CO-LOCATION OF INDUSTRIES WITH LIVESTOCK SLAUGHTER FACILITIES

Transcription

1 CO-LOCATION OF INDUSTRIES WITH LIVESTOCK SLAUGHTER FACILITIES

2 CO-LOCATION OF INDUSTRIES WITH SMALL LIVESTOCK SLAUGHTER FACILITIES IN THE MIDWEST Presented By Iowa State University Extension Value-Added Agriculture Program In Cooperation With The North Central Initiative For Small Farms And The Leopold Center For Sustainable Agriculture Prepared By Reginald Clause Mary Holz-Clause Sara Durhkopf A. Severin Johnson Rick Parker Madeline Schultz Craig Tordsen November 20, 2003

3 Foreword In business as in life, there are people who challenge the comment, "that is just how things are done." That we have these contrarians among us is good for business and the American economy. For if these contrary thinkers did not emerge to challenge a status quo, we would never find the next levels. We would have stopped seeking them. This brings us to the matters under study in this paper. There are those who seek to succeed in meat production, processing and marketing by creating a completely different model for doing so. These people believe bigger is not necessarily better. They believe that the large consolidated meat packing industry and its resident support systems of consolidated feedlots is not a sustainable business model. Furthermore it may be argued that such business models do not sustain communities and rural environments. These are the innovators who view a supply chain as a whole system--one which does not exist in a vacuum. The beef and pork industries are consolidated and continue to become more so. Industry experts and leaders consider these major trends and their attendant realities to be, just how it is. Contemporary analysts and leaders may have forgotten that many aspects of today s industry were once non-existent and were in fact spurned as uneconomical, unnecessary or unreasonable. Indeed the players in the industry do change over time. While there is no doubt about the power and efficiency of the meat industry in its dominant current form, there are still others seeking the next levels. Today there are value added groups looking for different models. These groups within production agriculture are motivated to try something new--small scale meat processing and guerrilla marketing. However this strategic differentiation presents some challenges. This study will seek to support the motivation of these farmers. But, by support we do not mean a blind acceptance of myths. This manual is not a how to guide for idealistic forays into the mean world of meat. The authors are also not willing to blandly repudiate the economic power of the current majority of the meat system. Every attempt was made to collect objective evidence to support or challenge the feasibility of small scale and multi-species processing of meat. Within these pages are realities that will be very difficult to overcome. Overtime, a business must make a profit. Farmers will not succeed with sustainability, if there are weak links. All the links in the supply chain must be equally strong for a group to succeed in the meat business. While it is clear that innovation often bucks convention and pushes against prevailing trends, the authors observe the following: the findings of the report show significant hurdles to overcome in making the small, multi-species plants and co-location of by product processing economically viable. This means those wishing to compete using this model will need to be extremely diligent in planning, well funded at startup, persistent in management and excellent in marketing. Mary Holz-Clause ii

4 TABLE OF CONTENTS Foreword..ii Executive Summary....iv Background..1 Upper Mississippi Valley Meats Cooperative New Zealand Style Processing....2 Market Realities and Perspectives..4 Case Study Example...5 Objectives and Methods..7 Project Findings..8 Livestock Slaughter ;..8 Meat Industry Competition...8 Slaughter Process Overview...12 By-Product Industry Business Development..29 Business Model Strategic Process Business Plan Results and Discussion..52 Small Facilities in Iowa 52 Co-Location Opportunities...55 Business Development Recommendations...61 Appendix 63 Bibliography..72 iii

5 EXECUTIVE SUMMARY Iowa State University Extension, with funding from the Leopold Center for Sustainable Agriculture and the North Central Initiative for Small Farm Profitability (a USDA-funded project) examined the potential for co-location of industries next to small, multi-species slaughter plants. A group of Iowa producers [Upper Mississippi Family Meats (UMFM)] interested in utilizing many of the tenets of the New Zealand meat packing supply chain to process natural and organic meats is the central focus of this study. The authors were asked to objectively analyze potential industries that could locate next to a specialized slaughter facility and to study the co-products they might produce. Background Meat Processing Industry Status Quo The meat processing industry is an evolved input/output model. The markets associated with the standard meat processing business model have evolved as well. These markets ebb and flow in a more or less direct relationship to the financial needs of the industry. This industry lives on narrow profit margins. To develop these margins the meat packing industry has focused heavily on costs, which has taken them to high volume, fast turnaround, disassembly line technology, and management. Although these processors don t generally trade in organic and natural products, the traditional packers determine the base market prices for livestock, meat products and co-products. A Different Approach UMFM has been examining the use of a different plan, often referred to as the New Zealand Model. This model is intriguingly different from the standard US meat plant. It does the same things but on a smaller scale. It focuses on diversity of species, low throughput, light environmental footprint, and low social impact. The difficulty is that the inputs must be sourced from a marketplace that is established by the standard US processor. The small processor must meet or exceed market values for the livestock inputs irregardless of their other variable costs. On the output side a similar situation exists. Major processors establish the value for all the products coming out of a meat processing operation. The difficulty with the small plant, especially if it is not located optimally, is that it will have much higher operating costs on a per unit basis. In nearly every category, it is difficult to operate even close to the efficiencies of larger plants. The small plant cannot operate in a market vacuum. Traditionally the kill costs of an abattoir are borne by the hide and offal values. However, this is not possible in a small plant. The market for hides is volatile. If they must be transported to a tannery, that cost is discounted from the price. Additional discounts apply if the volume is low per pickup, or if the plant needs to store the hides to accumulate volume. The same issues apply to offal. A significant marketing and sales iv

