Analyzing costs | Low margins in slaughter plants make business difficult for new and small players
Stephen Koontz has advice for anyone looking to build a beef slaughter plant in North America — don’t do it.
“Year in and year out, if I can talk a producer group out of building a packing plant, I’ve had a good year,” said Koontz, an agricultural economics professor at Colorado State University.
Producer groups or businesses thinking about building a plant usually understand that four companies, Cargill, National Beef, JBS and Tyson, dominate the beef packing industry in North America.
Nonetheless, most new entrants don’t fully comprehend the big four’s cost advantage, Koontz said.
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When asked about the viability of a $40 million, 250 head per day halal and kosher slaughter plant that the Manitoba Cattle Enhancement Council is proposing for Winnipeg, Koontz said it’s crucial to understand the cost per kill of a new plant and how it correlates to the number of animals processed.
In a 2007 paper in which he analyzed packer data, Koontz determined that the average cost of slaughter at the four major packers was $120 to $165 per head, or a mean of $140 per head. In comparison, the slaughter cost at smaller plants were $200 to $375 per head.
Updating the figures to 2012, Koontz estimated it now costs the big four $160 to $175 per head.
Assuming that costs have increased a similar amount for smaller packers, those plants would now spend $230 to $440 per kill.
As an example of scale in the industry, Cargill’s packing plant in Dodge City, Kansas, kills 6,000 animals per day, but Koontz said even beef plants of that size must operate at full capacity.
“Packers do make money, but it’s an extremely low margin business…. The critical thing with these plants is that they’ve got to run two shifts per day, five days a week and one shift on Saturday,” Koontz said.
“If you’re looking at any small plant, they’re usually running one shift per day, sometimes four days a week. That just won’t cover the cost of your building and your people.”
Koontz’s cost estimates are similar to numbers cited by Canadian Cattlemen’s Association president Martin Unrau during a speech in Brandon in late November.
He said costs are around $165 per kill at certain JBS plants in the United States and closer to $400 per kill at smaller plants.
A CCA spokesperson said in an email that Unrau’s figures are two years out of date and can’t be applied to a proposed slaughter plant such as the ProNatur project in Winnipeg.
ProNatur spokesperson Adam Dooley said it’s difficult to compare this type of project to large commodity players in the beef industry, because the Winnipeg plant will target niche markets.
“We have calculated our cost per animal and it is competitive,” Dooley said.
Although cost is a significant factor, Koontz said another argument against building a beef slaughter plant in North America is that existing facilities aren’t operating at full capacity.
Based on data from his 2007 study, Koontz said the industry had approximately 25 percent excess capacity.
A few plants have closed over the last five years, but the North American cattle herd has also contracted. Therefore, Koontz said excess capacity may no longer be 25 percent, but it’s at least 15 percent.
The plant in Winnipeg is planning to sell its beef into the kosher and halal market, which should partially compensate for increased killing costs.
In a study published this year in Agricultural and Resource Economics Review, Lee Schulz of Iowa State University found that steaks with a religious claim earn a market premium of $1.18 per lb. compared to steaks that aren’t kosher or halal.
The premium is helpful, but Schulz determined it’s relatively small compared to organic beef, which garners a premium of $2.98 per lb.
Koontz said cost per kill ultimately determines if a plant succeeds or not.
“It’s really hard to get enough premiums to offset a higher cost plant,” he said.
“The theory of premiums is great. But … what market is not being satisfied now that you’re going to satisfy? Or whose market are you going to take away from them?”
Cargill already produces certified halal beef at its Dunlop plant in Guelph, Ont., which processes 1,500 head per day.
The Islamic Food and Nutrition Council of America certifies the beef from the Guelph plant, which is much closer to the major Canadian markets for halal beef than Winnipeg.
