Small packers called unlikely

The pandemic created many calls for smaller regional plants to reduce Canada’s dependence on two huge plants to provide the country’s beef.

But the reality of the COVID-19 impact is that smaller plants are likely to be at an even bigger disadvantage than today, says a cattle industry economist.

“Mandated changes to protect the health of workers will add even more regulatory fixed costs that must be spread over greater volumes of meat production,” writes the University of Alberta’s James Rude in an article in the Canadian Journal of Agricultural Economics.

“This will favour larger producers who are able to achieve lower unit costs.”

That new level of costs will add to existing disincentives for small plant production, Rude thinks, such as less efficient production and the tendency of highly efficient plants to dominate the areas where cattle production is concentrated.

“The strongest counter-argument against promoting small- and medium-sized packers is that there are natural forces that limit slaughter to regions where the livestock is raised and that significant scale advantages limit the total number of slaughter plants across North America,” said Rude.

The competitive continental slaughter business has led to much consolidation. The basic minimum size for a mainstream slaughter plant is about one plant per 1.1 million animals per year, which both Cargill and JBS are. That is much more capacity than small plants have.

“The potential of small and medium sized plants is limited by construction costs, fierce competition from established large-scale competitors to procure animals, and overall operating cost disadvantages,” writes Rude.

“Therefore small and medium-sized packers cannot compete on a cost basis with larger operations.”

That doesn’t mean small players can’t find a role, but it won’t be by doing the same thing as the bigger players.

“They will have to compete in niche markets through product differentiation where they attract new buyers who are willing to pay premium prices that cover the extra costs associated with these types of plants.”

That is always one of the hopes for specialized processors and producers, but Rude cautions that even though some consumers might be willing to pay a premium for locally produced food, many will not.

“Many consumers will continue to demand low priced sources of protein and only the current system of large scale regional beef packers can provide beef at current prices,” concluded Rude.

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