What is in this article?:
- Outlook: Some Thoughts On The Cargill Plant Closure
- Market outlook
Limited supply is making the business environment for the feedlot, packer and retail sectors particularly challenging.
The major news of the past month surrounds Cargill’s decision to cease operations at its Plainview, TX, plant. The move effectively eliminates weekly harvest capacity by 15,000-20,000 head. The company explains the decision was largely the result of limited supply that has made the business environment particularly challenging in the region.
None of this comes as a surprise; timing was the only uncertainty that remained. Both the packing and feeding sectors have been chronically hampered by overcapacity for an extended period of time. That’s driven heightened rivalry in the sectors to ensure some semblance of operational efficiency. The current rate of cash burn at the packer level simply can’t be sustained indefinitely.
Understand The Impact: Cargill Plant Closing Drives Collapse In Futures
Cargill has opted for an alternative. That’s a telling pronouncement about the state of the business; the closure signifies the changing dynamics within the beef complex beyond just capacity and supply. Most notably, it speaks to the importance of managing capital efficiently.
There’s a huge financial commitment associated with maintaining and running a plant. If that working capital isn’t providing sufficient return, the company needs to reallocate it toward an alternative enterprise. What’s more, when capacity outruns supply, weekly procurement sometimes swings wildly simply to ensure plant volume and throughput.
The move gets Cargill out of the weekly running for cattle for the Plainview plant. Plus, the company is now better positioned to manage capital more effectively. Combined better overall operational and financial efficiency should allow the company to be more competitive in offering customers longer-term price stability. The latter aspect is one that continues to be increasingly important for the beef business.
In the face of escalating food costs, restaurants and retailers are trying to remove price volatility from their business model. Simultaneously, packers are willingly accommodating that requirement to be more efficient from a financial standpoint (hence the Cargill decision). Much of that shifting environment is best demonstrated by diminished weekly spot volume in both the fed cattle and wholesale beef markets (see my “Industry At A Glance” charts on Captive Supplies and Out-Front Beef Supplies.)
But whatever the reason, the outcome has already priced its way into the market. Removing about 4% of the weekly harvest capacity has a negative effect upon fed cattle demand in the region (and throughout the system) – and it eliminates at least a portion of the supply/capacity imbalance at the packer level. Meanwhile, diminished rivalry for fed cattle will also have second-order effects upon the price of feeder cattle over time.