Is There an Upside to Tyson’s Processing Plant Closure?

Small Packers Look to Fill the Gap

Nebraska’s state government along with state cattlemen associations have rallied to support the beef industry in the wake of Tyson’s announcement to close their Lexington processing plant. And rightly so. Cattle are a foundational piece of the state’s economy. The closure will affect far more people than the 3,200 Tyson employees at the Lexington location. Grain farmers, cattle feeders and ag adjacent businesses in the state are all unsure what the fallout could be. 

We’re talking about big numbers. Tyson’s plant currently processes 5,000 head of cattle per day and according to the vice president of Nebraska Cattlemen, Laura Field, losing the plant could take 15% of the state’s slaughter capacity offline. In conjunction with Tyson’s decreased operations in Texas, the nation could lose 7-9% processing capacity. The fact that such a large facility has decided to completely shut down is sending shockwaves through the beef industry. 

Will American beef face a new round of pressure or is this simply the beginning of a healthy redistribution of power inside a sector of agriculture that has been consolidated for a long time?

Packers Have to Consider Downsizing

At some point packers have to make decisions based on actual supply and demand, not on future potential. Cattle producers have experienced some of the highest live cattle prices in decades thanks to a tight national supply. But that same tight supply has pinched farmers who have lost markets and meat processors paying more per head while watching profit margins shrink.  Though the industry has hoped supply would rebound, there have been few indicators that producers are making a significant effort to rebuild national herd numbers.

After multiple years of tight supply and knowing that rebuilding efforts will take at least two years to impact markets, packers will have to start making strategic moves that match real supply dynamics. Downsizing of this scale will now also affect producers who heavily rely on commercial entities.

We’ve seen other operational shifts in the processing sector, but a full shutdown like this hasn’t happened since 2013. For Tyson, it's an opportunity to focus existing resources in the most profitable areas, which could include poultry and pork over beef. Tyson recently invested money into Texas facilities and the closure could simply be a move to consolidate operations to the most modern plants. 

For producers it’s a blow they were not anticipating. Cattle ranches across the country have braced for price drops as beef import negotiations unfold and tariffs continue to influence cattle markets. But Nebraska cattlemen likely didn’t foresee losing a significant local cattle bidder who contributes to competitive pricing for producers. Nor were they contemplating shipping cattle further to be processed and the additional expenses that shift could produce.

The closure could be detrimental for small feeder operations who cannot afford to absorb higher shipping costs or don’t have the number of cattle needed to be able to ship to large facilities. Tyson sources cattle from roughly 4,000 independent farmers in the Midwest, feedlots of all sizes. However, many of these small feed operations could be absorbed by commercial feedlots who have the capacity and herd numbers to seek buyers outside of the Lexington area.

The Potential for Redistribution of Power in the Packing Sector

Interestingly, Tyson’s shutdown comes on the cusp of anti-trust investigations into the Big Four meat packers who have been scrutinized for years because of their monopoly-like influence over the beef industry. Whether or not they have collectively acted to hinder competition, ag experts have worried the sheer size of each entity has weakened smaller, regional food systems. We have to wonder how much water this theory holds as we look at the extensive impact Tyson’s plant closure could have on the town of Lexington, but also the state and the Midwest region as a whole.

We want cheaply, or at least reasonably, priced food, but we also tend to balk at the systems of efficiency that keep food prices approachable. The Lexington shutdown affords us a micro view of what happens when a commercial entity is removed from a supply chain and how private businesses might fill the gaps left behind.

In Nebraska there are small packers that could fill the void. The state already has a new processing plant in North Platte which is designed around a producer-owner model and backed by stakeholders like Walmart.  Its development grew out of a desire to compete with the Big Four and build strength into the beef industry in Nebraska. The North Platte location hopes to employ 850 someday and is currently able to process 1,500 head per day. If they could absorb a percentage of the processing capacity it would be a win for those who want a food system characterized by small regional supply chains.

Hastings, Nebraska is home to a kosher processing plant.  It looks as though the facility will more than double its processing capacity to absorb the Tyson cattle. While it doesn’t change the fact that cattle will have to travel farther to be processed and may even mean producers have to adhere to new quality standards, it is another win for small time packers. As more small packers fill the gap regional food systems are bolstered and competition grows.

Will Tyson Eliminate Competition?

What remains unknown is whether or not Tyson will sell the plant or dismantle it. A sale would be far less disruptive to the beef sector and to the state of Nebraska and would allow a new investor to keep operations running much as they have been. However, Tyson could opt to dismantle the facility and render it unusable.  Investors could be less inclined to purchase such a large plant if they know they need to also cover the cost of new equipment.

The biggest question is: is this the first of many processing plant closures. If Tyson is focusing resources, are the other Big Four considering similar decisions all over the nation?  In the long run, a tight cattle supply might be a catalyst for a complete redistribution of power within the beef industry.

Originally Posted on Stratagerm's Blog