For years, cattle producers have questioned why so much of the money generated in the beef business seems to accumulate after the animal leaves their operation. Producers assume the risks of raising cattle, while packers, distributors and retailers control much of what happens between the feedlot and the consumer. Now 36 cattle investors in the Texas Panhandle are attempting to change that relationship by financing their own beef-processing facility. What interests me isn’t another packing plant being built. It’s the decision by producers to invest their own capital in a different part of the supply chain rather than remain entirely dependent on the companies purchasing their cattle.
USDA recently announced support for a $24.6 million commercial loan to help finance the proposed facility in Dimmitt, Texas. The plant is designed to process approximately 400 cattle per day and create 220 jobs. The concept is relatively straightforward: instead of earning money only from raising and selling cattle, these investors hope to participate in the additional value created through processing and marketing beef. But there’s an important distinction between gaining access to another revenue stream and actually earning an attractive return from it.
Here’s what makes the timing particularly interesting. American cattle inventories remain historically tight, cattle prices have been strong, and major packers have struggled with the cost of acquiring animals relative to the value of the beef they sell. In other words, these producers are investing in processing at a time when some of the largest, most experienced companies in the business have been having difficulty generating acceptable margins. Owning the packing plant doesn’t eliminate that problem. It means the investors now have to solve it.
A processing operation requires consistent cattle supplies, dependable labor, food-safety compliance, refrigeration, transportation and customers willing to purchase everything the plant produces. Much of the expense continues whether the facility operates at full capacity or not. And there’s another complication: the investors want strong prices for the cattle they raise, but their packing plant needs to purchase cattle at prices that allow it to make money. Those interests won’t always align. The operation can be profitable on one side of the transaction and unprofitable on the other.
I think this is where the story becomes relevant to nearly every sector of agriculture. Corn producers have explored investing in ethanol plants. Soybean producers have considered crushing facilities. Grain producers have built storage and transportation businesses, while others have pursued food manufacturing, specialty ingredients and direct-to-consumer products. The underlying motivation is similar: why settle for the economics of producing a commodity when someone else is generating additional revenue from it? But investing in a soybean crush plant doesn’t automatically make you a more profitable soybean producer. It makes you an investor in a manufacturing business that must purchase soybeans, manage processing margins, find customers and compete against established operators.
The critical question is whether moving farther down the supply chain gives you an actual competitive advantage. Do you have cheaper access to raw materials, better distribution, a differentiated product, stronger customer relationships or a cost structure competitors cannot easily match? Simply being frustrated with the price you receive for your commodity isn’t a business strategy. Neither is assuming that because someone else appears to be making money processing your product, you could necessarily earn the same return.
There’s also the question of how much capital producers should commit outside their core operations. A producer whose wealth is already concentrated in cattle, land and agricultural equipment may not be diversifying by investing in a packing plant dependent on the same cattle market. And while government-backed financing may make a project easier to fund, it doesn’t guarantee profitability. Every dollar committed to a new venture is a dollar unavailable for debt reduction, expansion or another investment opportunity. Sometimes the better answer is a joint venture, a long-term supply agreement or an ownership position in an established business rather than building something entirely new.
I like the ambition behind what these Texas investors are attempting. Agriculture needs more people willing to challenge established business models and find better ways to capture value. But I also think we need to separate the emotional appeal of owning more of the supply chain from the financial reality of operating it. The objective shouldn’t be to control more steps between the producer and consumer. It should be to earn a better return on the capital and risk involved. These 36 investors may have identified an excellent opportunity, but their success will ultimately be measured by profits and cash flow, not the number of cattle they process. The question every producer considering a similar move should ask is simple: Are we investing in a better business, or just buying ourselves another set of problems? (Source: usda, meatpoultry.com)