6 budget would be required to merely get the offal side to be revenue neutral. The market for these items is flooded domestically, adding to the difficulty. It is quite conceivable that edible offal would all have to go into render from this size of plant. In fact, the actual render volumes are small and will likely result in pickup fees. In other words, hides and offal are not likely to be revenue centers in a small meat processing business and are most likely to be cost centers. Objectives and Methods This study was conducted using information gleaned from interviews with industry experts (whom often insisted on anonymity), store visits and internet research, library research and previous industry knowledge. As needed, outside consultants were employed to fill in the gaps of knowledge beyond the scope of the principal investigators. This study reflects the findings of the authors who collectively have more than 180 years of experience in the meat industry. Project Findings Livestock and meat processing is a dynamic industry that is driven by the economics of volume and margin. The United States slaughters more than 35 million head of cattle, 98 million hogs, 3.5 million sheep and lambs, and.5 million goats each year. This study looks at the top competitors in beef, pork, lamb and goat packing. The activities involved in meat processing are discussed and shown in a process flow diagram. The by-products of livestock slaughter, their uses and value are described in great detail in an effort to determine the most likely industries to co-locate with small livestock slaughter facilities. Strategic planning and decision making are important parts of developing a business plan for a new value-added agriculture cooperative business. Farmers and others involved in the process must develop new skills in leadership, goal agreement, and building community support. This study recommends members of new cooperative businesses begin with a wants and needs assessment. Next, the members should work through feasibility issues, and finally develop a strong business plan that will demonstrate longterm viability of the business. This study provides examples of business models, priority questions that need to be answered, business plan check lists, and other essential tools in the planning process. Results and Discussion The objectives of the UMFM group and the New Zealand model will only be met if the business is profitable. So the question becomes, How best can a firm adopt a small, multi-species processing model and mitigate the higher operating costs? Since hides and offal will not support these operating costs as they do for large scale competitors, edible meat products must bear a greater portion of the operating costs. Edible meat products from the smaller plant must bring a significantly higher price in the market than v

7 similar commodity products. Ideally, the small business will also realize returns from colocated niche industries. Co-Location Industries It appears unrealistic to expect [standard meat processing] ancillary service businesses to co-locate around a plant of small size. These businesses operate on even tighter margins than a meat processor and therefore must be close to more significant sources of their inputs and/or close to output markets. Further, if the location doesn t offer other favorable aspects, (low cost labor, great roads, higher value product, etc.) the prospects of attracting ancillary businesses will be more difficult. The authors discovered a few small niche areas that provide some opportunity for development of co-located businesses including: Organic Pet Food The organic pet food industry represents an opportunity, but volumes are likely too small to justify co-location. However, this is a growing market. Trade sources quote that the market for organic pet foods is $21 million, but in the opinion of the authors of this paper, the total market for all non-commodity pet foods is upwards of $300 million. This segment of the industry uses non-traditional ingredients such as natural or organic products in pet food formulations. Organic Bones Beef bones can be cooked and used in organic soup stock. This process uses oldfashioned inexpensive cooking and drying technology. The resultant powder can be sold as an ingredient to be used in organic soups and ready meals. Though small (estimated to be $1 million in sales a year), this is a growing segment of the organic food industry and the supply of organically certified ingredients is short. The resultant bones could then be broken, ground and bagged as steamed bone meal for organic flower gardeners. Fertilizer There is limited potential for using cattle or hog waste (including but not limited to paunch manure) as fertilizer. The market opportunity may be greater among those who value the benefits of organic fertilizer and who will buy it for use in household gardens (about a $500,000 per year industry) rather than any large scale commercial applications. Composting of paunch manure near the plant is practical and the market price for such compost ranges from $3 ton to $5 ton. Co-location near organic farmers who would prefer not to use compost from conventionally fed cattle or hogs is a possible market niche. vi

