Tyson's Perry Pork Plant Sends Shockwaves in State Economy

Tyson Foods' announcement that it will close its Perry, Iowa, pork processing plant in June is the most recent casualty in the economic woes of pork packers. Businesses do not shut down profitable operations. However, in tough times, companies with multi-plant operations will logically idle their least profitable, highest-cost plants to limit losses. Many factors squeeze profitsLabor, packaging, transportation, insurance and property taxes continue to rise. More capital is needed to replace equipment. Interest rates remain elevated. New plants and retooling existing plants added about 10% to U.S. hog slaughter capacity from 2016 to 2022. This competition further disadvantages aging, higher-cost plants. Margins can vary among plants, with differences driven by costs, sources of hogs, plant size, capacity utilization and age of plant. Newer plants may be more automated. Older plants may have more breakdowns and need more downtime for maintenance, limiting ability to run at maximum capacity. These factors are unique for each plant. Multi-plant companies consider such factors, and company-wide capacity utilization and profits, in business decisions regarding plant closures. Single-shift plants face cost disadvantageThe roots of the Tyson Perry hog processing plant date back to the 1960s. Oscar Mayer bought the plant in the 1980s and sold it to IBP in 1989. Tyson Foods acquired IBP Inc. (formerly known as Iowa Beef Processor Inc.) in 2001. The facility has a reported capacity of 8,250 head per day. That is about 5.5% of Iowa's hog slaughter capacity and roughly 1.7% of U.S. hog slaughter capacity. The Livestock Slaughter 2023 Summary, published by USDA's National Agricultural Statistics Service, contains estimates of the number of federally inspected hog plants by capacity. The Perry plant is one of eleven plants in the 2-2.99 million-head-per-year-size group. In 2023, those eleven plants did 22.5% of the total federally inspected hog slaughter. In comparison, the fourteen plants in the largest group size, slaughtering four million or more hogs per year, handled 60.2% of the federally inspected slaughter. Those plants average roughly 20,000 head per day. Tyson's Perry plant is a single-shift plant. Double-shifting a plant enables processors to boost capacity, which trim both fixed and variable costs per head. A thumb rule says that adding a second shift would typically add 20% to building and equipment costs (for extra cooler capacity, etc.), but volume would rise about 95%. This suggests that double-shift fixed costs are approximately 55% to 60% of single-shift costs per head processed. However, ability to double-shift is predicated on factors beyond plant infrastructure to do so. Margins need to be good. Hogs need to be plentiful. Labor needs to be available. Impacts on pork producersTyson has four hog slaughter plants in Iowa and one each in Nebraska, Indiana and Tennessee, with the one in the Volunteer State primarily harvesting sows and boars. Tyson's Iowa plants in Storm Lake, Waterloo and Columbus Junction likely have capacity to absorb many of the hogs that would have been harvested in Perry. Those plants have capacities of 17,250, 19,500 and 10,150 head per day, respectively. Also, Tyson has pork contracts and sales to retail, food service and export channels to continue, which it will fulfill with pork from other plants. Barring any additional unforeseen changes in processing capacity, the industry will have sufficient capacity this spring and summer to process hogs. However, transportation costs may rise for some producers. Cash-negotiated hog prices and basis near Perry may also dip. Such weakness will likely be temporary. Impact on national prices will be minimal. Processing capacity constraints usually do not come into play until late in the year, when slaughter supplies peak seasonally. Tyson closing the Perry plant will tighten the slaughter capacity to hog-supply situation this fall. How packing plants impact local economiesPork packers generate three types of economic activity in communities where they locate plants. Direct effects are based on the level of output (sales) and include packers paying employees and buying hogs, equipment, supplies, services and other inputs to process pork for sale. Indirect effects are suppliers and vendors of pork processing plants buying intermediate inputs for resale to plants. Induced effects are business owners and employees who work in pork processing plants and for their suppliers and vendors converting incomes into household spending. A look at how economic activity will shift in IowaIt is necessary to define three regions to analyze the economic impacts closing the Perry plant will have in Iowa. One region is Dallas County, home of Tyson's plant. The second is other Iowa counties, where pork is processed. The final region is all remaining Iowa counties. The primary goal is evaluating economic losses in Dallas County and possible gains in other pork processing counties. Given Dallas County's central Iowa location, it is presumed most of the hogs Dallas County loses will be processed in other Iowa counties. Impacts, both positive and negative, extend beyond these counties because plant workers, hog producers and other input suppliers live and work throughout Iowa. It is also important to examine Iowa's statewide ability to absorb the economic shock of the closure. Information from the IMPLAN (economic software) input-output model is used to make predictions about the economic impacts. It is estimated that $890 million in annual direct sales will shift from Dallas County to the other pork-producing counties. This direct output figure is based on the 1,276 workers employed by the plant. IMPLAN estimates Dallas County will lose $1.18 billion of total sales revenue, or output, after accounting for indirect and induced effects. A total of 2,765 jobs is estimated to be lost in Dallas County. Value-added losses across all industries in Dallas County will be $274 million, of which $114 million is value-added loss from the Perry plant itself. "Value added" includes all labor income plus payments to investors (dividends, interests and rents) and indirect tax payments to governments. Value added is analogous to gross domestic product and is a preferred measure of economic worth. The other pork-producing counties gain sales revenue across all industries of $1.14 billion and $246 million in value added. For the pork industry itself, this is about $118 million in value added and an additional 1,269 pork plant workers. If the pork processing plants can indeed attract these workers and process additional hogs, the other pork-producing counties will see an additional 964 jobs created in other industries. The non-pork processing counties see net losses of $74 million in sales revenue, $18 million in value added and 210 jobs. Perry plant closure is net loss for IowaTaken all together, the statewide economic impact is a net loss of 741 workers, $118 million in sales revenue and about $46 million in value added across all industries. In terms of state and local taxes, Dallas County loses $815,000 in county taxes and about $4.85 million in other local taxes (i.e., cities, schools and special districts). Tax revenues will rise in counties that gain hogs to process. However, adding gains elsewhere to losses in Dallas County results in a net loss to the state of Iowa and to counties, cities and other local districts of about $2.19 million in taxes from closing the Perry plant. Contributor Lee Schulz is an Iowa State University Extension livestock economist. Contributor John Crespi is the director of the Center for Agricultural and Rural Development and professor of economics at Iowa State University. Stay informed, stay inspired! Newsletter sign up is free. Join hundreds of free subscribers who rely on DecorahNews.com for trusted information and fresh perspectives.