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Kay’s Cuts: US (and Australian) packers face growing labour crisis

Steve Kay, 04/08/2021

A monthly column written for Beef Central by veteran US meat and livestock market commentator Steve Kay, publisher of US Cattle Buyers Weekly

 

 

 

 

AUSTRALIAN and American beef processors face a labour shortage that might be the worst in the two countries’ history.

The shortage of both workers and cattle continues to negatively impact Australian beef processing margins, as Beef Central has reported. The opposite has occurred in the US, where procesor margins are record large for this time of year.

But labour constraints mean US slaughter levels are lower than they should be to handle the available supply of finished grainfed cattle. This has kept pressure on the prices of those cattle.

As I wrote in my Beef Central column in June, sufficient slaughter capacity in the US is not the issue. Lack of labour is.

Yet the US National Cattlemen’s Beef Association (NCBA), members of the US Congress and the Biden Administration remain fixated on a belief that the industry needs more capacity.

They have not uttered one word to acknowledge the labour issue and how to address it. It appears that the issue is being given only minimal attention by the federal government in Australia as well.

Two US congressional hearings on July 28 discussed perceived challenges within the beef supply chain. Both hearings focused on packer competition, beef processing capacity and the need for greater transparency in cattle markets. Again, lawmakers at both hearings made no mention of labour.

The hearings also exposed a common mistake about packer market share. Many lawmakers take USDA’s four-firm concentration number for steer and heifer slaughter and claim that the four largest US packers control 85pc of the total beef market.

But the percentage for total commercial cattle slaughter, from which comes all domestically-produced beef, is much lower. The four largest firms in 2019 had a combined market share of 73.3pc.

Only four packers control more than 80pc of the cattle market, Senator Chuck Grassley, R-Iowa, told a Senate Judiciary Committee hearing. He should have said “the live cattle market”.

The US House Agriculture Sub-committee on Livestock and Foreign Agriculture heard testimony from agricultural economists, land-grant university faculty and cattle industry stakeholders. Many members of Congress echoed NCBA’s longstanding call to expand processing capacity, says NCBA.

The calls to expand capacity fly in the face of the facts. The current maximum daily slaughter capacity at the nation’s 68 largest beef processing plants is just over 133,000 head per day. If they ran at an average 90pc of that capacity, they would be processing 29,700 head per day.

US beef kills this year have seldom exceeded 120,000 head per day. NCBA and lawmakers have also ignored the fact that various plans to expand or build new beef processing plants, if all are realised, will also add 6700 head of daily capacity in the next two or three years.

Prominent US agricultural economist Jayson Lusk of Purdue University addressed the capacity issue in testimony to the House committee. He noted how from 2010 to 2015, total number of all cattle slaughtered fell by more than 16pc.

The decline resulted from producers cutting inventory as a result of a dramatic increase in feed prices and a drought in some parts of the Midwest, he said.

The change in cattle numbers affected the packing sector. There was, at the time, too much packing capacity relative to the number of cattle and returns to cattle processing took a hit. Some small and medium-sized packers exited because it was no longer profitable and some large packers shuttered plants in an attempt to align capacity with inventory, he said.

Processing capacity in 2020, even if the pandemic had not occurred, was likely to be tight, which contributed to downward pressure on cattle prices, said Mr Lusk.

Fixing ‘yesterday’s problem’

But the industry appears to be in a different phase of the cattle cycle. Cattle inventory is falling. Feed prices are rising. There is a drought in the West. These factors will over time bring cattle numbers closer in line with current capacity.

Moreover, there are a number of private initiatives to increase automation and add more US packing capacity. More capacity and fewer cattle will help support future US cattle prices.

But as the experience of the past decade has revealed, that will not be the end of the story. Whether the industry is setting itself up in five years time for another situation in the packing sector like the one experienced in 2014 and 2015 remains to be seen. Government investment in capacity to improve cattle prices, might be fixing yesterday’s problem, he said.

There is another argument being made for adding capacity, to improve resiliency to the sector, Mr Lusk told the committee. But his research with Purdue colleague Meilin Ma indicates that even if the industry would have had a more distributed packing sector consisting of more small- and medium-sized plants instead of a small number of large plants, the price spread dynamics and beef supply disruptions would not have likely been appreciably different than what was witnessed, he said.

It is worth noting that costs of adding packing capacity are not limited to concrete and iron, Mr Lusk said. He encouraged the committee to consider other costs and barriers that limit new entrants and thus expanded capacity.

Availability of labour has been a significant challenge for the US industry and labour constraints put a limit on processing capacity, he said. Let’s hope lawmakers finally start to consider this.

 

 

 

 

 

 

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