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$500 million available for expanding meat processing capacity

USDA photo by Lance Cheung Vilsack Rustic Cuts USDA 070821.jpg
MORE MONEY: Ag Secretary Tom Vilsack and Rep. Cindy Axne, visit Rustic Cuts Butcher Shop for the USDA announcement of $500 million for expanded meat and poultry processing capacity as part of efforts to increase competition, level the playing field for family farmers and ranchers, and build a better food system, in Council Bluffs, Iowa, on July 9, 2021.
USDA wants to leverage COVID funds to boost number of small and medium meat processors to increase market competition.

Secretary of Agriculture Tom Vilsack is looking to create an opportunity to reverse what’s happening today in the countryside where livestock producers are selling at a loss only to learn processors are capitalizing on large profits.

While speaking at Council Bluffs, Iowa-based Rustic Cuts on July 9, Vilsack announced USDA’s intent to invest $500 million in American Rescue Plan funds – or the COVID package advanced in the early days of the Biden administration - to expand meat and poultry processing capacity so producers and consumers can have more choices in the marketplace. In addition, USDA will provide more than $150 million to strengthen existing small and very small processing facilities.

Vilsack says over the course of the next few months, he will be listening to those involved in the livestock industry on how to create a more competitive market and leveraging federal, state and local funds to increase processing capacity.

Related: President issues executive order promoting competition

USDA will provide grants, loans and technical assistance to address concentration within the meat and poultry sectors and relieve supply chain bottlenecks by supporting new meat and poultry processing facilities. These facilities will create competitive opportunities for producers in local and regional food systems so that farmers and ranchers have access to better choices and fairer prices.

These announcements mirror two previously introduced bills, the Butcher Block Act and the Small Packer Overtime and Holiday Fee Relief for COVID-19 Act. Rep. Dusty Johnson, R-S.D., and Abigail Spanberger, D-Va., introduced the Butcher Block Act to establish a loan program at USDA rural development for new and expanding meat processors and finance producer investment to drive competition within the meat packing industry. Additionally, it would allocate grants to entities to increase hiring and processing capacity.

In May, Johnson and Rep. Angie Craig, D-Minn., introduced the Small Packer Overtime and Holiday Fee Relief COVID-19 Act to reduce the federal Food Safety Inspection Service charges on overtime for its inspectors. Meatpacking plants with fewer than 10 employees would be required to pay 25% of overtime and holiday fees and FSIS would pay the additional 75%. Plants with 10-500 employees would be required to pay 70% of overtime fees with FSIS paying the additional 30%. 

“These USDA announcements are much-needed and frankly overdue for our cattle producers,” says Johnson. “Producers and members of Congress from cattle country have diligently pushed for a level playing field for small processors to diversify market options outside of the big four for a long time. Today’s announcements may not be the silver bullet to solve all of our problems, but they will certainly get us one step closer to a fairer cattle market.”

Extra capacity needed

The imbalance of excess market-ready cattle supplies in the face of reduced operational packing capacity has put downward pressure on cattle prices. As 2020 revealed, the need for additional diversified and smaller operators in the processing capacity could help, according to testimony offered by Dustin Aherin, vice president, RaboResearch animal protein analyst, during a recent Senate Agriculture Committee cattle market hearing.

According to a recent Rabobank report, an additional daily packing capacity of 5,000 to 6,000 head of fed cattle could restore the historical balance of fed cattle supplies and packing capacity. 

From 2000 to 2015, the U.S. beef industry experienced a net decline of roughly 14,000 head per day in fed cattle processing capacity. Numerous plans for greenfield plants or expansions of existing facilities have been unveiled in recent months. If all of the announced plans for plant construction and expansion come to fruition, roughly 8,000 head of daily fed cattle capacity and nearly 2,000 head of daily non-fed capacity could be added to the US beef industry over the next five years, Aherin explains.

Recognizing current drought conditions, if the beef cow herd declines by 2% or less, there’s opportunity for about 5,000 head per day of profitable packing capacity expansion, he adds.

Related: No easy solution on fixing cattle markets

Building additional capacity does not come without significant risks. The upfront cost of a new or expanded plant is extremely expensive. Industry sources estimate that a new plant costs $100 million to $120 million for every 1,000 head of daily capacity, Aherin says. Increasing construction costs over the past year likely put current costs near or even above the high end of that estimate. Then, a new endeavor must meet regulatory requirements, build a labor force, and keep enough cash on hand to absorb losses.

Vilsack says the $500 million pot of funds can help those organizations looking to expand to have the opportunity to qualify for a grant to reduce the capital input and make it easier to break ground. Interest rates may also be lower through a USDA loan opportunity, which can also provide early wins in seeing this money quickly deliver results, Vilsack says.

Looking for input

Vilsack says over the course of the next few months he will be listening to those in the industry on how to leverage significantly additional capital investment in expanding beef, pork and poultry processing capacity.

USDA issued a Request for Information to solicit public input into its strategy to improve meat and poultry processing infrastructure and will hold targeted stakeholder meetings and other public engagement to better understand the needs, gaps, and barriers to fair and competitive meat processing markets, the agency says.

“We don’t believe we have all of the answers,” Vilsack says, which is why the request for information allows input from those that can benefit from the funds to structure the program in a way to best leverage resources. “We’re not just talking about $500 million, but the power of $500 million to stimulate interest.”

He expects early wins, especially if loans or grants can help those organizations or groups seeking ways to create new markets. He expects at the end of this year, or potentially early 2022, seeing more real interest and starting to see the funds go to work.

While speaking at Rustic Cuts, Vilsack also introduced Chad Tentinger, project developer for Cattlemen’s Heritage Beef Company, which recently announced the upcoming construction of a $325 million beef processing facility in western Iowa. The plant will start by harvesting about 800 head per day for the first several months and ramp up to 1,500 head per day by the end of the first year. 

Tentinger says he knows of many young men and women who want to stay in the cattle business. “Our focus is simply add capacity and work with farmers and producers to create a profitable market for them to participate in.”

Rep. Cindy Axne, D-Iowa, says she’s excited to see this administration get excited about expanding processing on a local level. She says COVID revealed how the supply chain had become funneled into a tight number of plants, especially for beef and pork. “We’ve got to keep young farmers here,” Axne says.

“It’s absolutely imperative we fix this situation because we know what this has done to family farms,” she says.

“I think there’s a lot of demand out there for this. This is just the beginning,” Vilsack says of the grant and loans. “I’m convinced we will need more.” He believes there will be great demand for the funds, and he hopes to provide ammunition to those on Capitol Hill to provide a more permanent structure for this type of activity.

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