A monthly column written for Beef Central by US meat and livestock commentator Steve Kay, editor and publisher of US Cattle Buyer’s Weekly

IT SURELY is the best and worst of times for beef processors in North America and Australia, respectively.

Australian processors’ struggles to stem hefty operating losses have been well-documented by Beef Central. And there will be no letup the rest of this year, as Jon Condon reported last Tuesday in citing remarks by JBS.

In contrast, US and Canadian packers who produce grainfed beef are enjoying profits that would have been unimaginable ten years ago. The uptick in profits began in 2016 and has continued each year after that.

Tyson Foods, the largest processor of grainfed cattle, made more than US1 billion in operating income in fiscal 2018, and even more the next two years. It has made an astounding US$5 billion in income in the past five years.

JBS USA Beef, which includes the US, Canada and Australia, hasn’t been far behind. As Beef Central has also reported, the unit enjoyed record profits last year. One reason was that its value-added programs grew 20pc from 2019, which saw a 16pc growth on the prior year.

US packer beef margins have been equally astonishing this year. They are normally at their weakest in the first quarter because it is the softest quarter of the year for demand. Yet this year they have averaged US$310.25 per head, according to data from HedgersEdge.com. In contrast, Beef Central has reported recent losses for Australian packers well over A$300 per head.

The reasons for the US results are simple. Supplies of market-ready cattle have been ample for the last 12 months and are only just starting to tighten. Demand has been stellar, particularly in the US market. Americans renewed their love affair with beef after the onset of the COVID-19 pandemic closed restaurants by flocking to the grocery store. Retail meat departments saw a 19.2pc dollar increase and an 11pc volume increase in sales in 2020 versus 2019.

Expansion in US capacity

Given the record margins over the past five years, it was inevitable that existing companies would plan expansions and that new companies would enter the sector in the US. The sector is now in the midst of its first real expansion since the early 1990s. Maximum daily slaughter capacity peaked in 1995-2000 at an estimated 145,000 head per day, according to my data. It declined most years after that and is currently at 131,000 head per day. But a new plant opening in Missouri and plans by three other companies will add at least 3800 head of daily capacity to that total.

The latest move comes from a newly–formed company in Nebraska which plans to build a US$200 million, 100,000sq metre beef processing plant in North Platte. It aims to process 1500 head per day. Its plan belies the long-held belief that no newcomer of any size can enter the processing industry because of the perceived domination of the sector by three major packers, JBS USA Beef, Tyson Foods and Cargill.

Key ingredients for success

But it is worth noting that of the new US plants that went from drawing board to reality in the past 20 years, more failed than succeeded. In light of that, it is important to remember what the ingredients are for success. Here are the key ones.

As real estate agents say, it’s all about location. A new plant will struggle if it has to compete head-on with long-established plants within a region. Researching how many cattle are within that region is critical. The new company, Sustainable Beef LLC, says most of its cattle will be purchased within 200 miles of North Platte.

This leads to another ingredient. Do not under-estimate the level of competition that will come from other packers on both the buy and the sell side. Sustainable Beef will face fierce competition for cattle from JBS’s Grand Island (Nebraska) and Greeley (Colorado) plants and from Tyson’s Lexington and Dakota City, Nebraska plants.

It is also critical that any new enterprise raises enough financing not only to build a world-class plant but gives it sufficient working capital to operate for its first three years. Virtually no plant makes money in that time and can be considered a success if it breaks even in the third year. This is what felled Northern Beef Packers in Aberdeen, South Dakota. It started operations in October 2012 but quickly faced a capital crunch and filed for bankruptcy protection in July 2013.

Among the worst things a new venture can do is to predicate its success on unrealistic expectations.

This is what happened to Future Beef’s operation in Arkansas City, Kansas. The company claimed it would produce carcase yields far above the industry average. But it filed for bankruptcy only seven months after it opened in August 2001. The plant later re-opened as Creekstone Farms Premium Beef, whose strong brands became the foundation for its success. Brands are increasingly essential for all processors of grainfed cattle in the US.

In fact, a new venture might not survive without having a significant percentage of value-added sales, such as JBS USA Beef has.