Producer output and packer capacity must coincide.

To function efficiently, the U.S.-Canadian pork sector must be a well-tuned interaction of mainly independent businesses. Input suppliers, producers, packers, processors, retailers and foodservice operators must all be “on the same page” in order to deliver to consumers the correct quantity of pork products with the right characteristics in a timely manner.

Stated more succinctly — producers and packers had better be in step with demand! The relationship of producer output and packer capacity is critical to accomplishing this task and maintaining producer prices at equitable levels.

Packing Capacity Benchmark

Prior to 1980, the U.S. pork packing sector was comprised of widely scattered, mainly multi-species, multi-story plants that usually operated just one shift daily. Those characteristics made plants quite flexible and allowed them to easily handle large seasonal variation of hog supplies. At times, fourth-quarter slaughter represented 30% of the year's total.

But those plants also reflected old technology and business models that left them vulnerable to innovative competition.

The competitive balance of the meat industry began to change dramatically by the 1970s. Chicken had gone from being a by-product of the egg business and a relative luxury, as President Hoover promised “a chicken in every pot,” to supplanting pork as a low-cost source of meat protein.

Pressure on pork packer margins and relatively lucrative labor contracts at the major packers of the day — Wilson, Swift, Hormel and Morrell — set off a period of labor unrest that was to open the door for new competitors.

Enter IBP. Iowa Beef Processors had already revolutionized beef slaughter and fabrication with low-cost, frequently non-unionized, efficient operations and boxed beef products. IBP promised to do the same in pork slaughter and fabrication, putting greater competitive pressure on established pork packers.

The advent of species-specific, single-story, high-throughput pork plants began a long period of tight margins that rationalized pork slaughter capacity by driving old, inefficient, poorly-located plants out of business.

That rationalization process collided with higher hog output for the first time in the fall of 1994, when cyclically higher hog numbers and diminished slaughter capacity caused delays in orderly marketings. Live hog prices fell to disastrous levels in the mid-$20s.

The occasion, though, did provide one positive outcome: For the first time in virtually anyone's memory, we had a clear idea of the total capacity of U.S. pork slaughter facilities. A benchmark had been established. Little did we know how important this concept would become just four years later.

Importance of Packing Capacity

The packing-processing sector performs the absolutely necessary function of transforming live hogs into wholesale and retail cuts. It cannot be quickly replaced, and must be paid to perform those services.

Furthermore, no one in the packing-processing sector decides how much to produce. That decision rests solely with the people who breed and farrow sows.

For the pig-pork system to work well, packers must have enough capacity to slaughter and process whatever number of pigs producers can deliver at near optimal market weights in a given time period. If that number nears the capacity of packing facilities, packers' marginal cost (total cost added by the last unit processed) increases dramatically.

Since consumer prices are based, in the short run, on demand and not costs, the increase in packer marginal cost is taken out of the price paid for pigs. Obviously, this can spell potentially disastrous results for producers.

Figure 1 shows the strong negative relationship that existed between slaughter capacity utilization and hog prices from 1994 to 2003. High utilization in the fall of 1994, 1998 and 2002 resulted in low hog prices. Low utilization in 1996-1997 and the summers of 2000 and 2001 resulted in high prices. Note that utilization rates of over 100% in this graph are the result of computing average daily slaughter, using monthly slaughter and the number of slaughter weekdays in a month. The extra slaughter is accomplished by operating extra weekday hours and Saturdays.

This negative relationship between these two variables fell apart to some degree in 2004 because of a huge increase (12%) in hog demand. That increase was the result of higher domestic pork demand, record levels of pork exports and, at least from July 2004 through June 2005, tight packer margins. It appears that the negative relationship has reasserted itself since mid-2005, as capacity utilization has increased and hog prices have fallen.

U.S., Canadian Capacity

U.S. and Canadian slaughter capacities, by plant and company, for 2004 through 2006 are shown in Tables 1-3. Note that Canadian capacity is weekly, while U.S. capacity is daily. Right-justified names in the company column (i.e. Morrell, Farmland) represent companies purchased by the current owner, whose name is left-justifed (i.e. Smithfield) in that same cell.

No expansions of U.S. capacity are anticipated this year. But some capacity increases are quite subtle. Packers often increase throughput without adding plants, plant size or equipment, simply by developing new operational techniques. In fact, the current estimate of U.S. capacity is likely low for this very reason.

Need evidence? Consider the fall of 2004 (Figure 1). Very high-computed capacity utilization — even higher than that of the fall of 1998 — was not accompanied by extremely low prices. This probably occurred because our estimate of capacity is a bit too low, and thus, our computed utilization rate is a bit too high.