8 Edible Offal One of the best ways to capture the value of the packing plant s drop credits is to locally sell the edible offal. There is precedence for this. Two small facilities in Sioux City, Iowa and Geneva, Minnesota are selling edible offal directly to consumers, primarily Hispanic and Asian descent. This might mean establishing a retail outlet on-premise and literally selling it out the back door. However it is doubtful if the market will pay more for organic edible offal. Several other co-product possibilities were critiqued and examined, but deemed not viable at this time: Packing House Residue for Energy We are aware that there have been several attempts to utilize by-products for energy. Theoretically, fat can be burned. There needs to be some processing to bring the fats into a fuel standard so they will work in boilers, pumps, etc. However, that technology is not fully developed at this time. Additionally, paunch manure can be converted via a methane digester. But again cost- effective technology does not exist at this time for this to occur. Pharma Products Although this is a very secretive industry, there are groups utilizing New Zealand style facilities. There are several important considerations: Organic is not that important Traceability is very important Multi-specie plant is a problem Beef is the most important source of pharma products Pork is the next most important Customers prefer to work with larger slaughter facilities Plant location near a major airport is very important Plant location near an interstate highway is very important Hides and Skins There seems to be no incremental value for the hides or skins coming from an organically raised animal. However, the authors found there is a premium paid for native beef hides, which have no brands, insect infestations, or barbed wire marks. It is doubtful that the planned annual slaughter of 15,000 head from the UMFM facility would be sufficient to entice a tannery and a leather operation to move nearby. Additionally, there is no premium for the corium layer from organically raised animals, and the volume from any small plant is too small. Coruim is manufactured into artificial sausage casings. vii

9 Inedible Offal Regarding offal, the most effective way to mitigate the likely cost of disposal would be to co-locate this plant near existing rendering. Trucking, Truck Wash, Cold Storage Scale also limits the co-location opportunities for services such as trucking, truck wash and cold storage. Most small packing plants require inbound and outbound trucking, but not enough to warrant a company setting up shop near the plant. The same is true for a truck wash dedicated to livestock trucks. Outside cold storage facilities can be an important ingredient to the success of a small plant. But they have more impact on the location of the slaughter plant than vice versa. Business Development Recommendations Success in small business models that include meat processing and niche markets begins with: A systems approach that holistically understands and manages the fullness of the supply chain. All activities are back budgeted from the customer s needs. Innovation is a constant and pervasive theme in goal setting, management and marketing. Economics is a key driver and operating margins are fundamental. The business concept that includes a small meat processing plant will have higher operating costs than conventional larger processors. This reality can only be mitigated by addressing two issues more effectively than the conventional competitor. First, the business must achieve system efficiency such that inputs are precisely channeled to this processor. Second, all output products must precisely meet a higher value customer demand, resulting in a price premium. Co-location of ancillary businesses will be problematic because of the size of the contemplated processing business. Industries such as packaging, those utilizing byproducts, trucking, and feedlot operations, will only be attracted if the location offers a compelling economic improvement to the business. By-products are a fact of life in all food processing. These are either product streams or waste streams. The study looks at many possible uses for meat processing by-products. In virtually every case the by-products must be further processed but the volume is too low to support further processing businesses. The product attributes, which command premiums on meat products, generally do not apply to the by-products. Attributes such as organic, natural, farmer grown, grass fed, niche genetics, identity preservation all have a premium value to certain customers. But, these aspects tend not to bring any value to the by-product side. The possible exception is organic pet food, which is a substantial market. viii

10 In general, conventional market values apply for by-products, making transportation cost and volume the dominant issues in marketing this side of the process. Volumes are too low to attract co-location even if the attributes are compelling. The study supports the difficulty in attracting a critical mass of ancillary business at this scale of operation. While it is not impossible to image the co-location vision, it appears much more likely that it won t occur. It is recommended that planning for such a business model include looking at the opposite viewpoint as well. Review the possibility of co-locating a new processing/management unit near the necessary ancillary services or outlet markets. Emphasis should be on the by-product market. The study reinforces the need to plan strategically. The small meat processing business is generally supported by livestock producers looking for better markets. That fact means that the plant would be located to optimize the producer s needs. But, the study would suggest that there is another set of factors that may determine where to locate initially. This other set is primarily the further processors of the by-product. The organic pet food industry appears to offer opportunity. Innovation is the prime directive of the niche processor/marketer. The business will do a full array of things that are exactly the same functions as a mega processor. The question is, what will we do differently? The innovations may be in relationships within the supply chain. Or the innovations may be in the technology. Or the innovations may be in the product. This will be a multi-dimensional and dynamic environment. The product and process attributes may be compelling enough to attract a lot of customers. However, due to size (volume) and the strategic location the plant may be unlikely to attract co-location alliances. The premium attributes in the product are difficult or impossible to maintain and control over time. Eventually, whatever premium was there will erode as competitors find ways into that market. This is the reason for innovation as a prime directive in this business. The study suggests that the desired business model is bucking some trends in meat processing. The concluding recommendation: Do not attempt to buck the prevailing customer trend. That trend is a customer expectation of improving value over time. To achieve this expectation, production and processing business must consistently reduce cost. Success in business is measured in profit (net margin). In every industry the most profitable businesses will operate by lowering cost and delivering the best customer value (lowering price). This will achieve the producer s objectives of a better market and a reward for doing things well. ix

