Continual push for profitability drives competition.
The catchphrase, “The only thing that is constant is change” certainly applies to the U.S. and Canadian pork packing sectors. The never-ending effort to maintain profitability in a very competitive business has driven a number of changes this past year.
With shifting fortunes in the world pork market, and a Canadian dollar that is now virtually par with the U.S. dollar, the changes occurring in 2007 may be a harbinger of things to come.
Both U.S. and Canadian packers will deal with the emergence of China as a potentially huge customer and must conform to the specifications of mandatory country-of-origin labeling in the United States come September 2008. And, there is the potential impact of U.S. farm legislation slated for completion later this year.
Growth of U.S. Packing Capacity
The two largest changes in U.S. slaughter capacity for market hogs and light hogs this year were the closure of the Bryan Foods (Sara Lee Corp.) plant in West Point, MS, in March and John Morrell's elimination of the second shift at its Sioux City, IA, plant in February. Those two moves reduced U.S. slaughter capacity by a total of 12,700 head/day.
The Bryan Foods closing is believed to be permanent, while Smithfield has discussed resuming second-shift slaughter operations this fall at its Morrell plant in Iowa. Labor will likely be the primary roadblock. This plant has been on my questionable list for several years because it has minimal processing capabilities and no expansion potential due to its location adjacent to Interstate Highway 29 near downtown Sioux City. With the closure of the Sioux City stockyards a few years back, the Morrell plant is the last vestige of the city's terminal market heyday.
Morrell's Sioux Falls, SD plant and Premium Standard Farms (PSF), another of Smithfield Foods' Midwest subsidiaries, have expanded capacity in 2007. Morrell added 2,000 head/day, while a major expansion at PSF's Milan, MO plant added another 2,900 head/day. A planned 1,150-head/day expansion of Farmland Foods' Denison, IA, plant has been delayed until 2008.
Several other Midwestern packers made small additions to their plant capacity since last year. JSB Swift added 1,000 head/day to the Worthington, MN plant's capacity, while Hormel increased throughput by the same amount at Austin, MN.
Newcomer Triumph Foods ramped up the second shift of its St. Joseph, MO plant in late 2006 and early 2007, and have actually expanded the two-shift capacity another 1,500 head this year to total 17,500 head/day. Finally, Indiana Packers increased the capacity of its Delphi, IN plant by another 1,000 head/day after getting its 2006 expansion fully on line.
Some “new” plants appear in Table 1, although none of those actually commenced operations in 2007. This is the first time they have been individually listed in the capacity estimates.
Premium Iowa Pork of Hospers, IA is the largest of the newcomers at 1,600 head/day slaughter capacity. The other significant addition is Olson Meat Company of Orland, CA with 1,200 head/day capacity.
The sum of all of these changes is a net increase in U.S. market hog and light hog capacity for 2007 of 3,960 head/day, with 3,420 head coming from the newly added plants. But maintaining the capacity of the already-listed plants is rather remarkable given two major reductions.
Sow Slaughter Capacity Declines — Perhaps
The estimated capacities of U.S. packing plants that primarily handle cull breeding animals now totals 19,100 head/day. Only USA Pork Products in Pennsylvania handles a significant number of cull boars. The remainder of the plants handles mainly sows and heavy gilts.
The uncertainty remains because last year's estimated capacity was too high (20,800 head/day).
After last year's update, several sources questioned the size of our estimated 2,600 sows/day in Morrell's Sioux Falls, SD plant, which has processed both market hogs and sows for many years. The number of sows that pass through it is somewhat variable, but last year's capacity estimate of 2,600 was apparently too large. Jeff Luckman, senior vice president for Morrell parent company, Smithfield Foods, reports that sows are not currently being slaughtered at Sioux Falls, so sow capacity for that plant is not listed in this year's estimates.
The only other significant change in this year's estimate of sow and boar slaughter capacity is growth at all three of Johnsonville Foods' plants totaling 600 head/day. Abbyland Foods' Curtiss, WI plant was also expanded from 1,700 to 2,000 head/day.
