Surplus Kill Capacity behind JBS Acquisitions

Cattle processors losing money took opportunity to sell.

Published on: Mar 7, 2008

JBS announced deals this week to acquire the National Beef Packing Company and Smithfield's beef processing operation. One of the questions about the transactions is why?

According to University of Missouri agricultural economist Ron Plain the U.S. has surplus kill capacity in the cattle industry, which has lead to beef processors steadily losing money. That is expected to be the case for quite some time; last year's calf crop was smaller, this year's crop is expected to be down and Plain expects that trend to continue next year which means a lot of red ink for beef processors.

"You've got a situation where not much money is being made," Plain says. "JBS decided that it was a good time to bid for some of these assets because the owners, Smithfield or National Beef or anyone who owns a beef cattle kill plant, hasn't been making money and probably doesn't expect to make much money in the next few years, so it's probably a good time to sell. JBS put together a bid that made National and Smithfield decide they'd just as soon take the cash and let JBS try to figure out how to make a profit in this environment."

The sale of the processing plants really won't change anything for producers according to Plain. The only change will be a different name on building, and a different name on the check.

"The only real concern is whether this makes it more likely to shut down another kill plant," Plain says. "At some point we may see another slaughter plant close, and if that's one close to you that you've put most of your cattle through, it's going to be awfully unhandy because you're going to have a bigger trucking bill to get to the next one."

It's been a tough economic time and we may be in a situation where processors without deep pockets might have been forced to close a plant. With JBS shelling out money for these companies indicates they have deep pockets. Plain says it may actually keep some kill plants running that would have otherwise close.

"Other than changing the names on buildings and stuff," Plain says, "I'm not sure that producers or consumers will notice much of anything different."