Consolidation may not be enough

Ahead of the Heard

The recent announcement by XL Foods that it was closing two processing plants came as no surprise to the cattle industry. The main culprit was deemed to be an ongoing decrease in the cattle herd with fewer animals being available for all the processing capacity that is available. That’s true to an extent, but there is more to the story as one might suspect.

Firstly, producers are quick to suspect that anything that packers do has an ulterior motive and is bound to cost them in some form or another. There may be some truth to that, but big packers are faced everyday with a massive costly infrastructure in people and facilities that has to be kept operating – hopefully at a profit. It takes two things to address that reality – a huge flow of cattle and a huge flow of cash. The processing industry has painfully found out over the past 30 years that consolidation is the only answer if you want to stay in business.

XL Foods in the form of the Nilsson brothers has had a storied history, starting as humble cattle marketers to become the second largest beef packer in Canada. But the cattle and beef business is a rough and tough business and not for the faint of heart. It takes guts and money to survive and not everyone is going to love you. The economics can be brutal and as some hopeful upstarts like Rancher’s Beef quickly found out, it can be fatal.

The main thing that has driven the success and downturn of the feedlot and beef packing business in Canada has been the value of the Canadian dollar. When the dollar was 70 cents or less, making money on beef export sales to the USA was pretty steady even if it cost more to operate in Canada. But for the big packers it wasn’t only an appreciating loonie that has driven profits away its the ever increasing costs of doing business in Canada.

Feedlot operators and packers have found that the high flying loonie makes it very difficult to keep cattle from crossing the border. It’s made their costs higher than their US counterparts. Market analysts have stated that is the crux of the matter and not as much declining cattle numbers, although that remains a factor. Canadian processors claim that they are also faced with operating regulations imposed by government agencies that their American competitors do not face. With an open border, it was inevitable that cattle would go to the highest price.

In the case of XL Foods there would seem to be other economic drivers. They bought the massive Tyson plant in Brooks which was operating at under capacity. With smaller plants in Moose Jaw and Calgary, it would seem that consolidation was just a matter time. Economies of scale would seem to dictate that regardless of market conditions, consolidating processing at one big plant would make sense for any company. The Calgary plants, located within city limits, are probably costly to operate considering high city taxes, waste disposal costs, environmental restrictions and an urban society that really doesn’t like such industrial activity too close to home. From that perspective, it’s a wonder XL didn’t close the plants sooner. One assumes that this consolidation will give XL some breathing room and allow it to better compete for cattle that are going south.

Analysts have noted that be that as may, consolidation may not be enough to stay in business unless the cattle herd stops shrinking. Higher cattle prices usually cause producers to expand their herds and the cycle starts over again. But there are some other factors out there that are causing some producer apprehension about expanding or even staying in the business. A significant number of cattle producers after years of losses are quitting altogether, it’s going to take much higher prices to change that trend.

The other factor causing producers to quit isn’t economic as much as it is exasperation with a never ending stream of new government regulations. Sometimes it’s the little things that drives people crazy – case in point is cattle ID, age verification and the traceability drama. To many producers, that has become the straw that broke the bull’s back. Whatever the argument as to why it is all needed, it’s become the whipping boy as to government busybodiness in raising cattle.

The problem is it just doesn’t seem to end and the result is many producers are voting with their feet right out of the cattle business.