Fifteen small to medium sized meat processors in twelve states have now received a total of $35 million through USDA’s Meat and Poultry Expansion Program (MPPEP) to expand processing capacity. USDA says, the program was conceived to “create new jobs, support development of new processing plants, establish stronger business opportunities for local producers and entrepreneurs, and provide consumers with more options at grocery stores.”
Anyone reading my articles over the last two years know that I spend a great deal of time tracking and analyzing packing capacity in the red meat industry. Capacity and the utilization of that capacity is key to margins, not only across the entire industry, but more importantly, for an individual plant. And closely tied to capacity is the concept of economies of scale. These two economic considerations have largely been the drivers of packing industry growth over the last several decades.
So, now the beef packing industry faces two major challenges – a tight cattle supply and a tight labor supply – both of which are key to a plant’s financial well-being or even survival. Consequently, the situation creates a great deal of competition for both. There have been plant closures over the past 3 years as packers faced both these challenges in the red meat and poultry industries. This situation truly illustrates the financial hardship created in the current economic environment with even older fully depreciated, debt-free plants. When the situation is tough for large, well-established plants with no debt, one can only imagine the challenge for a small start-up facility competing for cattle and employees. They will only be successful if they have a dedicated cattle supply with qualified plant employees and market to a dedicated customer base. There are new and small plants doing just that. However, USDA’s big picture statement about processing capacity does not seem to be consistent with that business model.
My estimate of current fed cattle slaughter capacity is just over 30 million annually based on a 5½ day week. With current supply of finished fed steer and heifer numbers each week averaging 482,000 YTD through the first week of September, use of that capacity is averaging 82% compared to 88% during 2022. Dropping to a 5-day slaughter week reduces the annual figure to 27.6 million, a 9% reduction in capacity. With current fed cattle numbers, capacity use would increase to 91% if Saturday slaughter was eliminated. Over in the pork industry, when Tyson closed their Perry, Iowa plant, total industry slaughter capacity was reduced 2 million head annually. The pork packing industry is currently running at around 93% use with a positive margin.
The packing industry is much more complicated than a plant’s slaughter capacity alone. Capacity, economies of scale, labor, and debt are all critical to financial success. I do not believe USDA has taken all factors into consideration and consequently, I would submit that their $35 million “investment” might have found a better return on investment for rural America with other uses.
