Greater scrutiny placed on packing capacity, market access at Kansas State Cattlemen's Day
The challenge in matching meat supplies with dramatic shifts in demand — a problem underscored this past year as the COVID-19 pandemic swept the globe and retail meat cases emptied — has led to widespread questioning over whether packing capacity is adequate to maintain product availability for consumers and market access for producers.
That issue was one of the main topics discussed during this year’s annual Cattlemen’s Day at Kansas State University.
Interestingly, while beef and pork processing volume dropped 40 percent at the peak of the disruption from last year’s disease outbreak, poultry processing remained stable and showed little adverse impact, noted Jayson Lusk, agricultural economics head at Purdue University.
Concentration is the likely answer. Currently the 10 largest plants in the U.S. process 63 percent of all red meat, so if any shutdowns occur for any period of time it causes system-wide disruptions, Lusk said.
According to a map he showed as part of his presentation, the key large beef plants are all clustered in the Central Plains states of Colorado, Kansas, Nebraska and the Oklahoma-Texas panhandle.
“One suggestion to come out of this is that to be more resilient we need to have more plants,” Lusk said.
Liz Boyle, a K-State extension meat science specialist, said small meat processors have in some cases expanded and in all cases stepped up their workload to fill in some of that gap.
“What we’re seeing in Kansas is very, very busy plants operating at capacity,” Boyle said, adding that many are already booked out through 2022.
As a result of more state and federal support and heightened consumer interest, nine new member establishments joined the Kansas Meat Processors Association this past year, the biggest one-year jump the group has seen, Boyle said.
What’s unclear, however, is whether interest in direct-marketed beef will remain elevated, especially if the national vaccination campaign is successful and consumers return to their pre-pandemic shopping habits.
Maintaining excess capacity to more readily absorb unexpected plant closures adds considerable cost to the system, Lusk said, especially if that capital investment must sit idle at times.
“I don’t think there are easy answers to this,” he said.
Small plants will have a hard time competing on price, he added, noting that the output from a 35-head-a-day plant is a “rounding error” within the industry as a whole, essentially equivalent to .01 the volume at which big modern plants operate.
“That explains why we had such a big problem when one of these big packers went down, but I think sometimes the scale gets lost in some of these discussions,” he explained. “If you want to do small-scale meat and play the local game, don’t think you can compete on cost. You’ll need to compete on a different dimension.”
Regardless of the challenges, elected leaders and the industry itself are seeking remedies to what many see as a lack of price discovery and inadequate price leverage by producers. Many new programs are funding expansion of small-scale processing and direct beef marketing channels, and legislation is being considered that is aimed at reducing captive supplies, or pre-committed livestock.
“My guess is out of the current administration we’ll see more emphasis and focus on anti-competitive behavior,” Lusk said. “I expect that we’ll see more of an eye toward trying to do investigations to see if there is evidence of market manipulation.”
The Cattle Transparency Act of 2021, which creates new market reporting requirements and sets minimal levels for regional cash trade, highlights the tensions that exist within the debate.
The American Farm Bureau Federation responded favorably to the bill, while the National Cattlemen’s Beef Association opposes it.
“We have seen a rise in non-cash traded cattle, and the question is why,” Lusk said. “Presumably producers chose to use these alternative marketing arrangements.”
At the same time, he added, robust price discovery is important, too, citing extensive research conducted by Colorado State University’s Stephen Koontz.
As legislators and industry leaders wrestle over how best to proceed, Lusk noted beef trends overall remain largely positive.
The demand index for beef is actually higher now compared to where it was at the beginning of 2019, he said.
According to a team of business analysts with the Radian Group, a food market consultancy, total fresh meat sales grew 2 percent last year, with the retail sector driving all of that growth.
Food service has recovered somewhat but is still lagging. Around 20 percent of consumers remain unwilling to dine-in at restaurants for now, and Radian predicts it will be at least another year before the food service sector recovers to its normal baseline.
Still, somewhat surprisingly given historic unemployment, average incomes in the U.S. are running above trend-line, Lusk noted, thanks to increased unemployment benefits and other forms of government support.
“A lot of the extra income is going into savings,” Lusk said. “That indicates there’s a lot of money sitting on the sidelines, and if we get the vaccines rolled out, we could see a spike in demand.”
Overall, however, the impact of inflationary pressures on producers will be mixed, he said.
Any extra income is likely to be invested in fixed assets, such as land, which could lead to higher land values and rental rates. At the same time, prices for commodity feed crops are also trending higher.
“That will affect the cattle cycle,” Lusk predicted. “That will affect decisions of whether folks hang on to their cattle inventory or let them go, if it’s going to cost too much to keep them around.”