11 BACKGROUND Many farmers in the Midwest are exploring the opportunity to market their crops and livestock through channels or methods other than the traditional commodity alternatives. To fit their value systems, as well as carving out a marketing niche, many have chosen to either raise animals organically, or by some definition of natural, i.e., as grass fed or with minimal use of chemical, medicinal and other inputs. Upper Mississippi Valley Meats Cooperative One such group is Upper Mississippi Family Meats Cooperative (UMFM). Located in Northeast Iowa, the cooperative was organized in March Initially, the group started as several separate livestock groups, and came together in their collective desire to investigate a meat processing facility to process their livestock. The cooperative members outlined the following as their cooperative s guiding principals and values: Sustainability and humane production - both the future processing of animals and the production practices in which the animals were raised must follow current and future sustainable practices sensitive to the environment and natural resources. UMFM believes in focusing a facility on sustainably produced livestock (organic, grass-finished, free-range, natural, etc), building partnerships with cooperatives, marketers, and distributors of these foods and in the process encouraging more sustainable practices in the region. Local ownership structure - UMFM believes in an ownership structure controlled by producers and local partners with built-in guarantees to stay that way. Appropriate scale facility - UMFM farms and communities are small and diverse. UMFM believes in a small-scale facility that will not overwhelm or dominate the communities and landscape, and a facility that can process multiple species grown in the area. Sustainable processing facility - UMFM believes in a facility that fits into the landscape, is self-sufficient, fouls neither air nor water, and achieves high levels of synergy with co-located business or industry. Humane and hygienic practices - UMFM believes in a facility that practices both humane handling and slaughter techniques and achieves the highest levels of hygiene found anywhere in the world. Community and worker friendly - UMFM believes in a facility and management that values workers, families, and communities, and is rewarded with efficiency and productivity. UMFM in partnership with Blooming Prairie and CROPP Cooperatives commissioned a study to investigate the possibilities of a processing facility, which could extend the values and production methods of the producers through the value chain, and to explore the feasibility of such a facility. Dr. Keith DeHaan, President of Food and Livestock Planning, Inc., Kansas City, Missouri and ProAnd International, Ltd conducted the 1

12 commissioned study. Dr. DeHaan has had a distinguished career in the meat business, working for Farmland Industries and other meat companies, before embarking upon his own consulting company. ProAnd International is a meat plan design firm from New Zealand. The firm tends to draw strong tendencies and influence from European companies. ProAnd also does market analyses. Their U.S. representative is Food and Livestock Planning, Inc. ProAnd and Food and Livestock Planning conducted a feasibility study for UMFM that was completed in June The study focused on a facility, which would be a multi-species plant with the annual capacity to process 14,000 beef cattle per year, 17,500 market hogs and 7,500 market lambs in a single shift. The plant was estimated to cost $7.1 million for the property, plant and equipment (PPE). This study is proprietary information of UMFM. There was no discussion of offal, hides, or rendering in the study. A further processing addition to the plant was estimated to cost $2.74 million for the plant and equipment. The plant addition would manufacture ground meats, sausage, cured and cooked/smoked meats and portion controlled case-ready fresh meats. Organic and naturally raised animals would be the marketing focus of the products coming from the plant. New Zealand Style Processing The New Zealand model for processing plants is much smaller than traditional U.S. slaughter facilities. Typically, these plants produce at a rate percent below the large-volume U.S. plants. Because of their need for reduced labor, ( workers,) which is said to be conducive to a more stable labor situation, these plants are touted as a sustainable model. For instance, one plant on the North Island of New Zealand has an annual labor turnover rate of just seven percent. It is suggested this more stable workforce means that workers can be better-trained for their jobs, which is critical for hazard analysis critical control points (HACCP) and other food-safety regulatory initiatives. Proponents of the New Zealand facilities also suggest that since smaller plants, on a dayto-day basis; require less livestock, they can fulfill their needs from nearby local farmers and ranchers. The expectation, extrapolated out, is that the local economy would be supported and stabilized. Moreover, with a reduced livestock need, these plants require smaller holding pens, atypical of U.S. operations, and thus don't have the manure run-off problems prevalent at some U.S. plants. Additionally, because of the slower-paced chain speeds, it is suggested that the bettertrained workers can spend more time working on each carcass, primal and sub primal. Food safety and attention to details are strong tenets of the New Zealand system. To ensure lower microbe counts, preventative steps such as washing the livestock thoroughly 2

13 before slaughter, and the utilization of plastic weasand clips, which are stronger and more easily applied than other clips help to lower pathogen-loaded materials in the plant. This differing philosophy of prevention versus intervention delineates the New Zealand style from the U.S. "You Yanks assume the meat's dirty coming into the plant and you've got to clean it up. We assume it's clean and we've got to keep it that way," said Wayne Fergus, the production manager at Riverlands Eltham plant on the North Island in New Zealand, and quoted in an article written by Steve Bjerklie. The kill lines in New Zealand style plants feature none of the pathogen intervention equipment common to large-volume U.S. plants. (Bjerklie) Additionally bar-code and laser-scan technology, which help processors track and manage product from kill-floor to shipping dock are used throughout the New Zealand system. Application of these technologies may be more feasible when integrated into the initial plant layout. This application coupled with the lower chain speeds are conducive to accurate data capture. Additional features/benefits of the New Zealand Processing System as outlined in the UMFM feasibility study include: Minimal complex equipment Minimum overhead costs Compact size Flexible design. Additional product recovery as and when required. Minimum facilities at start-up. Add operations without interrupting the on-going process Direct production costs reduced 40 percent No water on the carcasses Hot, warm or cold boning options Side or quarter on rail boning Fewer hands touching the carcass U.S. Experience with the New Zealand Model Bellingham, Washington is the site of the only New Zealand style processing plant which has been built by ProAnd in the U.S. The facility was a beef slaughter facility and was killing 200 animals per day. It is currently closed and has had two ownership groups since it was built. Neither ownership group was able to profitably run the facility. (Keith DeHaan, conversations in April, May 2003) ProAnd has never constructed a plant which slaughters hogs and has never done a three species plant before. (Conversations with Keith DeHaan, conversations in April, May 2003) Iowa Experience In addition to the interest by UMFM, there are several other producer groups in Iowa that are interested in a multi-species slaughter plant. These producers believe in natural, organic, grass-fed or other niche markets and feel they can obtain extra value from their 3

