Canadian cattle feeders can take a bit of assurance that the Lakeside beef plant at Brooks, Alta., will be in “strong hands” after its sale and may even spur new competition for cattle, according to a new report from the George Morris Centre.
In a report released Thursday, the Guelph, Ont.-based ag think tank’s market analyst Kevin Grier writes “the fact that the beef packing industry in Canada is down to two major players in Canada and three in the U.S. should help to dispel the myth that the sector is a lucrative profit machine” for packers.
Grier quoted a January interview with Dick Bond, CEO of the Lakeside plant’s current owner, U.S. meat giant Tyson Foods, in which Bond said “what we are doing in Canada is viable for the long term.”
“As such, we see that the ‘viable for the long term’ meant that it was viable for about five months,” Grier wrote, as Tyson announced in late June it will sell Lakeside to XL Foods, owned by Alberta cattle marketing firm Nilsson Bros., for $107 million.
Observers have suggested the Nilssons got the better end of this deal, which is expected to close at the end of September. But Grier, in his report, quoted industry analyst Steve Kay as saying Tyson paid $45 million to buy the plant from IBP in 1994 and likely invested $90 million in improvements for what turned out to be a top-producing plant in Tyson’s stable — especially counting the “exceptional” returns it generated during the BSE crisis.
“I don’t think the plant owes Tyson anything” and besides, the U.S. firm was looking for an exit anyway, Grier wrote. However, he added, the Nilssons’ reputation as shrewd buyers remains “well intact.”
The deal calls for the Nilssons to pay $50 million on closing and $57 million plus interest to Tyson over the following five years.
Calgary, Moose Jaw
Though the Nilssons say they plan to keep their XL beef plant at Calgary open, “keeping the two XL kill plants (Calgary and Moose Jaw, Sask.) open in addition to Brooks would be surprising” from Grier’s perspective.
The two XL plants, combined with Lakeside at Brooks and Cargill at High River, currently slaughter less than 47,000 head of cattle per week in Alberta and Saskatchewan, or below 75 per cent of their total capacity, Grier wrote.
Shutting the small XL Calgary plant, with its real estate value, makes more sense than shutting Moose Jaw, in the middle of Saskatchewan’s cow country, and would boost the remaining plants’ use of their capacity to about 80 per cent, he said.
And while it would doubtless be better from the cattle feeder’s perspective to have XL and Tyson compete for their Alberta plants, Grier noted that Tyson’s plant in Pasco, Wash. (about 500 km south of Kelowna, B.C.) had been competing with Lakeside for Alberta cattle even when Tyson owned both plants.
It’s possible, Grier wrote, that “this action may even heighten the competition in Alberta” between Tyson’s Pasco beef plant and Idaho packer Agri Beef’s plant in Toppenish, Wash., about 110 km west of Pasco. “As such, it is reasonable to expect that Tyson will continue to be very active in southern Alberta,” he wrote.
“In fact, if Tyson has decided they are going to ride the Pasco horse, it is expected that Tyson would be a formidable competitor in Alberta. They have not, however, been making moves in that regard,” Grier wrote.
Tyson, he wrote, is “not openly attempting to tie up Alberta cattle for the fall once they are out of Brooks and they are not reassuring current suppliers. Alberta cattle feeders need to keep an eye on Pasco more than they need to worry about XL Calgary.”
Furthermore, in view of the declining numbers of cattle on feed in Washington and Idaho as a share of the U.S. total since 2000, and even though the Canadian Prairies will still see more cow liquidation, “there will still be a massive herd when the liquidation is through,” Grier wrote.
“Furthermore, grain is the most important factor in the cattle and beef industry. In that regard, again there are current challenges but, long-term, Alberta has the advantage.”
With that in mind, Grier wrote, “I am not certain that Tyson actually made the right decision to abandon Brooks and stick with Pasco.”