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Timing Good for New Plant Opening

This week brings news of an actual increase in North American slaughter capacity with the commencement of slaughter operations at Triumph Foods in St. Joseph, MO. The company announced there are currently 500 workers and another 500 will be added over the next 18 months as the plant ramps up operations to slaughter and process 8,000 head/day. The plant is designed to handle a second shift of that size, but there has been no announcement about when a second shift might be added.

The plant's opening had been delayed since October when a natural gas explosion killed one construction worker and injured 14 others.

It's an interesting dynamic for St. Joseph. The town has a long history as the home of a major terminal market and, at one time, several packing plants. There had been no slaughter facility in St. Joe since the 1995 closure of the Swift pork plant.

The new plant is built on the same site as the Swift plant. In a real sense, it's a "back to the future" event.

The business arrangement of this firm is interesting. Several large U.S. producers and a cooperative of over 400 smaller producers own the plant. Seaboard Foods -- a company that was unsuccessful in locating a plant in St. Joseph just a few years ago will handle product marketing. Triumph's CEO is Rick Hoffman, a former CEO at Seaboard.

That business arrangement suggests that the effect of this plant's opening may be quite different as well. New slaughter facilities face three main challenges: hog supply, sales and operations.

Triumph's producer ownership means that hog supply will not be a significant problem. The shift of the owners' hogs to the Triumph plant will cause other packers to chase hogs. In fact, other packers have been trying to build relationships with new suppliers. Rearranging hog supplies will likely keep packer demand for hogs strong for much of 2006.

Sales are usually the biggest hurdle, but that may be solved by the arrangement with Seaboard. Though Seaboard has the sales system and contacts in place, it still has never sold this amount of product.

The key to how smoothly the sales hurdle is surmounted will likely depend on how well Seaboard identifies customers of other packers who may not be getting enough product. While not nearly as high as the hurdle facing a completely new entrant in the packing business, this aspect of the startup will still be a challenge.

That leaves only operations. Every plant has to work out the kinks in the equipment, get the workers trained, discover those ideas that looked great on paper but don't look so great in reality, etc. All of us have been through similar challenges in our businesses, but this packing plant is probably far more complicated than anything we do!

Market Impact
The timing of the entire issue may still be very good. We didn't have a capacity crunch last fall. At present, we are looking at a very modest increase in hog supplies this year, although supplies could increase sharply given the Canadian corn tariffs/rebates and the incentives those create for shipping hogs to the United States. And, productivity gains could increase supplies further. Add all of that up and we will need the plant.

It is still questionable if we need this plant PLUS a new one in Canada PLUS another Triumph plant in Illinois PLUS some other expansions. On that last point, Triumph's Missouri neighbor, Premium Standard Farms, announced last week its plans for a 2,600-head/day expansion of its Milan, MO, plant.

February and April Chicago Mercantile Exchange Lean Hogs futures have been in choppy trading ranges since mid-December and it will probably take some significant move in the cash market to drive them out. That doesn't often happen in January and February where there is really no pork cut that has much seasonal strength.

Summer Lean Hogs futures have seen a nice rally the past two weeks and are all within shooting distance of the contract life highs set back in early November. Those highs are meeting resistance at this point and any break of that resistance will be a sign to look for selling opportunities.

October-December Lean Hogs futures have not shared the summer contracts' strength -- yet. There is a strong historical tendency for fall hog futures to rise from Jan. 1 to early April. The caveat to that tendency (the "on the other hand" we economists are so famous for) is that just the opposite happened in 1994, 1998 and 2002. Among those three years, only 1998 saw significantly higher breeding and market herd inventories in the December 1997 report. The other years reflected only modest increases in the December reports -- much like this year.

The fall futures contracts are priced at levels that would be profitable for many producers. If you fear that this could be a '94 or '02, perhaps some sell stops one to two limits below the market make sense. Options are, at least theoretically, an alternative but they carry a lot of time value this early and the market nine to 11 months out is very thin.

"Marketing by inactivity" is not a good option this year. Make sure that "waiting" is an action step and not just procrastination.

Click to view graphs.

Steve R. Meyer, Ph.D.
Paragon Economics, Inc.