While the direction of the cattle cycle (cattle inventory) may be the main topic of discussion, the other part of the story is capacity – and it is just as important as cattle numbers. Both the cattle inventory and production capacity are the result of economic decisions. However, once those decisions are made, the interaction of cattle supplies resulting from those decisions concerning herd expansion or liquidation with capacity creates another set of dynamics – capacity utilization.
I have been quite perplexed at the discussions over the last two years concerning capacity with most of the discussion centering on the statement – “we do not have enough capacity.” Or taken the next step, “we don’t have enough small plant capacity to create competition with the four largest packers.” The problem with that conclusion is lack of insight including fundamentals that drive consolidation, a sound measure of current capacity, constraints to optimal utilization of that current capacity, and the likely outcome to adding to current over-capacity, and last, but not least, letting the political decisions override on-the-ground economic reality. This is not sound policy-making and where it leads will not be beneficial to the industry.
I reviewed ERS’s (Economic Research Service) recently released study on “Concentration and Competition in U.S. Agribusiness”. That study has many points that we know to be true and one of those concerned the need to maintain “large and steady flows” of livestock. This is a basic economic tenant of capacity and capacity utilization whether it be slaughter and fabrication capacity in a packing plant or utilization of forage capacity on a ranch. I have often said you would not buy a ranch that is priced at a carrying capacity of 500 cows and only run 100 cows – at least not for an extended time, particularly if it involved borrowed capital. My estimate of fed cattle supplies over the next 2 years suggests utilization of current fed beef plant capacity will average 82% in 2024. For cow slaughter, utilization will be reduced to 65%. Rest assured – there will be decisions made.
So, the question I pose to USDA is – after financing new capacity for small-to-mid sized plants (not locker beef or custom, specialty plants) and adding to an already over-capacity situation, what will be the response when those new plants are unable to compete for cattle, labor, and customers with existing larger plants benefitting from scale economies and little or no debt?