14 livestock. In order to gain more control over the process and end product as well as better access to those markets, they choose to pursue their own packing houses. Ethical considerations sometimes play a role as well, as in the value statements of the members exploring the New Zealand model facilities. Iowa State University s Extension Value Added Ag Program was commissioned by the Leopold Center at Iowa State University to explore market options and niches for byproduct from these multi-species slaughter facilities. Market Realities and Perspectives Niche beef, pork and lamb operations typically focus their marketing plans on the muscle meats. If successful, the operations are able to achieve premiums for muscle meats that more than off-set the higher cost of production, slaughter and fabrication. But these plans rarely take into account the importance of co-product in the packing plant profit equation. By-product generates between $60 to $85-$90 for beef and $4-$7 for pork per animal. If niche beef, pork or lamb operations do not realize a return for the co-product, then they must get an even larger premium for the muscle meats. Small packing houses are at a cost disadvantage to large packing houses. This disadvantage is exacerbated by the small operation s inability to effectively market offal and hides. The U.S. beef industry is highly concentrated at the feedlot and packer levels. This is a result of movement toward industrial efficiency. While the current model may seem disagreeable to some, the fact remains that the system is efficient.. The U.S. cattle herd has shrunk nearly 30 percent in the past twenty years or less and still produces record tonnage of meat because the weights and yields are higher. Increased efficiency has made it possible for most sectors of the beef chain to be profitable, often enough to stay in business. The drive to system efficiency is consistent with all foods. In fact, the protein sources have all accepted this trend toward cheaper and higher quality. If UMFM believes deeply enough in the smaller modular systems of production and processing, there is the possibility of financial success. However, the reader must understand that the proposed model goes substantially against a monster trend. Consolidation is driven by an urge to survive, more than the urge to dominate. Optimizing economies of scale has been a hallmark of the meat processor for decades. Two things will over-ride the good faith and best efforts of a small packer. These are operating costs and competitive revenue streams. First, the smaller models all accept higher incremental costs. Second, the packing industry has frequently paid its operating costs out of the hide and offal value. This study will show that there is little value opportunity for either hides or offal from a plant of this scale unless this plant co-locates near an end user. The value of these materials will not support much transportation cost. Hides are subject to spoilage and deteriorization. In terms of hides, if the plant cannot maintain hide quality until load lots can be accumulated, the value can become negative. 4

15 Supply and demand are such that this small operation will not operate in a vacuum. There is more offal produced than can be sold every day, with the result that much of it goes into the render. Even the largest packers cannot merchandise all the offal they produce, and they have the best opportunity. The issue becomes one of logistics. Using the old saying, the money is in the haul, the operations that can consistently fill containers or trucks and manage efficiently will get the business. The operations that can consistently fill a retailer s needs will get the business. In today s retailing world it is often important to the end user that their supplier has more than one location. These are issues that will constrain the small model from competing either on costs or to even gain access to certain markets. The evolved production and processing systems of major meat packers have improved along financial objectives and in terms of product quality. If the small processor is able to differentiate with organic, natural or other specific premium attributes the processor may be competitive. The operation will have to get premium value for fresh meat products in order to overcome the higher operating costs and lack of value for the offal. Additionally it is very hard to move beef rough cuts and also usually end meats or cuts. Extraordinary marketing zeal and skill may overcome some uncompetitiveness but that seems unlikely given the general history of the industry. The large packer doesn t need to be overtly predatory when the small competitor is saddled with very high breakevens. The mainstream packers serve mainstream America, namely the consumers that want inexpensive food. For most middle class persons this is the choice they make. For lower income people it can be a necessity. While there are premium markets for food, they tend to be in geographic and income pockets and are expensive to serve. Producer objectives need to be weighed against these realities. If certain aspects are worth subsidizing in the business model, there will need to be offsetting revenues to allow that. If having a packing plant will enable the more profitable aspects of the business model, then perhaps the less efficient processing plant is a key. One immutable fact is that the values of inputs and outputs to a plant, large or small are governed by the total marketplace. In a world where you don t make the market, you must control your costs to have a margin. It will be that margin that keeps a company in business to meet other objectives. Case Study Example One example of a co-location success would be Garden City, Kansas. Until the 1960s this area was primarily a lowly agriculture economy based primarily on dry land wheat and cattle grazing. The community is far from any population centers. There was no political advantage to exploit. Few jobs existed and value-added activities were few as well. The local economy labored against the reality of long transportation distances for what it did produce and this transportation cost was discounted from the already low market value of the produce. 5

