Cargill Inc., the largest U.S. beef processor, will idle a Texas processing plant after the size of the cattle herd fell to a 60-year low and drought increased feed costs. Cattle futures dropped.
The Plainview plant will stop operations at the close of business on Feb. 1 to reduce the strain on the company’s beef business, John Keating, president of Cargill Beef, said today in a statement. The plant employs 2,000 people and those affected by the closing will get help finding jobs elsewhere, Minneapolis-based Cargill said in the statement.
“Given the overcapacity that exists with four major beef plants in the Texas Panhandle and a dwindling supply of cattle in the region, idling Plainview will allow Cargill to operate its other beef plants in Texas, Colorado and Kansas more consistently on a five-day-per-week basis,” Keating said.
The U.S. beef-packing industry has 10 percent to 15 percent excess capacity, with the highest level in the southern plains where Plainview is located, said David Nelson, an agricultural global strategist for Rabobank International in Chicago. Herd liquidation intensified in that region during the 2011 drought, he said in a telephone interview today.
While the U.S. in the last year has been hit by the worst drought since the 1930s, Texas is among states that have suffered from dryness and lack of rain since 2011. Drought conditions are expected to persist through the Great Plains and spread across most of Texas, according to a three-month U.S. outlook by the Climate Protection Center.
“The industry does need to rationalize capacity to match up to lower cattle supply,” Nelson said. Idling the Plainview plant will help Cargill “alleviate that situation,” he said.
Cattle futures for April delivery fell by the 3-cent exchange limit to $1.297 a pound earlier today on the Chicago Mercantile Exchange, while feeder-cattle futures for March settlement declined by the 3-cent exchange limit as well.
Cargill’s remaining beef processing plants in Texas, Kansas and Colorado will receive cattle destined for Plainview, according to the statement. Cargill beef facilities in California, Wisconsin, Pennsylvania and Nebraska and two plants in Canada are unaffected.
Cargill doesn’t plan to sell the Planview plant, Mike Martin, a spokesman for the closely held company, said in a telephone interview today. He declined to comment on how long the plant will be idled.
“We don’t think there will be a reversal in the national cattle herd for a number of years,” he said.
Idling of the Plainview plant may be positive for Tyson Foods Inc. (TSN:US), said Tim Ramey, a Lake Oswego, Oregon-based analyst for D.A. Davidson & Co. who has a buy rating on the shares. Cargill is the largest U.S. beef processor followed by Tyson, according to Tyson’s 2011 Factbook.
Tyson rose 3.9 percent to $21.26 at 3:20 p.m. in New York. The shares gained as much as 4.8 percent earlier, the biggest intraday gain since Nov. 19.
In November, Tyson said the number of cattle that are available for slaughter may decline 2 to 3 percent in the year ahead. While it expects adequate supplies for its plants, there may be periods of imbalance and its beef-segment profit may be below its “normalized range” of 2.5 percent to 4.5 percent, the company forecast on Nov. 19.
Gary Mickelson, a spokesman for Springdale, Arkansas-based Tyson, declined to immediately comment in a phone interview.
“The southern plains have been the hardest hit by drought and cattle availability,” Ramey said in a telephone interview today. “It probably has a positive impact on industry margins given less competition for cattle.”
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