Droughts Have Consequences

Just found out about this today - it's already happened.

Cargill Inc. said Thursday that it will indefinitely idle a Texas beef processing plant that employs about 2,000 people, primarily because of a dwindling cattle supply that is largely a result of drought.

The shutdown in Plainview, Texas, appears to be the first among major U.S. beef processing plants, as the industry's profits have been squeezed due to overcapacity.
"The idea of closing one or more of our major beef processing plants is not a big surprise," said Derrell Peel, a livestock specialist at Oklahoma State University's agricultural extension service. "It's been a matter of who blinks first."

Minnetonka-based Cargill is one of the biggest U.S. beef processors, and Plainview is home to one of the agribusiness giant's five sprawling plants that take in live cattle and ship out boxed beef.

The same economic dynamics that led to Cargill's Plainview closing have sent retail U.S. beef prices soaring the past two years, and no relief is in sight. Peel said retail prices could rise as much as 10 percent this year.

That would be after increases of 6.4 percent in 2011 and 10.2 percent in 2012, according to federal data.

Cattle ranchers can't even begin to rebuild their herds -- a multiyear process -- until the drought subsides. "Right now, [relief] of the drought conditions doesn't look very favorable this year," Peel said.

The Plainview shutdown begins Feb. 1, though Cargill says it will take measures to preserve the plant's "infrastructure" for potential reopening if the U.S. cattle herd rebounds. The plant in north Texas processes 4,500 head of cattle per day.

"While idling a major beef plant is unfortunate because of the resulting layoff of good people ... we were compelled to make a decision that would reduce the strain created on our beef business by the reduced cattle supply," Cargill Beef President John Keating said in a prepared statement.

The U.S. cattle herd is at its lowest level since 1952. "Increased feed costs due to the prolonged drought, combined with herd liquidations by cattle ranchers, are severely and adversely contributing to the challenging business conditions we face as an industry," Keating said.

By idling its Plainview plant, Cargill says it can operate three of its other big beef facilities on a five-day-a-week basis more consistently. Cargill plants in Friona, Texas; Dodge City, Kansas; and Fort Morgan, Colo., will receive cattle that normally would be slaughtered in Plainview.

Cargill doesn't break out results for its myriad meat businesses, though it has noted that its U.S. beef profit margins have been under pressure. Many U.S. beef processors are suffering losses or getting poor returns on the investments, Peel said.

The U.S. cattle herd has been in a long-term decline for years, particularly since about 2007, Peel said. Since then, grain prices have shot up due to structural changes in grain markets, thus precipitously boosting the price of cattle feed.

The 2012 drought, the nation's worst in decades, sent corn to over $8 a bushel. The heart of cattle country experienced its second straight year of very arid conditions, toasting pasture land.

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I've hauled tanks for rendered fat and other liquids down there several times over the years. So, until the beef industry picks up again, Cargill Plainview is right out for us. We do business with the other plants as well, but still. The other plants can take up the slack, and I'm glad Dodge City's plant is one where they plan on expanding production, but transportation costs on that pound of hamburger just went up.

What a mess.