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By Staff | Feb 1, 2013

I have reported recently there was a 10 percent oversupply of kill-capacity in beef packing.

The announcement that Cargill was closing the Plainview, Texas, plant with a reported 4,650 head per day kill capacity would idle 4 percent of total capacity.

Other plants with unused capacity could pick up part of the slack. Cargill said that it just put $6.1 million updating the boiler system at the plant and a total of $50 million in efficiency projects over the past five years, so the decision to close the plant was painful.

Cargill said its closing is a manner of protecting the infra-structure, but it may be a long time until cattle supplies recover to the point it makes sense to reopen.

There is still 6 percent too much kill capacity and it is in the wrong place as fed cattle numbers have shifted north pulled in that direction by distiller’s dried grain feed availability.

The packing capacity is still concentrated farther south where the plants were built long ago. The cattle inventory report this was expected to show more liquidation and a shrinking cow herd that cannot stabilize until the drought ends.

It will take a lot of years to rebuild herds again to the point they need the Plainview plant operating. I would be pessimistic as to its long-term prospects. To rebuild herds it takes directing heifers to ranges with green grass growing on them instead of into feedlots. That will tighten fed cattle numbers even more when that happens.

Cargill has a complete view of the supply chain. It buys feeder cattle, places them on feed in Cargill lots, sends all DDG produced from Cargill ethanol plants to its feedlots, kills the cattle in Cargill packing plants, of which they have three more and markets the beef to retailers and exports.

Given their view, they closed the plant. They will likely downsize their entire supply chain feeding fewer cattle, too. Before the plant closing, Cargill represented 23 percent of slaughter capacity, JBS had 23 percent, National Beef had 13 percent and Tyson had 26 percent of U.S. kill capacity.

It was sort of like musical chairs, somebody had to close a plant and Cargill volunteered, however begrudgingly.

The choice product market has been stuck near $194, which, given the level of production, was all packers could wring from buyers.

One doesn’t get the impression that beef demand is any ball of fire. Japan is weakening its currency which makes US. beef more expensive. There has been a lot of retail resistance to higher beef prices and there are good supplies of cheaper pork and chicken as alternatives.

Cargill had as good a view of this as anyone. Someone had to shake things up as $194 is not enough to cover industry cost of production. I have said for some time that packers needed to cut kills, reducing beef production tightening supply in order to achieve higher prices.

Some will argue that reducing kill capacity will reduce demand for fed cattle. It does – but if fed cattle supplies were not extremely tight and expected to stay that way, Cargill would not have closed the plant.

We need new all-time highs, about $200 in choice beef in order to generate the gross revenue to cover costs. I think that cattle numbers are still shrinking and we will still see new price highs. Packers cutting kills is part of that process.

Feedlots have had extended losses, but they have not lost enough equity to drain the waterers and leave bunks empty. I would assume that Cargill will downsize its entire supply chain placing fewer cattle on feed. Feeder cattle have been priced too high relative to what can be returned from the beef market for too long. Feed costs are not going to come down until U.S. corn production normalizes.

Right now you can buy cattle futures at lower prices than recent placements generate break-evens and you don’t have to worry about finding corn to feed. That doesn’t mean that you will make money, but you should lose less than those feeding cattle. Cargill probably figured that out, too.

There was nothing in recent NOAA forecasts to relieve concern over the drought. Hay stocks have depleted or will be by spring. We can have a hay crisis if spring rains don’t materialize because they will need the first cutting to go right into bunks. Corn stalks, already valuable, could get more so as feed supplies get desperate.

David Kruse is president of CommStock Investments Inc., author and producer of The CommStock Report, an ag commentary and market analysis available daily by radio and by subscription on DTN/FarmDayta and the


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