Many questions have arisen regarding the possible impact of an explosion Oct. 12 at the new Triumph Foods pork processing plant in St. Joseph, MO. One construction worker was killed, another was seriously hurt and 14 others were treated for less severe injuries. An Associated Press story on Thursday said the blast blew a 150-ft.-wide hole in the roof. In fact, a portion of the roof collapsed as a result of the explosion.
The damage is confined to the administration and cafeteria portions of the plant. The remainder of the plant, including the kill floor, cutting lines, refrigeration and waste treatment areas were unaffected. Triumph management is not at this time predicting how long the delay may be. One source said the plant was due to open in 2-3 weeks.
Five large hog producers and a coalition of smaller producers own the Triumph operation. When the plant opens, the hogs that those groups are currently sending mainly to upper-Midwest plants will be redirected to St. Joseph, creating a need for hogs on the part of former purchasers.
This plant was not yet a factor in cash hog markets, but was probably already having an effect on marketing contract offers in the upper Midwest. Packers need dependable supplies, and the packers losing this supply source have no doubt been trying to secure hogs to replace those currently purchased from Triumph owners.
Market analysts (including me) have considered the possible impact of the Triumph plant on hog prices in 2006 and beyond. It is difficult, though, to quantify that impact, and many have chosen to treat Triumph's entry as a risk factor that could positively impact hog prices. We know the factor will be here. We just do not know how large it might be.
Tracking U.S. Hog Slaughter Capacity
Figure 1 shows packing capacity utilization rates and hog prices from 1994 to the present. The utilization rate can go above 100% due to overtime and Saturday operations. These data go back to 1994 simply because no one ever knew the capacity of the U.S. hog slaughter sector before then. The sector had a substantial amount of excess capacity that was slowly wrung out of the business as new companies entered and new, low-cost plants came on line.
The fall of 1994 created the first possible benchmark for U.S. hog slaughter capacity. Anticipating large hog supplies, agricultural economist Ron Plain of the University of Missouri asked me in a September 1994 phone call whether I thought we could run out of room to slaughter pigs that fall. I laughed. Really, I laughed. The idea, after years and years of ample capacity, was that foreign. After computing the effect of closures by Swift (the old St. Joseph, MO, plant) and Seaboard (Albert Lea, MN), I concluded that Plain's concern was very well-founded.
The "mini-crash" of 1994 was, to my knowledge, the first time producers had real difficulties in moving hogs to slaughter. Delays of up to one week and rising slaughter weights confirmed that capacity was an issue - at least in as much as the capacity was less than producers' desires and needs to move hogs at any given point in time.
Of course, 1994 was just a blip compared to 1998. A large increase in production, coupled with some degree of panic-selling as hog prices fell and significantly fewer shackle spaces all added up to producers' worst financial disaster in history.
Packing Capacity Price Impact Lessens
So what about now? Figure 1 shows that the strong, negative correlation between packing capacity utilization and hog prices (it was -.76 from 1994 through 2002) has lessened markedly in recent years. It now stands at -.49 for 1994 through September 2005.
Much of that decline in correlation was due to price patterns of 2005. Even a run above 100% capacity utilization from September to December last fall did not drive hog prices down significantly. Strong consumer-level pork demand and excellent exports kept product moving, and buoyed hog demand enough to offset the negative price effect that high-capacity utilization rates have had in years past.
Slaughter Capacity Growth
What about the future? The new Triumph plant will still add to slaughter capacity in 2006. Hormel's expansion of its Crete, NE, plant is supposed to be operational in December. Smithfield will lose some capacity in Virginia this fall but gain some spots in Iowa in early 2007. I expect capacity to be 7,200 head/day higher (to 415,075) when the Triumph plant comes on line with one shift. A second shift (the timing is not known for certain, but within one year has been mentioned by Triumph principals) would add another 8,000 head/day.
With hog supplies next year expected to be quite similar to this year, those capacity numbers suggest relatively low utilization rates that should support hog prices.
Click to view graphs.
Steve R. Meyer, Ph.D.
Paragon Economics, Inc.