Producers in Saskatchewan would like to see more processing capacity in the province. It would offer better choice and more competition among customers, which would help ease the difficulties posed by long-haul trucking or occasional plant closures and disruptions.
When considering whether Canada’s beef market could support increased packing capacity and less concentration of packing plants, we must remember that the market has many moving parts.
Producers, feeders, packers, retailers, and consumers all have economies of their own. And unlike the manufacturing sector, for example, there isn’t a linear progression of price markup from one segment to the next.
Cow-calf producers can’t pass on their costs to the feedlot operator if the feeder can’t get a good price from the packer. But packers’ bottom lines suffer if they have unused capacity in their plants.
If you have too many hooks competing for too few animals, prices generally favour producers and feeders (drought and high feed prices notwithstanding). There is little incentive to build new plants unless the beef herd expands and the margins favour the packers.
Packers need that bigger herd to keep prices low and fill their plants.
In the U.S., the expansion of the beef herd up to its peak two years ago has meant a buyer’s market for fed animals. At the same time retail demand has steadily increased, meaning extremely favourable margins for packers—they pay less for cattle, and they get more for finished beef products.
There is a buzz of new activity, trying to build more packing plants to take advantage of those margins.
“We got to the first point in decades where we actually had more cattle available to slaughter than we had hooks in processing plants to accommodate them all,” said Lance Zimmerman, research and data manager for Cattlefax in the U.S.
“The price packers were getting for wholesale beef far exceeded what you would normally see. Packer margins reached hundreds of dollars a head, upwards of around $1000 a head during the pandemic when all the supply chain factors got scrambled,” Zimmerman said.
“The cattle industry in the United States sat back and said we need more processing capacity. We are running into a challenge to accommodate all the cattle we have eligible for harvest today and we need more facilities, more capacity in the processing side of this segment to marry up with our available cattle numbers.”
Zimmerman says new capacity includes a couple of smaller plants in Missouri, and another smaller facility in Georgia. One of the big four packers is expanding its operation in Iowa, “and then there is a list of many more plants from mid-size regionals to small regionals being proposed throughout the United States,” he said.
These are scheduled to come online starting in the fall of 2022 and over the next two years. But there are no guarantees in this business.
“The challenge is, history suggests that a chunk of that capacity will probably never be fully productive,” Zimmerman said.
For the Canadian industry, the lesson to be learned is that even growing the herd won’t assure increased slaughter and packing capacity.
The move to build capacity in the U.S is starting to bear fruit two years after the herd size peaked in 2019, but the cycle of herd expansion is not in sync with the cycle of packing capacity growth. This means risk for any new plants that are hoping to cash in on the attractive margins of abundant cattle.
Zimmerman says herd size runs in fairly predictable 10-year cycles.
“If we peaked the cow herd in 2019, conventional wisdom would tell you that the next peak probably isn't coming until late in the 2020s,” he said. “What it means is at the midpoint of the current decade, the cattle cycle would dictate that numbers would be at or near their cyclical lows sometime over the next two to three years. Based on that timeline, we're going to be having perhaps a large number of these new facilities coming on board right as cattle supplies are essentially at their tightest.”
Zimmerman recalled an old industry axiom: the third owner of a plant is the one who finally makes a profit. The startup cost to build a new facility, staff it, train employees, and build a consistent customer base for one of those plants is “immense,” he said.
“And typically speaking, those plants trade hands about three times before they eventually reach a valuation and reach a time horizon where the plant can operate profitably.”
Zimmerman says in a best-case scenario, half of the proposed new capacity will be able to open and survive. More realistically, he said, it will be about a third. “The biggest mystery is how much of what's being proposed today actually is still here and productive 10 years from now,” he said.
The Saskatchewan government’s goal of doubling processing by 2030 may have to rely on smaller plants, if it happens at all. The government and the industry hope that a $4 billion expansion to the province’s irrigation system, and other measures, will help grow the herd and create critical mass to support a major packing plant.
But at least one big player says don’t get your hopes up. A spokesperson for Cargill said they are not looking at Saskatchewan, or anywhere else, for a new plant in the West.
“Cargill is operating with excess capacity in West Central and Western Canada. Based on the available cattle in Canada and the hours of the operating processing plants, the industry does not require a new processing facility in the region,” the spokesperson said.
“Cargill is always looking for opportunities to grow our business and meet the rising global demand for protein, but there is no indication that a new processing facility is needed in Western Canada at this time.”
Brian Perillat, manager and senior analyst at Canfax, says the larger U.S. herd has helped to sustain the packing capacity we have in Canada. As U.S. numbers cycle downward, it will be even harder to add new plants here.
