US Beef Industry Facing Crisis of Overcapacity

By Chris Harris, Senior Editor, TheCattleSite. One of the major problems facing the US beef industry is overcapacity in its processing sector.
calendar icon 1 February 2008
clock icon 4 minute read

Efficiencies in the industry to produce more meat from fewer animals has seen production rise, meat industry consultant John Nalivka from Sterling Marketing told the Outlook 2008 conference in London.

Beef production saw a slump in 2003 but is now on an upward trend and reached more than 26 billion pounds last year from just over 95,000 head of cattle.

Mr Nalivka said that a look at the steer carcase weights showed how beef production had increased with a lower cattle inventory.

"It is greater productivity across the industry. Carcase weights are going up but things could change as feed prices go up," he told the conference.

Steer carcase weights have risen from just below 750 pounds in the early 1990s to now around 825 pounds.

Mr Nalivka raised concern over the rise in feed prices, which are being forced up by rising corn prices.

Over the last decade, the US industry has seen both the supply and use of corn increase significantly, with supply reaching more than 14 billion bushels over the last year.

However, much of the demand has been driven by the US requirement for corn used in ethanol production and in the coming year, Mr Nalivka said, the USDA projects that 5.5 billion bushels will be produced for ethanol production alone.

This demand for corn used as ethanol, taking away from the corn used for feed, has forced prices up from around $2.20 in 2005/06 to more than $4 a bushel this year.

Mr Nalivka said that in the past there had been peaks in the price of corn that had been forced by droughts and shortages in the US, but the ethanol demand is now driving prices higher and higher.

He said that cattle feeding returns are volatile in the face of high break-even prices.

In recent years, beef packer operating margins have been falling into deficit until the packers were losing between $10 and $20 a head last year.

"We have gone through a bloodbath in the meat processor sector," Mr Nalivka said.

"And there will be more consolidation. Feed lots and processors are on the loss side and only the cow-calf producers are in profit."

The most recent closure of a beef processing plant was the Emporia plant in Kansas.

At present just 9.6 per cent of the plants, all processing more than 50,000 head of cattle a week process 97.3 per cent of the beef. The other 2.7 per cent of the beef processed is in the hands of small slaughterhouses, processing under 50,000 head and which account for 90.4 per cent of the industry.

The biggest processor in the US is Tyson, with its IBP operations, with 30 per cent of the beef produced. Cargill Meat Solutions has 21 per cent of the national production and the Brazilian company, JBS SA, that recently bought out the Swift group, has 15 per cent, which National Beef Packing has 13 per cent of production.

"Capacity is a major issue in the US. As long as there is a gap between the cattle going through and the capacity, then we have a problem," said Mr Nalivka.

At present the US has a capacity to slaughter 31 million steers and heifers, but is only slaughtering 27 million.

While not quite as marked, there is also over capacity in the cow beef sector, where American Foods Group and Cargill, with 20 per cent and 19 per cent of the market each, are the major players.

With a capacity of 6 million cows, the processing sector is presently processing near to capacity. One are that is showing a healthy profit is the by-product sector of the beef trade.

Following the discovery of a case of BSE in the US, the beef export trade slumped, but is now starting to recover, rising to an estimated 1.5 million pounds this year. In 2006 exports rose by 67 per cent and by 26 per cent last year. This year they are expected to rise by 17 per cent. However, imports that fell by 14 per cent in 2006 rose by three per cent last year and are expected to rise by six per cent this year. Up to November last year the latest figures show that beef exports were worth $1.8 billion, showing a 34 per cent increase.

One part of the trade that is also helping to fill some of the gap in the processing overcapacity is the imports of cattle from Canada. Last year the US imported 23,708 head of cattle and this year the figure is expected to rise to 30,575 head. Imports of beef that rose following the discovery of BSE in the US and Canada and the closure of the borders to live cattle. Now the borders are open more live cattle are being allowed through.

In all the US has just nine per cent of the world export market, with Brazil holding the lion's share of 32 per cent and Australia the second largest with 19 per cent. The US share of the market is half of what is was before it had its single case of BSE in 2003.

January 2008

© 2000 - 2022 - Global Ag Media. All Rights Reserved | No part of this site may be reproduced without permission.