Meat + Poultry - April 2006 - 21

Mixed
Beef packers confront
market challenges with
surprising strategies
By Steve Kay
meat&poultry@sosland.com

.S. beef packers have been swimming in red ink for the past two
years. They've lost more money
than at any time since the infamous beef
price freeze imposed by President Richard Nixon in the early 1970s. There's
some light at the end of the tunnel, but
the losses have already wreaked profound changes on the sector.
Processors of fed cattle may have lost
as much as $700 million in 2004 and
2005, according to market consultants
HedgersEdge.com. That seems like a
lot until you consider that Tyson Foods
was expected to lose $128 million in
beef in its fiscal 2006 second quarter
that just ended. That will mean $205
million in beef operating losses in the
past three quarters for the nation's largest beef processor. Processors of nonfed cattle have also struggled with losses as cow slaughter numbers dipped in
2005 to their lowest level in 42 years.
Such losses have forced packers to
initiate paradigm shifts in their priorities. This includes shuttering plants
that might be quite functional and
even profitable but are closed to protect much larger assets. That's what
Tyson did in closing its West Point and
22

MEAT&POULTRY

April 2006

Norfolk, Neb., plants. It decided to
consolidate the operations of both
plants to its much larger Dakota
City, Neb., plant.
A cautious approach
Beef processing is in
the midst of the biggest
structural changes since
the mid-1980s, say observers. Packers' protection of market share
has become redundant
under the sea of red ink.
Raising utilization rates
and adding value are the
new mantras of the industry. In the
future, there will be no room for any
plant, large or small, that cannot run
close to 90 percent of capacity most
of the year.
The whole industry ran less than 80
percent of capacity in 2004 and 2005,
according to this author's calculations.
That compared with rates in the mid80 percent range only two or three
years earlier. This decline in rates exacerbated packer losses last year because
per-head processing costs soar when
utilization rates decline.

www.MEATPOULTRY.com

Tyson was particularly vulnerable
because of its number of slaughter
plants - 10 in the United States before it closed West Point - and their
varying size. Tyson says West Point's
closure will raise the capacity utilization rates at its remaining nine plants
from the low 70s percent range to
the high 70s percent range. Its total
slaughter capacity has declined from
36,000 head per day to just more than
34,000 head. But it will kill more cattle
this year than last year because more
cattle are coming. This will allow it to
operate its plants more efficiently.
The huge losses have meant plant
closures and consolidation. At least
nine plants have closed since the summer of 2003; seven of them slaughtered
cows exclusively or on a part-time basis. These closures included two plants
in Idaho; two in Nebraska; and plants in
Iowa, Mississippi, Michigan, Ohio and
Minnesota. Most of them were small,
privately owned businesses.
Four firms now account for 47 percent

http://www.HedgersEdge.com http://www.MEATPOULTRY.com

Meat + Poultry - April 2006

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