Packers aren't necessarily lying about their capacity; they just have every incentive to operate a plant in a manner that increases its output, and they don't always make those changes public.

According to the Canadian Pork Council, Canada's packing sector will grow this year as Olymel completes the expansion of its Red Deer, Alberta plant; the RDA plant in Quebec opens; and two other plants expand slightly.

Plans are in place for significant capacity growth in both the United States and Canada in 2007 and 2008. Table 4 shows these increases, including new plants in Moline, IL, and Winnipeg, Manitoba. The combined increase of 32,850 head/day would represent a 6.4% increase of current combined capacity.

What Does It All Mean?

These data suggest that U.S.-Canadian packing capacity will likely be sufficient for the foreseeable future. Higher U.S. hog supplies and relatively constant Canadian output through the fall of 2007 will increase utilization rates, but likely will not drive them to the problematic levels of years past.

If all planned capacity expansions actually occur, the growth rate of slaughter capacity will be higher than the growth rate of hog production through 2008. This will drive capacity utilization rates lower, putting positive pressure on hog prices and negative pressure on packer margins.

The latter raises the question: “What plant(s) may close?”

The U.S. list provides no clear answers. The plants that are usually considered suspect (Sioux Falls, SD; Monmouth, IL; Louisville KY;) have either seen major modernizing investments, or owe their owners little in terms of fixed costs.

While margins may get tight over the next two years, they are not likely to fall short of variable costs for any long period of time. Consequently, these plants will likely continue to operate. There simply isn't much vulnerable capacity in the United States.

On the other hand, Canada presently has excess slaughter capacity, and the planned expansions will increase that excess.

A number of Canadian plants are older and, at least by U.S. standards, less efficient. The current reduction of the Canadian sow herd, output difficulties related to porcine circovirus-associated disease (PCVAD), and a Canadian dollar that creeps closer and closer to par with the U.S. dollar will put economic pressure on the weaker plants.

The biggest risk for pork producers in both the United States and Canada is that plant closures will be delayed long enough for any reduction in capacity to again coincide with a significant increase in hog numbers. When and if that happens, we could see a repeat of the '98 hog price disaster.

Should the planned sow herd expansions occur, some believe that another 100,000 to 150,000 sows will be added in the United States. There is a greater risk of such a replay. The pork sector simply will not work in the long run with production and packing sectors whose sizes do not match.

