White knight charges in to save XL, but it may be the last one

There seemed to be a collective sigh of relief from the western Canadian cattle and beef industry when it was announced that JBS would be taking over management of the XL Foods Lakeside beef plant in Brooks. The reality is that there was a very good possibility that the plant was not going to reopen unless a white knight came to the rescue.

The financial hit the Nilsson brothers were going to have to take along with the ongoing acrimony between them and the CFIA would have made the operation difficult to start up again. It’s been estimated that the losses, including recalls, lawsuits, hedges, contracts etc. will be around $100 million. JBS wisely separated itself from any outstanding or future liabilities incurred by XL Foods before agreeing to manage the plant.

The arrival of JBS to rescue the plant is no surprise. Company representatives at cattle industry events over the past year have indicated that they were actively looking for a way to expand their operations into Canada. For the giant global JBS organization, Canada was one of the last significant beef-producing countries where they did not have a serious presence. One suspects that JBS might already have had exploratory talks with XL prior to the E. coli debacle.

Clearly that event would have expedited any interest JBS had in acquiring XL. It seems to have the best deal — figure out if the plant can make money and if it does, buy it. If not, walk away.

But if the industry is now relieved that JBS has arrived to save the day, that morning-after feeling may not be so pleasant once the company figures out what it needs to do to get the plant back on its feet. If there is one observation that the industry agrees upon it is that JBS knows how to operate big beef plants — its global success surely proves that. It has become known for acquiring processing plants that are in financial or operating difficulty and turning them around into viable operations.

The question that should arise for those who have a stake in the Brooks plant, from feedlot operators to plant workers, is how does it turn losers into winners? I expect the formula is pretty simple.

Worldwide expertise

First the positive side of the formula — JBS’s expertise in massive production will see its experience used to streamline efficiencies in the plant like never before. Next, its global marketing presence bodes well for increasing Canadian beef exports to new markets. JBS is easily equal to, or even better at Cargill in competing for markets anywhere, and has the deep pockets to wage market share battles with anyone. In addition, its sheer corporate global size and expertise should garner it some respect from the prickly CFIA. That should help in re-establishing realistic plant food safety programs and inspection protocols.

There is of course the other side of the coin in achieving plant viability and profitability — cost reduction. There would be a number of ways to do that and a longtime operator like JBS would know all the angles. If one agrees that JBS knows how to operate a big, low-cost beef plant, it would surely know how to buy cattle at the lowest price.

I expect that after the initial honeymoon period is over, feedlot operators are going to be faced with newly inspired JBS cattle buyers who will do what they have to, to acquire cattle at the lowest price. The reality is that meat plants anywhere are not usually successful because they have an overly generous livestock-buying policy.

It was discouraging to see the belligerence of the plant union boss in almost cheering the demise of the Nilsson’s management of the plant. Union officials may yet come to regret the loss of those good times if the other shoe drops in making the plant viable. It doesn’t take a genius to figure out that the other way to plant profitability is to radically reduce labour costs. One expects JBS operating expertise will see efficiencies implemented to reduce labour, and that probably will not mean reducing the line speed by half. In fact the production realities of JBS management may well come home to haunt the plant workers and their union.

For instance, meat processing and labour costs are considerably higher in Canada than they are in the U.S. The possibility is that JBS, after some learning experience, may just decide to eliminate most meat fabrication jobs at Brooks and ship carcasses to their underutilized American plants where labour costs are significantly lower. Considering the attitude and history of the union at the Brooks plant, one can see labour relations turning sour sooner or later.

One doesn’t like to rain on the parade of industry relief, but there is a reality with the Brooks plant, if JBS can’t make it successful, is not going to buy the facility. If that happens the plant’s life may be over. It has changed hands four times now and there may be no more white knights left to save it again.

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