It Boils Down to Supply and Demand

By Chris McClure, Contributing Editor

My wife is a realtor. It isn’t the same thing as a packer, but for some reason, I see a parallel between what is happening in her industry and what is going on in the meat packing industry. The real estate business has been booming for the last few years and everyone seems to think the fastest way to get wealthy is to become a realtor, so they get their license. The problem is that there is an oversupply of realtors and an undersupply of properties available for sale – at least in some markets.

When we moved back to the Amarillo area, she attended a local meeting of realtors and learned that there were approximately 1,000 of them in the local association and only 300 houses listed. The lack of available inventory makes it very difficult to garner a share of the market, but if you have a listing, it is not difficult to get it sold. I suspect there will be a lot of newly minted realtors who give up and let their licenses lapse.

The meat packing industry has enjoyed a time of sizable profits in the last couple of years. Some of those quoted margins have reached what most of us perceive as obscene levels. I’ve heard many cattlemen complain about losing money on every calf born while packer profits have soared to more than $1,000 per head. It makes for some hurt feelings and knee-jerk reactions.

Our memories are short, though. It hasn’t been too many years ago that those same packers were losing a significant amount on every head harvested. I don’t think the losses ever ran in the thousands, but they did dig quite a hole for a while.

We are in an industry of cycles. There are annual cycles and there are longer cycles, such as the expanding and contracting cow herd. Once upon a time, we could expect the cattle cycle would be about 10 years, but recently it has been less predictable. Those cycles affect prices from the supply side of the supply-demand equation.

Supply and demand is another area in which our memories are deficient at times. The supply and demand for cattle is not necessarily the same as the supply and demand for beef. That’s the primary reason those packer profits got out of line. Cattlemen supplied more cattle than the packers could harvest due to labor issues and aging plants at the same time that demand for beef outstripped the ability of the packers to meet the need. The combination of the two supply-demand equations meant that the price of cattle faced downward pressure while the price of beef enjoyed upward pressure.

So, in our wisdom, we decided to do something about the situation. The efforts crossed a number of fronts, including sought-for government intervention with the packers, government funds to “fix” the problem and private investment to create competition. I think we’ve been down some of these roads before – both in our industry and in other industries.

With the exception of a small number of plants, the packing industry is faced with aging infrastructure. Many plants are outdated and no longer efficient. New plants will theoretically be able to incorporate the newest technology and operate at levels of efficiency that will make them competitive – even against the legacy behemoths.

Just like those “newbie” realtors who expect to grab a share of the booming market in real estate, the “newbie” packers expect to garner a chunk of those huge packer margins (which, by the way, are shrinking). “If they can do it, so can I,” is the typical cowboy response. When I look at the For Sale signs on properties in the area, I see a repetition of the same names, over and over. The “newbies” are struggling because they don’t have the experience or connections necessary to become one of the “big dawgs.” When the dust settles, the old names still dominate the market.

How many times have we seen the newcomer go under? Are we about to see another cycle of that occur in the packing industry? I’ve always heard the best place to be is in a position to pick up the pieces at about 10 cents on the dollar. Maybe that’s how the legacy packers plan to replace their aging infrastructure.

Yeah, I know this seems to be doom and gloom. We are pretty good in this industry about blaming our problems on someone else. I suspect the base issue is that we don’t know how to work together. Oh, there are a few cooperative efforts out there where partnerships or cooperatives are forming in order to build new packing capacity, but the reality is that our track record of rowing in the same direction isn’t particularly good.

Even if the efforts to build new packing capacity succeed, we are still faced with aging infrastructure within the industry. Every few years, we hear of a plant being shut down due to lack of water, labor or something else – usually they are just worn out and not worth refurbishing. So, we build another 10,000-head-per-day capacity and someone else mothballs 11,000 head of capacity. The net impact on the cattle industry is still “Where are we in the cattle cycle?” If the herd has expanded and there is a greater supply than can be harvested, the cow-calf guy will lose money. If, on the other hand, we have contracted and demand exceeds supply, the cow-calf guy will make money. It’s all about supply and demand.

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