Table 1. Estimated Daily Slaughter Capacity (U.S. Plants — Market Hogs and Light Hogs)
(Company headquarters in parenthesis)
Fall 2004 Fall 2005 Projected Fall 2006
Rank Company City/State Plant Co. Total Plant Co. Total Plant Co. Total
1 Smithfield Foods (Smithfield, VA) Tar Heel, NC 32,000 32,000 32,000
Smithfield, VA 7,800 Closed Closed
Gwaltney, VA 9,500 10,800 10,800
Morrell Sioux Falls, SD* 14,400 14,400 14,400
Sioux City, IA 14,500 14,500 14,500
Farmland Crete, NE 10,400 10,400 10,400
Denison, IA 9,200 9,200 9,200
Monmouth, IL 9,000 106,800 9,000 100,300 9,000 100,300
2 Tyson Foods (Dakota Dunes, SD) Waterloo, IA 19,200 19,200 19,200
Logansport, IN 14,500 14,500 14,500
Storm Lake, IA 14,500 15,000 15,000
Col. Junction, IA 9,800 9,800 9,800
Madison, NE 7,500 7,500 7,500
Perry, IA 6,800 72,300 6,800 72,800 6,800 72,800
3 Swift (Greeley, CO) Worthington, MN 17,500 17,500 17,500
Marshalltown, IA 18,500 18,500 18,500
Louisville, KY 10,000 46,000 10,000 46,000 10,000 46,000
4 Excel (Wichita, KS) Beardstown, IL 18,000 18,000 18,000
Ottumwa, IA 18,000 36,000 18,000 36,000 18,000 36,000
5 Hormel (Austin, MN) Austin, MN 18,000 18,000 18,000
Fremont, NE 8,800 26,800 10,500 10,500
Clougherty Los Angeles, CA 7,300 7,300 7,300 35,800 7,300 35,800
6 Prem. Std. (Kansas City, MO) Milan, MO 7,300 7,300 7,300
Clinton, NC 10,000 17,300 10,000 17,300 10,000 17,300
7 Seaboard (Shawnee Mission, KS) Guymon, OK 16,000 16,000 16,000 16,000 16,000 16,000
8 Indiana Packers Corp. (Delphi, IN) Delphi, IN 12,500 12,500 12,500 12,500 12,500 12,500
9 Hatfield Quality Meats (Hatfield, PA) Hatfield, PA 10,200 10,200 10,200 10,200 10,200 10,200
10 Sara Lee (Cincinnati, OH) West Point, MS 6,200 6,200 6,200 6,200 6,200
11 Triumph Foods (St. Joseph, MO) St. Joseph, MO 8,000 8,000 8,000 8,000
12 J.H. Routh (Sandusky, OH) Sandusky, OH 4,200 4,200 4,200 4,200 4,200 4,200
13 Meadowbrook Farms (Rantoul, IL) Rantoul, IL 4,000 4,000 4,000 4,000 4,000 4,000
14 Sioux-Preme (Sioux Center, IA) Sioux Center, IA 3,500 3,500 3,500 3,500 3,500 3,500
15 Greenwood (Greenwood, SC) Greenwood, SC 3,000 3,000 3,000 3,000 3,000 3,000
16 Fisher Ham and Meat (Spring, TX)** Spring, TX 1,500 1,500 1,500
Navasota, TX 500 2000 500 2,000 500 2,000
17 Spectrum Meats (Mount Morris, IL) Mount Morris, IL 1,600 1,600 1,600 1,600 1,600 1,600
18 Yosemite Meat (Modesto, CA) Modesto, CA 1,500 1,500 1,500 1,500 1,500 1,500
19 Leidy's (Souderton, PA) Souderton, PA 1,400 1,400 1,400 1,400 1,400 1,400
20 Vin-Lee-Ron (Mentone, IN)** Mentone, IN 1,100 1,100 1,100 1,100 1,100 1,100
21 Martin's Pork Products (Falcon, NC)** Falcon, NC 1,000 1,000 1,000 1,000 1,000 1,000
22 Cloverdale Foods (Minot, ND) Minot, ND 920 920 920 920 920 920
23 Verschoor Meats (Sioux City, IA)** Sioux City, IA 800 800 800 800 800 800
24 Peoria Packing (Chicago, IL) Chicago, IL 750 750 750 750 750 750
25 The Pork Company (Warsaw, NC)** Warsaw, NC 750 750 750 750 750 750
26 Independent Meat (Twin Falls, ID) Twin Falls, ID 650 650 650 650 650 650
27 Masami Meat Co. (Klammath Falls, OR) Klammath Falls, OR 650 650 650 650 650 650
28 DeKalb Co. Packing (DeKalb, IL) De Kalb, IL 500 500 500 500 500 500
29 Carleton Packing (Carlton, OR) Carleton, OR 375 375 375 375 375 375
30 Lowell Packing (Fitzgerald, GA) Fitzgerald, GA 350 350 350 350 350 350
31 Parks Family Meats (Warsaw, NC) Warsaw, NC 300 300 300 300 300 300
32 Morris Meat Packing (Morris, IL) Morris, IL 200 200 200 200 200 200
33 Southern Quality Meats (Pontotoc, MS)** Pontotoc, MS 130 130 130 130 130 130
TOTAL TOP & LIGHT HOG CAPACITY 380,875 390,775 390,775
TOTAL SOW AND BOAR CAPACITY 20,800 20,800 20,800
TOTAL HOG SLAUGHTER CAPACITY 401,675 411,575 411,575
*2,600 hd/day of capacity is counted for sows.
**These plants mainly slaughter light pigs (total:5,780 head/day).
Table 2. Estimated Weekly Slaughter (Capacity Canadian Federally Inspected Plants)