16 Today the town has a tremendous meat processing base, thousands of jobs, burgeoning ancillary businesses and an overall different look. Was it the building of the original packing plant that caused this transformation? As always, that sort of question should lead one to examine the why a bit more deeply. The agriculturalists in this region were not simply pessimistic, although they could have found many reasons to be so. Some farmers began to sink irrigation wells into the substantial aquifers of the area. This water changed the productivity of the land enabling the farmers to grow corn, which was too high a risk crop without irrigation. The big pivot irrigation systems were a transforming technology. Quite suddenly a new commodity became dominant and brought with it a broader set of uses. The transportation problem, however, still existed and actually was exacerbated by the enhanced production. So, one solution led to another problem. The rational response to this problem was to add value to the corn at the source so that higher value products were transported away. This led to the cattle feeding businesses that sprang up in the region. But, this was a risky and capital intensive business so it strained the ability of the local economy to support the capitalization. Once again a solution led to a problem. To meet the capitalization need there was an expansion of commercial banking but that would never be sufficient to meet the needs since retail money was all they could supply. So, the commercial feedlot industry was born. These feeding businesses, all of which started relatively small, sought out customers that could bring cash to the feeding business in the form of cattle. The feedlot then started to sell feed and feeding services for customers who would own the cattle in the hope of making a profit. This solution to the capital problem supported growth in the individual businesses, the banks as well as support services and manufacturing. It is no accident that companies developed slip-form methods for building fence line feed-bunks. The companies building feedlot equipment such as mixer wagons, electronic scales, gates, working chutes, engineering contractors, millwrights, etc. also saw fit to emerge in the region. It should be noted that the region benefited magnificently from the federal feed grain subsidy programs, which were developed primarily to benefit upper Midwest states. And other federal policies helped as well. For example, until the 1986 tax code changes, these feedlots were able to exploit tax loss feeding which offered value to the customers who were in effect capitalizing the feedlots. The continuing development of information systems and analysis tools was important as well. These businesses were early adopters of mini computers and later the micro computers utilizing proprietary software. These three aspects were enhancing factors and not purely enabling. So, now we ve moved from a very low level of risky commodity production with poor markets into the next level of local markets that add value. But, these cattle still had to be transported long distances. However, the trend in meat packing at the time had shifted to a strategy of locating the plants near the cattle. A leader in that trend, beginning circa 1961, was IBP. So, the Garden City meat production system began to emerge. With the packing plant we saw the emergence of box plants, cold storage, trucking companies, 6

17 rendering and hides, further processing of meat products, municipal water treatment facilities, repair and maintenance services, hotels, restaurants, retail stores, golf courses, airport expansion and on it went. So, was it the original packing plant that generated the success of this community? This short analysis is not definitive. What it shows is that there may be technology that tips the balance enough to send a trend into a slightly different direction. The analysis also suggests that other factors may be enhancing while not being enabling. And a more indepth examination of the root of the change will show two things: 1) Local producers and businessmen were both motivated and hopeful they could improve their circumstance. 2) Almost none of these people could dream broadly enough to imagine the scope of possibilities. OBJECTIVES AND METHODS Objectives To identify and describe possible operations to co-locate with the proposed New Zealand style meat processing facility. The focus outlined in the proposal included exploring market niches for sustainable and organic products from the hides, skins and pelts; pharmaceutical items; pet food items; animal feed items and; products that would lend themselves to composting/anaerobic digestion of waste for soil amendments or energy. To identify opportunities between proposed co-located businesses. Networking opportunities between proposed co-located businesses. Methodology This study was conducted using information gleaned from interviews with industry experts (whom often insisted on anonymity), store visits and internet research, library research and previous industry knowledge. As needed, outside consultants were employed to fill in the gaps of knowledge beyond the scope of the principal investigators. Additionally the members of this study team have met with representatives of UMFM to share preliminary findings of the study. Members of the study team will provide copies of the report to the Iowa Departments of Agriculture and Land Stewardship, Economic Development and Natural Resources. Additionally information and findings will be shared with the Iowa Area Development Group, an economic development firm sponsored by the rural electric cooperatives in the state, Cybus Capital, which administers the Value Added Ag Venture Capital Fund, Venture Capital Network of Iowa (VINI), a collection of venture capital companies who help foster development of, and financing for, new venture capital ideas in the state, and interested farm and agricultural organizations. 7