“The size of the [Canadian] cow herd hasn't been that big of an issue in terms of our production, simply because we've been exporting less cattle. But we've become a big net importer of feeder cattle, which is how we've expanded production and slaughter capacity here in Canada,” Perillat said.
“We've been able to tap into those larger feeder cattle supplies, which unfortunately aren't going to be there in another year, probably. So that's where some caution comes in.”
Availability of inexpensive feed is another issue. “Ultimately cattle will move to wherever the cheapest grain is,” Perillat said.
“Not only is our herd shrinking, we have not been competitive from a feed grain perspective either,” he said. “So it doesn't bode well to continue to import feeder cattle and import grain into Western Canada, which would be required to build another slaughter plant.
“A new packing plant is ultimately going to need a feed cost advantage here to make it happen. And we're certainly not anywhere near that right now.”
Any expansion may be driven by smaller outfits serving specific buyers. Dr. Jared Carlberg, professor of agribusiness and agricultural economics at the University of Manitoba, says there are downstream opportunities for specialized beef if a facility can secure a reliable supply of animals.
“I remember being a small kid in the little town of Osage, Saskatchewan and going down to the corner gas station, the only business in town,” he said. “My dad would go down there and pay twenty-five cents for a Styrofoam cup of coffee.
“Imagine if you told the old fellows sitting around shooting the breeze that the day will come where somebody will spend $8 for a cup of coffee because it's got a squirt of caramel in it and some whipped cream. They probably would have laughed at you.”
But we are seeing that consumers have that same willingness to pay a premium price for specialized meat products.
“We have seen over the last several decades commoditized products become boutique products as consumer demand has evolved and as people have had more money, more purchasing power, more discretion, more choice of products,” Carlberg said.
The best bet for a small packing operation could be one that is owned by producers or feeders—one that can provide the supply of animals needed to fill the niche demand.
“You have to have some skin in the game,” Carlberg said. “You have to have people that are willing to commit the supply because if you're not going to be able to operate at capacity, you're going to have trouble.”
And there are other barriers. According to Carlberg, the cost of operating in such a heavily-regulated industry can be daunting. A new plant would require considerable capital to be able to meet the startup costs and satisfy regulatory regimes while weathering the cycles of supply and demand.
Finding the requisite workforce is another major challenge. Carlberg says it’s not so much a shortage of labour that raises difficulty but a shortage of people with the right skills.
“I think knowledge availability is how I would put it,” he said.
“Management expertise and marketing expertise, that's the real trick. Many years ago when I looked at what distinguished successful new-generation cooperatives from those that failed, it was really interesting. Of the 50 factors that I looked at—management factors or operational factors—having that local champion and having skilled management was amongst the top few.”
Which is not to say that availability of labour isn’t an issue. The Canadian Meat Council (CMC) describes it as their number one challenge, and points to a recent survey that shows the shortage of butchers has doubled in the past six months. The industry is currently short of butchers by 9,500.
But Carlberg says it’s a solvable problem.
“If people can make a living because they know there's going to be 40 hours a week of full time, good paying or decent paying work, I think that's one thing. But when you start asking people to come in two days every second week, that's a tougher sell,” he said.
The CMC says improvements to the Temporary Foreign Worker program would also help ease the pressure. Again, as Carlberg said, there are solutions available.
“I do think labour availability could be an issue, though perhaps not as high on the list as something like the need for significant capital and regulatory approval.”
According to CMC, removing barriers to inter-provincial sale of provincially-inspected meat could help to make smaller plants viable, but standards are not consistent from province to province—a situation that would need to be addressed.
Facilities also must meet grading and environmental standards, as well as local and municipal regulations. All of these, even if they are necessary safeguards, add up to an expense burden that is hard for small facilities to recover.
Small-scale production becomes much riskier if a plant tries to make a go of selling commoditized beef. This is where the big companies have mastered the economies of scale, reducing per-unit costs and finding markets for offal, trim, and hides—products that are difficult for a small plants to sell. These by-products can often end up going to a landfill at the plant’s expense, becoming a cost rather than a profit generator.
“You can't say ‘here's a good location, I'm going to start up,’” Carlberg said. “All of a sudden the guy down the road or one of the big boys starts paying a nickel more per hundredweight, and now you can't get cattle.
“We've seen that in many industries. The large-scale players in an industry can discipline the new entrant. They can price somebody out of business pretty quickly.”
For Carlberg, it comes back to having skin in the game: having cow-calf producers and feedlots that have an interest in assuring reliable supply to a plant, and making sure the management and marketing expertise is in place. It also means identifying a product whose price will overcome the disadvantages of operating at a small scale.
“There's potential there,” he said. “Will it happen? It's going to have to be carefully planned and coordinated and executed, but I think it could happen. And yes, that farmer-owned packing facility could definitely be a cornerstone of that.”