In late 2020 when pandemic disruption was at its worst in the US, Rabobank produced a report suggesting that the US industry could accommodate additional beef processing capacity.

They viewed addition or 5,000 to 6,000 head daily extra processing capacity as a means to return meat packing and cattle supplies to the historical balance while retaining factory profitability.

Rabobank also concluded that additional capacity would result in a larger US beef industry in the longer term, capitalising on growing global demand for protein. Alongside this the report suggested that profitability would be more evenly distributed across the supply chain.

This theme was picked up by the Biden administration during 2021 when they publicly blamed the beef processing industry where four groups (Tyson, JBS, National and Cargill) between them control 85% of beef processing capacity for consumer inflation and poor farmgate prices.

This has been disputed by the North American Meat Institute, the trade association that represents factories. It says that over a period of four decades with the present processing structure in place, margins across the supply chain have more or less remained consistent.

Record factory profits

However, with factories posting record profits in 2021 and into 2022, the administration has set about encouraging new entrants to beef processing, hoping to increase competition. To this end they have put in place a $1bn (€944m) fund to support new entrants to beef processing.

The announcement recently by a group of investors of plans to build a state-of-the-art factory at a cost of $1bn (€944m) in South Dakota suggests that there is a willingness to try and break into the US beef processing network.

The ambition is to build a factory with 8,000 per day processing capacity, making it the largest processing facility in the country.

Last week, 667,000 cattle went through US beef factories according to USDA. If a new factory was able to process 40,000 cattle per week, it would immediately give it 6% of the national kill, a number big enough to have a significant impact in the region where it is located.

Challenges for a new factory

However, while funding is essential and a new building should be the most efficient at processing cattle, it takes more to operate a successful meat factory.

With everything else in place, the two further essential ingredients for a successful meat processor are a reliable cattle supply base along with a strong customer portfolio. Securing either of these will be made difficult by the competition. Existing feedlots in the catchment area will undoubtedly get attractive offers from existing processors, driving the cattle cost higher for a new startup.

Similarly, a new business will have to displace existing players in the market in retail and food service.

Coming out of the pandemic when supplies were often disrupted, large valuable customers will proceed carefully in changing suppliers, particularly to a new entrant without proven credentials.

A new entrant risks buying the most expensive cattle and having to sell the beef in second-rate markets until it establishes its credibility.

In many cases, smaller independent beef factories supply the larger groups with product that goes into major supermarkets and burger chains where they don’t have listings themselves.

There is also a level of global market expertise in the larger meat processors that a new independent factory will not have. Beef processing requires selling each component part from the nose to the heel in the most valuable market across the world and failure to know this means less return.

If it succeeds…

Despite the challenge, it would be wrong to say that a new entrant cannot succeed.

With a budget to build the best factory, investors will recruit the best talent in the industry to maximise the chance of making it work.

If a new entrant overcomes the challenges and becomes established then in turn it becomes an attractive target for investors who are most likely to come from within the beef processing industry.

If one of the large players comes along with an offer, the original investors may well take the money if it is an attractive offer which would put the sector back at the start of the cycle again.