18 PROJECT FINDINGS LIVESTOCK SLAUGHTER Meat Industry Competition The following will provide a brief overview of the beef, pork and lamb processing industry in the U.S. Beef Industry The U.S. is the world s largest producer of beef. The U.S. is also the largest fed-cattle industry in the world, primarily high-quality grain-fed beef used for both domestic and export use. According to the National Agricultural Statistics Service, (NASS) there are million head of cattle in the U.S. The U.S. slaughtered more than 35.3 million head of cattle in Steers and heifers accounted for 28.9 million animals, cows were 5.7 million and bulls and stags were 630,000 head. (Meat and Poultry 2002 Facts) More than ninety-seven percent of the cattle were slaughtered in federally inspected plants and 1.7 million head were slaughtered in state inspected plants. More than 26.4 billion pounds of dressed beef entered the marketplace from U.S. processing plants. There are 723 federally inspected beef slaughter facilities in the U.S. However, many of the states only have a federal inspection system, so small locker plants in those states are federally inspected and included in these numbers. In Iowa there are only eight federally inspected beef plants, (Meat and Poultry 2002 Facts) four of these process any noticeable quantities. The four plants are Postville, Amend Packing in Des Moines, IBP/Tyson in Denison and Iowa Quality Beef Supply Cooperative/American Foods Group. The 29 largest beef packers in the U.S., on average slaughtered 102,600 head per day and have the capacity to kill 131,955 head per day. The top three meat packers in the U.S. have the capacity to kill 84,700 head per day. (Cattle Buyers Weekly, Yearly Summary) The top beef packers in the U.S. are: 1. Tyson Foods, Springdale, AR 2. Excel Corp, Wichita, KS 3. Swift and Company, Greeley, CO 4. Farmland National Beef, Kansas City, MO 5. Smithfield Foods, Smithfield, VA 6. Rosen Meat Group, Fairmont, MN 7. Greater Omaha Packing Company, Omaha, NE 8. Nebraska Beef Ltd, Omaha, NE 9. Beef Packers, Inc., Fresno, CA 10. American Foods Group, Green Bay, SI 8

19 11. Brawley Beef LLC, Brawley, CA 12. Shapiro Packing Co, Augusta, GA 13. Sam Kane Beef Processors, Corpus Christi, TX 14. L and H Packing Companies, San Antonia, TX 15. Washington Beef, Inc, Toppenish, WA 16. Harris Ranch Beef Co, Selma, CA 17. PM Beef Holdings, LLC, Richmond, VA 18. Lone Star Beef Processors, San Angelo, TX 19. Caviness Valley Meat Co., Hereford, TX 20. Central Valley Meat Co, Hanford, CA 21. Martin s Wholesale Meats, Godwin, NC 22. San Angelo Packing Co., San Angelo, TX 23. Aurora Packing Co., North Aurora, IL 24. Booker Packing Co, Booker, TX 25. Brown Packing Co., Gaffney, SC 26. Agriprocessors, Inc., Brooklyn, NY 27. Simplot Meat Products, Nampa, ID 28. Hallmark Meat Packing, Chino, CA 29. Minnesota Beef Industries, Buffalo Lake, MN (Cattle Buyers Weekly, Rankings 2002) More than three percent of all cattle slaughtered in the U.S. met the USDA grading specifications for prime, 52.4 percent were choice, 30.0 percent select and less that.5 percent was standard and lower grade. Twenty three percent of the cattle slaughtered in the U.S. were not graded. (Meat and Poultry 2002 Facts) Pork Industry The U.S. is the world s second-largest producer of pork. China is the largest. According to NASS, there are 58.9 million hogs in the U.S., and 52.9 million are market hogs. Commercial hog slaughter during 2002 was 98.1 million hogs. The four largest pork processing firms account for 59 percent of the total U.S. slaughter capacity. The nation s top five firms and estimated capacities were: 1. Smithfield Foods, estimated daily slaughter capacity of 79, Tyson Foods, estimated daily slaughter capacity of 67, Con Agra (Swift) estimated daily slaughter capacity of 39, Excel Corp estimated daily slaughter capacity of 29, Hormel estimated daily slaughter capacity of 31,700 Other major hog slaughter operations in 2002 were: 6. Farmland Foods, estimated daily slaughter capacity of 22,000, (declared bankruptcy in Summer 2003) 7. Premium Standard, estimated daily slaughter capacity of 19, Seaboard, estimated daily slaughter capacity of 16, Indiana Packers, estimated daily slaughter capacity of 13, Sara Lee Corp, estimated daily slaughter capacity of 8,200 (Sterling Marketing, Inc, Meat and Poultry Facts) 9

