Rising Margins Push U.S. Beef Packers to Add Slaughter Capacity
(Bloomberg) -- It’s a lucrative time for U.S. meat packers, with rising tastes for beef and ample cattle driving up profitability so much that it’s prompting one industry giant to ramp up slaughter capacity.
Margins for beef packers are trending upwards, with producers potentially pocketing $316.35 per head of cattle, according to a Thursday estimate from advisory firm HedgersEdge. That’s well above the single- or double-digit returns that were commonplace about five years ago, and is adding incentives for the U.S. industry to boost cattle-slaughtering capacity for the first time in years.
Marfrig Global Foods SA said its subsidiary National Beef Packing Company is spending $100 million to more than double slaughtering capacity at its plant in Tama, Iowa, to 2,500 cattle daily by adding a second production shift. The changes will be done by late 2022 and will add “several hundred additional jobs,” according to a company statement.
Marfrig said the move will “increase the capacity of the company to produce premium products that are in high demand by the customers worldwide and will provide an expanded market for the Iowa family farmers who supply the plant with Angus cattle.”
Smaller slaughterhouses have also been popping up, with Kentucky Governor Andy Beshear this week announcing a $1.2 million meat plant that Farmstead Butcher Block LLC is building near Central City that will create 25 jobs and process cattle, hogs, lamb, chicken and turkey. Farmstead Butcher Block didn’t reply to a request for comment.
Economies of scale mean bigger operations are likely more efficient, and profitable -- though it also raises concerns of industry dominance.
The American beef industry has been criticized for being overly concentrated, with the four biggest packers -- Tyson Foods Inc., JBS SA, Cargill Inc. and National Beef -- controlling about two-thirds of all U.S. beef processing. The concentration can cause a disconnect in the market when plants are forced to shut down, which can send meat prices soaring and animal prices tumbling.
That happened during the coronavirus outbreak, with plants forced to close as hundreds of employees caught the virus as consumers cleared store shelves of meat and other foods. Beef-packer margins surged to a record $1,009.30 per head last May during the meat-plant shutdowns, according to HedgersEdge.
Beef prices are likely to continue rising, with restaurants and businesses reopening and more people receiving a vaccine expected to boost meat purchases outside of the home while families also continue cooking more meals at than before the pandemic.
There has been no major expansion of beef packing capacity in the U.S. since the 1990s, when it peaked at 145,000 head per day, according to Steve Kay of Cattle Buyers Weekly. Plant shutdowns including the 2013 closure of a Cargill facility in Texas reduced capacity, which now currently stands at 131,000 head per day, he said.
Opening new slaughterhouses can be costly and complicated, involving local and federal regulatory requirements.
“It is important to appreciate the impact of adding second shifts to existing facilities that largely run single shifts versus the addition of brand-new facilities that often have smaller per-day volumes,” said Glynn Tonsor, agriculture economics professor at Kansas State University.
©2021 Bloomberg L.P.