The Meat Cartel's Moat
Prime Future 038: the weekly newsletter highlighting trends in animal protein
The whiplash inducing effects of the pandemic highlighted the bottleneck in the meat value chain that sends economic ripples from ranches to food retailers: primary processing.
This has raised the question in many circles, how does the industry create more distributed processing capacity?
Before we dig into the complexity around that question, let's start with the obvious: meat processing is a volume business. The fixed costs associated with building and operating a plant are high, so the more salable pounds that leave the plant, the lower the fixed costs per pound. The pursuit of lowering cost/lb has led to 2 related but distinct dynamics:
Consolidationamong companies who own processing capacity, e.g. 85% of beef processing capacity owned by 4 companies, 63% of pork processing capacity owned by 3 companies.
Concentrationof capacity, e.g. individual plants are getting larger so an individual plant can represent a meaningful % of total industry capacity, as evidenced by the market swings after the loss of 6% of total beef processing capacity from the Tyson Holcomb plant fire.
Consolidation is the natural economic end game in a mature market, and concentration (scale) is the natural end game in a high fixed cost, commodity business. It is what it is. Normally the system functions efficiently and effectively. Yet in 2020 as plants shut down due to pandemic driven labor shortages, producers were left with nowhere to send market ready animals. The backlog of live animals drove livestock prices down while the shortage of meat drove meat prices up. The problem was that producers had few to no other options.
how do we increase processing optionality for producers? What does a more distributed processing industry in the US look like? If the US had more distributed processing capacity, it seems it could not only increase optionality for producers but also for food companies who buy meat, and for more programs/brands, aka more options for value creation from differentiation.
So if the benefits are obvious, why isn’t there more processing capacity outside the large plants / large packers? Why aren’t companies rushing out to build new plants or restart idle plants? Some traps to note…
If you want to build a new plant, it requires a huge upfront capital investment.
If you want to buy an old plant and upgrade it, it’s either a huge investment to upgrade or older equipment means subpar operations and high costs.
Processors make money when they sell the entire carcass, not just the middle meats. Anybody can find a buyer for ribs, but establishing a sales machine and programs to consistently sell the entire carcass is a huge challenge…one that’s been underestimated by almost every producer co-op that bought a plant thinking it can’t be that hard to make those sweet sweet packer profits.
It’s a labor intensive business so access to labor is paramount.
Because of all the above plus the volatility of profits in a commodity market, Private Equity tends to prefer higher margin, more predictable businesses in further processing so access to capital (or finding the right capital) can be an issue for upstarts in primary processing.
Before we go further, let’s also anchor in the 3 types of beef processing plants in the US:
Local custom plants processing <50 head/day
Regional plants processing 500-2,000 head/day, e.g. One World Beef or the Missouri Prime Beef Packers new plant soon to open
The Big Plants processing 4,000+ head/day
Though, of course, category 3 is and will be the high volume category, there’s a place for all 3 types in the grand scheme. But how realistic are the hopes of those wanting to see significant expansion of categories 1 & 2?
Custom processing plants had been on a steady decline for years until March 2020 when demand skyrocketed as consumers turned to local cattle producers to fill their freezers with meat. By the summer, most custom processors had no available processing slots through the end of 2021. Is that level of demand sustainable? I’ve heard a lot of people talk about building new small plants, I’ve seen very few take action. It makes me wonder if there isn’t a private equity play to purchase multiple small plants and roll them up into something with a more strategic marketing approach.
A robust custom processing ecosystem is a pre-requisite for a robust direct sales ecosystem for producers.
When you think about regional plants, there’s a reason these plants change ownership every 4-6 years as the beef cycle fluctuates and the challenges of operating a beef plant profitably settle in. The thing about regional plants is they simply cannot compete with the big plants on cost, so they have to win on marketing & sales strategy. Creekstone or Caviness are good examples of making this model work. This is where I see opportunity. Cue all the aligned/coordinated/virtually integrated supply chains.
A robust regional processing ecosystem is a pre-requisite for a robust aligned supply chain ecosystem.
A marginal option that has been talked about for a long time but has little traction in the US is mobile processing. I’ve heard this is much more common in Australia. The logistics and regulatory challenges seem to be the hurdles to overcome.
Processing is a topic that we kind of avoid talking about with customers/consumers because really, it's not a fun topic for normal people. Normal people aren’t captivated by the glistening stainless steel of a truly pristine facility, unlike us industry weirdos. And yet, why can't the how’s & what’s & why’s of processing become a differentiation point? If marketers have convinced consumers to care about what feed ingredients are in the diet, why aren’t brands capitalizing on the idea of such and such claim about how the animal was harvested? Not to mention, as automation is increasingly incorporated into large plants, doesn't that create an increasing opening for positioning around the contrast? Weirdly, butchering has become a kind of bougie skill among tech bros and the like. That seems like a trend someone could capitalize on.
So we wind up where we began, that there’s no easy answer to this topic or a single obvious solution. Producers need more options, but the seemingly indestructible moat the big packers have is that processing is a high volume business which is why the industry structure today is what it is. And despite the chicken or the egg dynamic here, I’m bullish that as more non-traditional supply chains pop up, these supply chains will create sufficient business cases to drive new investment in processing optionality.
What are interesting business models for processing in other countries?
What interesting trends do you see in this space?
Side note: once again, this conversation pertains mostly to the beef industry, somewhat to pork. Because of vertical integration, this isn't relevant for poultry. It's just a lot more fun to think about beef and pork because the fragmented industry structure creates so many more opportunities for interesting business models. Although upstarts like Shenandoah Valley Organic and Cooks Ventures are proving there could be alternative models in poultry.
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The Automated Farmers Market
Jason Mauck, a corn & soy farmer in Indiana, joined me for a chat on his 2020 purchase of a meat company with the intent to move it from primarily a foodservice supplier to 80% D2C / 20% foodservice. Jason is an advocating of doing a lot of experiments to learn and find what works, the most interesting on for our purposes is “the automated farmers market” that he’s launching in Muncie, Indiana.
3 minute mark for a counter point to traditional corn/soy production and some mental models that drive Jason’s approach
13 minute mark for the context & explanation around the automated farmers market
Perhaps the most notable thing he said was, “taking risks is the best safety net in ag”….watch the video for the full context:
What comes after smartphones?
“What comes after smartphones?” is a great read by venture capitalist Benedict Evans, particularly the mental models as we think about platform technologies like the mainframe, PC, or smartphone that fundamentally changed the game. I’m including this because in the context of agtech applications across livestock and poultry, there’s a lot of room for implementation and adoption of existing technology for high value use cases.
“We’ve spent the last few decades getting to the point that we can now give everyone on earth a cheap, reliable, easy-to-use pocket computer with access to a global information network. But so far, though over 4bn people have one of these things, we’ve only just scratched the surface of what we can do with them. There’s an old saying that the first fifty years of the car industry were about creating car companies and working out what cars should look like, and the second fifty years were about what happened once everyone had a car - they were about McDonalds and Walmart, suburbs and the remaking of the world around the car, for good and of course bad. The innovation in cars became everything around the car. One could suggest the same today about smartphones - now the innovation comes from everything else that happens around them. “