20 In 2002, there were an estimated 699 federal hog slaughter facilities in the U.S. More than 64 percent of the federally inspected plants slaughter less than 1,000 hogs per year. Nineteen plants kill more than 2,000,000 hogs per year. As of July 1, 2003, there are 17 federally inspected slaughter facilities in Iowa They are located in Sioux Center, Estherville, Boyden, Sioux City (2), Hospers, Denison, Storm Lake, Waterloo, Des Moines (2), Columbus Junction, Wellsburg, Perry, Ottumwa, Jewell and Decorah. More than 28 percent of the hogs slaughtered in the U.S. go through plants located in Iowa. (Meat and Poultry 2002 Facts) Lamb Industry As of January 2002, the U.S. had 6.69 million sheep and lambs. (National Association of Ag Statistics) In 1942, the sheep industry of the U.S. peaked with 56 million head. The top five sheep and lamb producing states are Texas, California, Wyoming, South Dakota and Colorado. In 2001 there were 3.5 million sheep killed. 90 percent were killed in the 538 federally inspected U.S. sheep slaughter facilities. However, there is heavy concentration in the sheep kill facilities and more than 84 percent of the sheep were killed in plants that slaughter more than 100,000 head per year. (AgMRC Web site) Iowa has five federally inspected sheep and lamb facilities that kill/and/or process more than 453,300 animals per year. Other significant sheep and lamb processing states are Colorado with 16 plants and 1.07 million sheep killed, and Texas with 17 plants and 421,000 lamb and sheep killed per year. (Meat and Poultry, 2002 Facts) Due to the higher ethnic populations, lamb consumption is heavier on the East and West Coasts of the U.S. Greeks, Hispanics and Middle Easterners and people of the Jewish religion, as well as Native Americans, account for more lamb consumption than other groups. There are several lamb slaughter facilities in the U.S. The larger ones are: Iowa Lamb Corp. in Hawarden, Iowa and Rancher s Lamb in San Angelo, TX. Iowa Lamb Corporation is owned in part, by the lamb producers that supply it. The producerowners supply the plant during the typical Midwestern delivery season (result of spring lambing) of August to February. The plant slaughters 45,000 head per year and is one of the largest lamb processing plants in the U.S. There are about 4,000 lambs that are certified as organic, as well as about one million acres of pasture that are certified as organic. 10

21 Goats The USDA does not keep a goat census, but trade publications and breed associations estimate there are approximately 1.9 million meat-type goats in the U.S. herd. In 1999, there were 492,000 goats slaughtered at federally inspected plants. According to long time industry observers there were another 300,000 slaughtered in state inspected facilities or on-farm. The majority of the U.S. meat goats are raised in Texas and other southwestern states and then transported to the slaughterhouses relatively near consumption, with the exception of the large slaughter in New Jersey. Roughly onethird of all federally inspected goat slaughter takes place in New Jersey. (Iowa agopportunity.org web site) Meat Industry The meat industry is dominated by several large firms, as evidenced by the table below: Figure 1. Top 20 Meat Companies (Ranked by 2001 Sales) Rank Company and Location 2001 Sales (MIL$) Number of Workers Number of Plants 1 Tyson Foods, Inc Springdale, AR $24, , Excel Corp/Cargill Inc 1 - Wichita, KS $12, , ConAgra Foods, Inc Omaha, NE $10, , Smithfield Foods, Inc - Smithfield, VA $5, , Sara Lee Meats Group Cordova, TN $4, , Farmland Meats Group Kansas City, MO $4, , Kraft Foods, Inc Madison, WI $3, , Hormel Foods Corp. Austin, MN $3, , Perdue Farms, Inc Salisbury, MD $2, , Pilgrims Pride Corp Pittsburgh, TX $2, , Keystone Foods, LLC 2 Philadelphia, PA $2,400.0 NA NA 11 OSI International Food Ltd. 2 Aurora, IL $2,400.0 NA 7 13 ContiGroup Companies, Inc. New York, NY $2, , Gold Kist, Inc Atlanta, GA $1, , Sysco Corp. Houston, TX $1,400.0 NA Foster Farms Livingston, CA $1, , Seaboard Corp 3 Shawnee Mission, KS $1, , Empire Beef Co. Rochester, NY $ Greater Omaha Packing Co. Omaha, NE $ Sanderson Farms, Inc. Laurel, MS $ Source: Meat Processing Magazine 1 Sales do not include Cargill s turkey operations 2 Estimate 3 Does not include operations sold to ConAgra Poultry 4 Sales may include non-meat items 11

22 Slaughter Process Overview The economics of the world s competitive meat industry necessitates value is derived from animal co-products. If animal co-products are not effectively utilized, a valuable source of potential revenue is lost. Further, the added and increasing cost of disposal of these products is incurred by the individual firm as well as the industry. Today the cost of the live animal often exceeds the selling price of its carcass; therefore the expense of slaughter and the profit generated for the meat-slaughtering operations must be offset by the value of the by-product. Bengtsson and Holmqvist (1984) suggested that seven percent to 12 percent of slaughterhouse income could come from by-products and coproducts. Bowater and Gustafson (1998) gave a figure of 15 percent and reported that some plants were as high as 32.5 percent. Hwever, over the last several years the value of animal by-product relative to the value of the live animal has declined. (Hedrick, etc al., 1994). This is due to the technological progress in producing competitive products from non-animal sources such as synthetic materials to replace leather, synthetic fibers to replace wool, vegetable oils to replace animal fat, and synthetic detergents to replace soap made from animal fat, etc. Meat slaughtering incorporates a range of activities, from simple slaughtering and butchering of various species, through to complex cooked, and preserved production. These processes add value to the product by dividing it into smaller units or transforming them into more complex products. A variety of species are slaughtered for meat production including beef cattle, pigs, sheep, and poultry and to a lesser extent goats, kangaroos and deer. The following figure shows the generic process for meat processing, however steps can vary depending on the species slaughtered. 12