With: Elliott Dennis, Assistant Professor and Extension Livestock Economist, UNL Agricultural Economics; Charlie McPherson, Nebraska Business Development Center Director; and Dave Aiken, Professor and Extension Agricultural and Water Law Specialist, UNL Agricultural Economics.
This webinar will cover how meat processing size has evolved and discuss the financial concerns associated with starting a new meat processing plant. It will also address food safety issues that should be considered when deciding on either a custom exempt or federally inspected plant.
Webinar Recording:
Webinar Summary/Recap
Listen: Nebraska FARMcast
The following is a summary of the webinar, “Developing A Meat Processing Plant: Financial and Legal Issues,” given Oct. 12, 2021, as part of the Center for Agriculture Profitability’s weekly webinar series housed in the Department of Agricultural Economics at the University of Nebraska-Lincoln. This webinar was the first of two webinars focused on the current state and potential growth of the meat processing industry. The second webinar is entitled “Grant Opportunities for New and Existing Meat Processing Plants.” Both webinars can be accessed at https://cap.unl.edu/webinars.
Current Situation
During COVID-19, meat processing plants came under increased scrutiny about plant working conditions and what plants were doing to control the spread of COVID-19. At that time, cases per capita were rising faster in counties where there were livestock and poultry processing plants relative to counties without a processing plant. Meat and poultry processing plants responded to this by allowing workers to take paid time off due to active or suspected illness and implemented CDC and OSHA-approved safety measures. Some measures included increased spacing between workers, hanging plexiglass and face masks. As a result of these measures, the available labor force and chain speeds were reduced. This, in turn, caused harvest-ready cattle to be backed up, reducing farm gate prices and, in extreme cases, led to euthanizing animals.
These market disruptions highlighted the structure and size of the meat processing industry. Larger plants are more efficient (i.e. lower average cost per unit) than smaller plants because they can process a larger number of animals by building plant locations close to livestock and with workers specializing in one task. Rapidly rising retail meat and poultry prices have led both the public and livestock producers to be concerned about the size and consolidation of meat processing plants. Congress responded to these concerns by launching an investigation and passing several spending bills that allocated money to help aid new and existing “Very Small” and “Small” meat processing plants. The purpose of this webinar is to address the financial and legal implications of building or renovating a meat processing plant.
Meat Processing Plant Types and Locations
All meat processing plants are subject to one of three types of inspection. The first was inspected by the United States Department of Agriculture Food and Safety Inspection Service (USDA-FSIS), state-run inspection programs, and custom exempt. State-run inspection programs must be equal to or greater than federally inspected plant requirements but the state pays the cost of inspectors. Custom exempt plants cannot sell meat for retail use and must document everyone that either partially or wholly owns the processed livestock. The primary focus in most research tends to be on federally inspected plants because more than 98% of all meat and poultry production occurs in federally inspected plants.
The USDA FSIS has created a public dashboard that allows users to find the number of plants by location, type of livestock or poultry harvested, and size (https://www.fsis.usda.gov/inspection/establishments/meat-poultry-and-egg-product-inspection-directory). Data includes all slaughter and further processing plants. There are 113 federally inspected slaughter and processing plants within Nebraska – 35 “Very small”, 50 “Small”, 15 “Large” and 13 “non-classified”. Most of these plants are in red meat production. For example, 30 plants process at least some portion of beef, and 20 plants process at least some pork. Other surrounding states also have numerous plants but many of them our class categorized as “Very Small” or “Small”. Within a state, it is often the spatial distribution of plant location rather than the number of plants that is the most important factor for producers trying to get animals processed. The closer operations are to plants, the lower the costs associated with transportation (i.e. shrink, death/lameness, transportation, etc.). Most slaughter and further processing plants for beef and pork are located along the I-80 corridor and in the northeast corner of the state. Very few plants are located in the central and northwest portions of Nebraska.
Financial Considerations for New Meat Processing Plants
Research and planning of any new operation is a crucial stage in the development and startup process. A well-researched and written business plan lays out the operation on paper before any money is spent. It also allows individuals to identify potential problems and challenges, be strategic with their thought processes, and set goals for growth (both short-term and long-term). A business plan also forces individuals to get realistic and look at the financial projections and financing options for the project.