Fall 2004 Fall 2005 Fall 2006
Rank Company City Province Plant Company Plant Company Plant Company
1 Olymel Vallée-Jonction Quebec 35,000 35,000 35,000
St-Valerien Quebec 38,000 38,000 38,000
Brochu St-Esprit Quebec 15,000 27,000 27,000
Brochu St-Henri Quebec 15,000
Fletchers Red Deer Alberta 45,000 148,000 60,000 160,000 80,000 180,000
2 Maple Leaf Foods Brandon Manitoba 45,000 45,000 45,000
Burlington Ontario 43,500 43,500 43,500
Charlottetown Prince Edward Island 5,000 5,000 5,000
Berwick Nova Scotia 6,000 7,500 7,500
Lethbridge Alberta 6,500 6,500 6,500
Schneider Winnipeg Manitoba 17,500 123,500 17,500 125,000 17,500 125,000
3 Quality Meat Packers Toronto Ontario 30,000 30,000 33,000 33,000 33,000 33,000
4 Abattoir St-Alexandre St. Alexandre Quebec 15,500 15,500 20,000 20,000 20,000 20,000
5 Du Breton Rivière-du-Loup Quebec 18,000 18,000 18,000 18,000 18,000 18,000
6 Mitchell's Saskatoon Saskatchewan 18,000 18,000 18,000 18,000 18,000 18,000
7 Springhill Farms Neepawa Manitoba 18,000 18,000 18,000 18,000 18,000 18,000
8 Trahan Yamachiche Quebec 12,000 12,000 15,000 15,000 15,000 15,000
9 Agromex St-Blaise Quebec 10,000 10,000 12,000 12,000 13,000 13,000
10 Conestoga Breslau Ontario 12,500 12,500 12,500 12,500 12,500 12,500
11 RDA Les Cèdres Quebec 10,000 10,000
12 Britco Export Packers Langley British Columbia 6,000 6,000 6,000 6,000 6,000 6,000
13 Lucyporc Yamachiche Quebec 3,500 3,500 4,500 4,500 4,500 4,500
14 Kamouraska St-Pascal Quebec 3,500 3,500 3,500 3,500 4,000 4,000
15 Trochu Meats Trochu Alberta 3,500 3,500 3,500 3,500 3,500 3,500
16 J&M Meats International Warburg Alberta 3,000 3,000 3,000 3,000 3,000 3,000
17 Hébert Ste-Hélène-de-Bagot Quebec 2,500 2,500 2,500 2,500 2,500 2,500
18 Oronor Lorrainville Quebec 1,000 1,000 1,000 1,000 1,000 1,000
19 Giroux East Angus Quebec 1,000 1,000 1,000 1,000 1,000 1,000
20 Sturgeon Valley St. Albert Alberta 1,000 1,000 1,000 1,000 1,000 1,000
West Perth / Newco Mitchell Ontario 5,000 5,000
Worldwide Pork Moose Jaw Saskatchewan 5,500 5,500
Best Brand (formerly Forgan) Winnipeg Manitoba 10,000 10,000
TOTAL WEEKLY CAPACITY 451,000 457,500 489,000
Source: Canadian Pork Council
Table 3. Estimated Daily U.S. Slaughter Capacity (Sows & Boars)
Fall 2005 & Projected Fall 2006
Rank Company Plant Plant Co. Total
1 Morrell Sioux Falls, SD 2,600* 2,600
2 Jimmy Dean (Sara Lee) Newburn, TN 2,600 2,600
3 Johnsonville Watertown, WI 600
Momence, IL 1,350
Oldham's Sausage Holton, KS 600 2,550
4 Pine Ridge Farms Des Moines, IA 2,500 2,500
5 Pork King Packing Marengo, IL 2,000 2,000
6 USA Pork Products** Hazellton, PA 2,000 2,000
7 Abbyland Foods Curtiss, WI 1,700 1,700
8 Bob Evans Farms Bidwell, OH 200
Xenia, OH 300
Hillsdale, MI 300
Galva, IL 300
Owens Sausage Richardson, TX 600 1,700
9 Odom's Little Rock, AR 1,000 1,000
10 Calihan Peoria, IL 425 425
11 F.B. Purnell Sausage Simsonville, KY 400 400
12 J.C. Potter (Atlantic Premium Brands) Durant, OK 400 400
13 Williams Sausage Company Union City, KY 400 400
14 Dean Sausage Atalla, AL 225 225
15 Wampler's Sausage Lenoir City, TN 200 200
16 Gunnoe Sausage Goode, VA 100 100
TOTAL 20,800
*Morrell sow capacity is estimated. Sioux Falls plant kills both top hogs and sows.
** USA Pork Products kills 80% boars, 20% butcher hogs.
Table 4. Expected New Market Hog Slaughter Capacity, 2007-2008
New Capacity In:
Company Plant 2007 2008 Source of New Capacity
Triumph Foods (St. Joseph, MO) St. Joseph, MO 8,000 Second shift
Moline, IL 8,000 New plant, first shift
Trim-Rite (Carpentersville, IL) Freeport, IL 4,000 New plant — break ground Q2-'06, open Q2-'07
Premium Standard Farms Milan, MO 2,700 Expansion — planned opening Q2-'07
Farmland Foods Denison, IA 1,150 Expansion — adding 1,150 hd/day in 2007
TOTAL NEW U.S. CAPACITY 15,850 8,000
OlyWest (Canada) Winnipeg, MB 9,000 New plant — Olymel, Hytek & Big Sky
TOTAL NEW U.S.-CANADA CAPACITY 15,850 17,000