feeders, away from packers
6. Cattle producer-investors declare bankruptcy on their processing business
7. Repeat at the next swing in the cattle cycle  

With more recent announcements about plans for building regional packing plants, I’ve been thinking about some of the traps those plants will have to deftly navigate in order to avoid step 6 above.

Here are 4 watch outs for upstart meat processors:

(1) Sourcing cattle. With the drought in the US shrinking the cow herd by the day, the next 24-36 months could be a reeeally tough time to be establishing a processing business when competing with not only the big players but also a growing number of regional players for a smaller pool of cattle. Smaller supply + higher demand is great for producers but tough for processors…especially upstarts.

But cattle markets are local, and depend on the triangulation of (1) where these plants are located, (2) where the cattle they will source are located, all in relation to (3) where the big 4's plants are located. This location triangulation becomes all the more critical the higher transportation costs are, and the tighter cattle supply is.

(2) Competitive margins. These regional plants processing fewer head per day than their larger counterparts will have higher processing costs per pound, simply because of the math of spreading fixed costs across more pounds. And if you can't compete on cost, then you have to remain competitive via topline revenue which means either premium programs or some other path to higher sales price per pound. The big players largely play the commodity game with the mountain of meat; these emerging plants will have to create and play a different game.

(3) Carcass balance. Sourcing cattle and processing them efficiently are big enough challenges, but perhaps the biggest challenge of all is selling the entire carcass. Anybody can sell high-value middle meats, it takes a well-oiled sales machine to sell the entire carcass, even more so to do that at premium prices.

(4) Ability to recruit & retain talent, at all levels. Several hundred million dollars in capital projects for automation investments have been announced by the big 4 in the last few months, because of the labor crisis. Both accessing humans to do work, and the cost at which the humans are willing to work in a processing plant. This is not a small problem. This is not ‘build it and they will come’. A labor strategy right sized (read as: plan for higher wages than you would have even a year ago) for the current labor market is critical.

I wanted to test my hypothesis of the above traps with industry experts who’ve actually managed large-scale beef plants and know what it’s like to manage the business of buying cattle, processing and disassembling carcasses, and navigating customers relationships.

As someone who knows the beef processing business well, Nicole Johnson-Hoffman said, "I would agree with your watch outs and add that complexity is a factor. Unless you have a large organization to spread the costs across, you struggle to afford the high cost of compliance and sophisticated talent."

Meatpacking may not be rocket science, but it is wickedly complex.

Another industry friend added, "It's all about double shifting to be the most efficient. That’s a big battle and takes a lot of start-up capital for many years to turn the corner on profits. At first, you lose more the more cattle you kill as a total but you have to kill more cattle to ever get over the hump. It's a double edge sword.

Carcass utilization is the biggest link to packer profitability. You need international sales channels for items, plus retailers, plus food service. You need all 3 to balance the carcass. Plus hide, blood, rendering products that pay the bills. On top of that is the case-ready piece. If you're building a plant and not thinking about cutting the final product to a retail/food service customer then you can’t last playing the commodity game with the big 4. But you have to have a customer to do case ready."

There is a reason meatpacking has seen so much consolidation; it may not be rocket science but it is a deceptively challenging business.

Now for the bull case for these new plants:

1.If large cattle producers are invested in the plants, then that should increase the ability of the plant to secure cattle even when the big 4 are paying more for cattle than the regional plant can. The producer-investors will have a different level of economic commitment.

2.There are more opportunities than ever for branded programs and unique selling propositions that target a specific customer segment in a specific market.

3.Some argue the market has structurally changed in recent years with packer consolidation and that the cattle cycle is no longer the same. Maybe so. Maybe that structural change will mean these emerging packers will be operating in a different environment than prior attempts at this playbook with a higher probability of success.

4. I'm always going to be on the side of people making bold moves. I hope these moves pay off and that these producer-investors get Scrooge McDuck rich, start acquiring competitors, and keep growing until they themselves are considered big players who need shaking up by the next generation of upstarts. Circle of life.

Time will tell whether this time was different, whether this really is a new era in US meatpacking🤞

Meat industry folks - what did I miss here? What would you add?

Janette Barnard writes the Prime Future blog, with the goal of elevating the conversation about trends and opportunities for meaningful innovation in the animal protein value chain. She can be reached at https://primefuture.substack.com

"Prime Future is where I learn out loud. It represents my personal views only, which are subject to change…’strong convictions, loosely held’".

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