Some financial considerations for starting and/or expanding a meat processing facility include a financial evaluation of the project as it takes significant infrastructure to operate. The processing business is complex and high risk, with narrow profit margins at times. A simple new facility often exceeds $1 million or more ($300-$400/sq ft on average). To justify the investment, a prospective processor and financial backers must be confident that the processor will be profitable (supply and demand). To do this, the processor must have significant, sustained demand for processing services. In other words, there must be enough farmers and ranchers who commit to bringing enough livestock consistently during the year and pay the processing costs. Therefore, productivity, revenue, and services offered are all interconnected: the more productivity, the more revenue. The more revenue, the more (and more sophisticated) services a processor can provide.
For example a 1,300-pound steer at $1.12 per pound, that steer is going to cost $1,456. Then throw in $675 for slaughter costs, the total cost per animal will be about $2,131, assuming no credit for the drop of hides, offal, bone, or fat, unless you can find some special marketing such as smoking meats or making pet treats. That 1,300-pound steer, after a 62% dress, will have a hot carcass weight of about 806 pounds. That 806-pound carcass will have about a 60% cut yield, so you will end up with about 484 pounds of meat to sell off that steer. It will cost $2,131 to slaughter the animal with 484 pounds in meat, which would mean you need to charge $4.40 per pound for all cuts of meat on average to break even. In the current market with inflated retail meat prices, it is best to use historical prices for business projections which represent a more realistic vision of the future.
Legal Considerations for New Meat Processing Plants
From a regulatory perspective, processors are either inspected (USDA or state) according to federal standards or are custom-exempt. Nebraska stopped its state inspection program in 1971, so USDA inspection is its current meat processing inspection option. USDA-inspected meat can be sold in-state, across state lines and exported. In contrast, custom exempt processed meat cannot be sold, but can be consumed only by the livestock owner, their family, their non-paying guests (if any) and their employees (if any). The USDA meat inspection program is designed to provide a high degree of food safety for inspected meat products.
Livestock producers may sell shares in a single steer, hog, etc. The buyers collectively become the new owner of the live animal. The producer may arrange the animal’s transportation to the custom exempt facility, and the co-owners each arrange for the processing of their share. Wyoming has developed a “herd share” program where live animal buyers purchase a share, not in an individual live animal, but a group of live animals. USDA-FSIS officials are currently working with Wyoming state officials to evaluate the legal validity under the Federal Meat Inspection Act of Wyoming’s herd share program. Nebraska adopted a herd share program in 2021, but it is too early to determine whether it will be approved by FSIS.
Poll Question Responses
As part of the webinar, two poll questions were asked to assess the understanding and use of processing plants. The first question asked, “How many USDA-FSIS approved meat and poultry processing plants are there in Nebraska?.” Approximately 10% of participants correctly answered 113 plants. All other participants stated they were much fewer plants with the most common answer being 47 USDA-FSIS plants. The second question asked, “How many times in the last two years have you used a custom exempt plant to harvest livestock or poultry?”. Approximately 45% of individuals had not used a custom exempt plant in the last 2 years and 40% had used it between 1-5 times. Among participants, custom exempt plants are used regularly.
Frequently Asked Questions
Q: What type of plants are included in the USDA-FSIS processing plant database?
A: Plants include both slaughter and processing plants. Plants can choose to either specialize in one commodity or can slaughter/process more than one commodity. Larger plants are more likely to specialize in a single commodity whereas very small plants tend to specialize in multiple commodities.
Q: How does HAACP classify plant size?
A: HAACP classifies plants by business class which is defined by the number of full-time employees (FTE) or sales. A “Very Small” plant is defined as less than 10 FTE or sales less than $2.5 million. A “Small” plant is defined as having 10-499 FTE employees and a “Large” plant is 500+ employees. It is important to note that HAACP’s plant size is not highly correlated with production volume.
Q: What is included in the construction and running costs of a meat processing plant?
A: This depends on the type, size, inspection, and commodity the plant will harvest. However, the general rule of thumb is that new construction costs are approximately $300-400 per sq ft. In addition to the fixed costs of the building and machinery, variable costs to process animals are ongoing. All-in costs to slaughter/process livestock are estimated to be $500 per head for beef, $150 per head for hogs, and $120 for lamb. In addition, there are taxes, interest, and deprecation regardless of the species harvested that can total as much as $675 per head.