Cargill balances production, profits with regulations, safety

DODGE CITY, Kan. -- The giant Cargill Beef slaughter plant on the east edge of Dodge City, Kan., is a factory -- in reverse. It takes 6,000 cattle a day and, within a few hours, divides the carcasses into hundreds of cuts of meat and byproducts.

"It's like Henry Ford in reverse," says Mike Martin, spokesman for the company, as he makes his way through a main processing room during a tour.

In one of the main processing rooms, hundreds of workers with hooks in one hand and sharp knives in the other stand along lines as large chunks of beef move along overhead cables. They each make a couple of quick cuts on the same spot on each piece before it moves down the line.

Workers are bundled in hooded sweatshirts or coats under chain-mail shirts and white Cargill smocks in the chilled air. On their hands and arms, Kevlar protects against a slip of the knife.

Cargill focuses intensely on that disassembly process to squeeze out more profit and to control contamination.

Cargill has been very successful on the first and labors with imperfect success on the second.

Cargill Meat Solutions, based in Wichita, Kan., is an umbrella for seven companies involved in pork, beef and poultry processing, marketing and distribution.

Cargill Beef, the largest of the units, had sales of $9.7 billion in 2010 and expects sales between $10 billion and $11 billion in 2011.

The unit processes nearly 7 billion pounds of beef and beef byproducts a year in its six plants, including the one in Dodge City. It sells that beef and byproducts around the world.

It's not the largest beef processor, but it is one of the big four -- along with JBS, Tyson and National Beef -- with a 23 percent market share.

And it stretches far beyond the U.S. to more than 60 countries. Its meat winds up in tacos in Mexico and as steaks in Japan. The tallow winds up as cooking fuel and the hides as seats in luxury cars.

Complex operation

In the Wichita headquarters, brokers and salespeople spend their days making deals with grocery chains days, weeks or months away from delivery.

Other employees talk to the plants, deal with government regulators or forecast cattle production.

Cargill Beef President John Keating, who has run several smaller Cargill business units before this, says it's an operation of enormous complexity.

"You get the same stresses as any business, (but) you just add zeros," Keating says. "It's a big business."

The business landscape for Cargill Beef presents challenges this year.

Keating says the cost of finished cattle for slaughter has gone up 31 percent from a year ago, but so has the price of the beef they sell.

Cargill is a middleman, buying feeder calves for its feedlots or as finished cattle for its slaughter plants. Because of its size, it has been able to survive sharply higher costs, passing along the increases to customers.

Cost challenges

Driving the increases are the shrinking size of the global cattle herd and the rising costs of other inputs, particularly corn. Keating is no fan of ethanol.

Keating blames the decline in the number of cattle on the difficult economics for producers.

Ranchers are choosing to sell the herd for production rather than hold back heifers to build the herd. Even if ranchers decided to expand, it would take three to five years.

"The U.S. herd is the least since 1956," Keating says. "It will continue to drop, but we see that slowing down."

He cites other reasons for the drop in numbers: increased government regulation globally, drought in parts of the U.S., and the fact that U.S. ranchers are growing older and might be more interested in cashing in now.

Though the average size of cattle continues to grow by 5 to 10 pounds a year, producing more meat per animal, the tight supply means that beef prices will remain high for the foreseeable future.

Grocery chains traditionally have tended to absorb the rising costs, but they now are passing them along. The result is higher beef prices at the store.

Competition and consolidation

Last year, Secretary of Agriculture Tom Vilsack proposed rules that he said would promote competition in the meat industry.

Consolidation, Vilsack says, has given the packers ever-greater control over producers and allowed them to keep a larger share of revenue.

In the beef industry, for example, the four largest packers process about 80 percent of the country's feedlot cattle.

The number of cattle producers has fallen from 1.6 million in 1980 to 950,000 today, according to the U.S. Department of Agriculture.

Vilsack has argued that the reason ranchers have had such a tough time financially -- and cut their herds -- is because they've lost the ability to command higher prices from packers such as Cargill.

The proposed rules would make it easier for farmers to sue under the Packers and Stockyards Act. Instead of existing rules requiring that farmers prove that a company had reduced industry competition, the new rules require a farmer to show only that a company has engaged in discriminatory acts against the farmer, such as offering higher prices to preferred suppliers.

That provision likely would unleash a wave of litigation, forcing feedlots and packers to buy cattle more as a commodity, rather than differentiate by producer and by quality.

Cargill's stance

Cargill is not shy about objecting to the proposed rules. Beef packers have spent much time trying to escape commoditization by creating brands such as Cargill's Sterling Silver brand. Branding products allows the packers to charge higher margins.

These new rules would discourage paying for higher quality -- and greater investment in food safety, Keating says.

"If you are going to be serious about food safety, you're going to need a lot of Ph.D's in your business," Keating says. "There are just so many food safety issues that it's tough for smaller companies to compete these days."

But Cargill's biggest challenge might be its ongoing effort to produce safe food.

Cargill continues to fine-tune its in-plant food safety systems in an effort to further reduce the already small percentage of meat contaminated by bacteria. That's because slips can be expensive -- and worse.

In 2010, the company agreed to pay for lifetime care for Stephanie Smith, 23, who was a Minnesota dance instructor when she lost the use of her legs, bowel and bladder in 2007 after eating a hamburger produced at Cargill's Butler, Wis., plant that was contaminated with E. coli O157:H7. Hundreds of others also were sickened by the meat.

The most recent major recall at the Dodge City plant was in 2004, when it recalled 45,030 pounds of ground beef after E. coli was found. No illnesses were associated with it.

E. coli O157:H7 causes an estimated 70,000 illnesses a year, according to the Centers for Disease Control.

Food safety

E. coli lives in cattle feces, which gets on the hide. If butchering isn't done carefully, bacteria will cross onto the interior of the carcass. So, immediately after animals are killed and before the hides are removed, the animals are run through a car-wash-like cabinet that scrubs the skin. Each carcass gets several more such baths during its trip down the line, using acids and steam pasteurization.

The handling of the meat is monitored by plant personnel and by third-party observers. There also is an extensive testing program for ground beef.

"We're chasing a needle in a haystack . . . 0.03 percent of the time," Keating says.

The federal government is considering requiring packers to test for six other less common strains of E. coli, including the O26 version that is thought to have sickened several people.

Keating says the company has tests that will show the new strains of E. coli, but they aren't yet commercially feasible.

The company is studying longer-term solutions such as a vaccine that eliminates the bacteria inside the cattle.

"It's a global business," he says. "It's a tough business, one that is highly regulated. There are concerns about food safety. I would argue you need to be a large corporation to compete in this game today."