It appears that the sow slaughter sector faces some challenges in years to come. While weekly sow slaughter has exceeded 2006 levels by as much as 6% this year, the year-to-date figure is now only 1.9% above one year ago.
The U.S. sow herd is growing slightly, but productivity growth will still be the main source of output growth in the future. This sector cannot count on any substantial increases in raw material availability. The numbers suggest we have the capacity to handle 95,000 to 100,000 sows/week even without sow slaughter at Morrell's Sioux Falls plant.
Weekly sow slaughter has ranged between 60,000 and 65,000 head, with some fall spikes up near 70,000, providing ample room for U.S. sow and boar processing.
Will sow slaughter plants close? Perhaps, but many of these companies make branded sausage products that might have enough margin to keep them profitable even with excess capacity. This is a different business than the butcher hog kill-and-cut sector, but it is not immune to economic pressure. The survivors will have to be very good at what they do given this much capacity.
Canada's Cost Squeeze
Nary a week goes by that we do not hear of some change in the Canadian packing sector. It is interesting that talks of new plants and second shifts mingle with news of plant closings and pig price reductions. The main drivers of this change, of course, are the constantly rising Canadian dollar and very high energy prices.
Dermot Hayes of Iowa State University once explained the importance of exchange rates by pointing out that the value of a country's currency basically assigns a relative value (or cost) to that country's fixed assets and labor. When the currency is low, the value and cost of assets and labor are low and the country is quite competitive in international markets. When the currency is high, the cost of those items is high and competitiveness is damaged.
Canada's meat packers have found themselves in the unenviable position of seeing asset and labor costs rise due to the stronger Canadian dollar, while dealing with higher labor costs due to competition from the oil industry. These forces have been particularly difficult for prairie province plants.
Most of the changes to the Canadian weekly slaughter capacity estimates (Table 2) occurred within the top two firms. Olymel, Canada's largest pork packing company in 2006 dropped behind Maple Leaf in this year's rankings. Olymel closed its plant in St. Valerien, Quebec and has had significant difficulties in double-shifting its plant in Red Deer, Alberta. It now appears Olymel's plant in Vallee-Jonction, Quebec is safe after a labor settlement that includes significant reductions in wage rates.
The big question for Olymel is still the status of the second shift at the Red Deer, Alberta plant. We included the second shift in last year's estimates, but second-shift operations never got daily throughput to the rated 80,000-head level and second-shift operations were stopped late last year. Labor is a huge problem in northern Alberta where high oil prices have revived the Canadian oil industry and made Canada's oil shale a cost-efficient oil source. And Olymel has won no friends among suppliers with its plan to cut the price paid for hogs at Red Deer by $Can12/100 kilos. Therefore, we left Red Deer at one-shift capacity until labor and hog supplies indicate that a second shift is actually possible.
Maple Leaf has made the difficult decisions to close two plants and consolidate slaughter at its Brandon, Manitoba facility with only a small net effect on total capacity. While competitive conditions may be difficult due to labor costs and exchange rates, this move is probably the best possible change to keep Maple Leaf competitive as a pork supplier.
The only other significant changes in our Canadian capacity estimates were the closure of Qualiporc in Quebec (likely permanent), and the reopening of the Mitchell, Ontario plant by a partnership between Sunterra (owner of Trochu Meats in Alberta) and U.S. firm Parks Livestock.
Table 2 includes 24,000 head of weekly capacity in “provincial inspected” plants for all years. These are an addition to this year's estimates. I added them to prior years to get an “apples-to-apples” comparison over time.
The bottom line is a significant decline in Canadian capacity to 441,650 head/week. That compares to weekly slaughter that will average barely 400,000 for all of 2007. Canada's average excess capacity of just under 10.5% is actually lower that the 12% average excess capacity of U.S. packers, assuming that U.S. packers will normally run at 5.4 days/week.
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