Some Numbers

[farmers_son]

Some numbers that I have been thinking about:

Although the productivity of soils varies around the province there will be a correlation between how much grain could be grown on a given acre and how much grass could be grown on the same acre of land. In the dark brown soil zone it will take 10 - 15 acres to keep one cow year round. Your land may carry more or fewer cows. However let’s assume 12 acres per cow; that will pasture her and her calf all summer and provide hay for winter feeding. Basically keep your cow with feed in front of her all year.

And although grain prices are up and down for figuring lets say that the same land in the dark brown soil zone can generate $40 cash per acre more than the cash cost of putting in the crop and taking the crop off. Cash revenues minus direct cash expenses. I call that contribution or contribution margin. The amount of money that is available to pay the fixed costs like taxes and living.

I have calculated the cash costs of keeping one cow for one year at about $300. That does not include any feed or pasture, for this example the farm provides all that. The farm bales its own winter feed and so on. The numbers I used are below (hopefully they will be readable and not jumbled):

Variable Expenses Cows Per Cow 200 Cow Herd
Salt and Minerals 12 2400
Diesel 55 11000
Gas 35 7000
Bulls 40 8000
Equipment Repairs 40 8000
Fence Repairs 30 6000
Hay and Pasture Insurance 15 3000
Grass Seed 15 3000
Trucking 10 2000
Veterinary Services 10 2000
Auction Commission 10 2000
Ivomec Pour On 5 1000
CattleMaster 4 VL5 5 1000
Twine 5 1000
Ear Tags 3 600
Scour Guard Vaccine One Dose 3 600
Checkoff 3 600
Implant 1 200
Brand Inspection 1 200
8 Way 0.50 100

Total Variable Costs 298.50
58700


If the cash cost of keeping a cow is about $300 (you may agree or disagree) and your land could generate $40 per acre contribution margin from grain than assuming your cows take 12 acres to keep them a year what would 550 pound calf prices have to be to equal your return from grain. Assuming the risk was equal which it is not but just for discussion’s sake.

I assumed a 15% inefficiency per cow, that is some dead calves, some open cows. Prices for a weaned calf would have to be $1.65. That would provide a revenue of $770 per cow and a contribution (revenue minus cash expenses) of $40 per acre.

550 pound calves have been bringing about $1.00 per pound the last few weeks. Which explains the grass acres we all see being broke. At $1.00 per pound for a 550 pound calf that cow is only generating $14 per acre contribution. That will not pay many bills.

It sure seems like if you have land that can grow grain but is in grass that maybe that land has to grow grain instead. And maybe the cows have to eat chaff and straw next winter and pasture only the roughest land next summer. Bottom line is ethanol has changed the profitability of growing grain versus growing grass and that has to be reflected in the acres in remaining in grass and ultimately the size of the Canadian cow herd. Comments?

[grassfarmer]

Interesting figures farmers_son which cause a person to think.
The first thing that strikes me is that although your $14/acre return with cows is woeful the $40/acre from grain is little better. This is before taxes or living expenses or presumably land ownership costs? Anyone that has bought land good enough to grow grain on - even at $1000 an acre on borrowed money will need what $70-80 an acre just to service the interest.
Also I would question why anyone would move out of cows to grow grain - I'm sure cash rents would be more than $40 an acre so why take the risk yourself?
I feel there is also a very great risk with grain farming that doesn't exist with cattle - whether you get a crop. With frosts, droughts, hail, land too wet to seed you risk getting little or no return. Cows are pretty safe in that you generally get a percentage calf crop every year regardless of rain or shine. Of bigger concern to me would be that I would have less control over costs with a high input system than with a low input cattle one. Lots of land was broken up last year on the hope of $12-$14 canola but if that ends up being $7 or $8 canola with fertiliser doubling in price it doesn't look so clever.

We run a rather different model than you demonstrated and on the face of it could shave close to $100 off your variable costs per cow. We don't hay so use 10% of your diesel, spend vastly less on fencing, zero on pasture insurance, virtually nothing on grass seed, no twine, less drugs, no implants. Admittedly we do buy in our winter forage but reckon on between $100-$120 per head(delivered to the cow)and this brings with it fertility benefits derived from someone else's land.
I certainly agree that cows are being pushed into the land too poor to farm but that brings it's own opportunities. In my area of previously mixed farms many cows have been sold, the grain land is increasingly being rented out to the hutterites, hay land being broken up to go the same route which leaves the non-farmable land more or less vacant. We are renting different parcels and paying on average between 70-75 cents per cow/day. This is allowing us to extend our grazing period to 9-10 months at a very low production cost.
I much prefer the prospects in beef to the prospects of growing grain in the current climate.

[farmers_son]

Really, I used $40 an acre contribution for grain because if I used a number that was closer to reality like $60 or more it just looked too awful for cattle. Still the grass does always look greener on the other side of the fence and it does cost money to own and operate a lot of machinery. I think most would agree that $40 per acre contribution to fixed costs is a very conservative number for a grain enterprise even in the dark brown soil zone. In fact you could do that blindfolded with one hand tied behind your back.

There is no argument that there is more money in growing grain than there is in raising cattle. Obviously something had to change for the grain farmer from where it was 2 years ago and ethanol was that change. And just as obviously the price of a weaned calf is heavily influenced by the price of grain. Grain is coming down and that should help the cattle sector. But what is apparently not as obvious is that the acres in tame grass and pasture (and therefore the amount of that resource available to raise cattle) is also linked to the profitability of grain.

Our memories are short. Today we tend to think the Canadian cow herd was always the size it is now and that Canada was always a beef exporting nation. However if you look back the increase in the size of the Canadian cow herd that change came as a direct result of the Western Grain Transition Payment Program which gave farmers a one time payment in return for removing the export subsidy on grain transportation. This gutted the grain industry and forced what were formerly grain acres into grass with cows on them. As well other acres were diverted into silage. The size of the Canadian cow herd grew and in a few short years we were a beef exporting nation where prior to 1995 we historically produced just about what we consumed.

Then along comes ethanol and there is money in grain again. The question now is will those acres that were seeded to grass in 1995-2000 go back into grain. I think unless the price of a 600 pound calf is $1.50 or better the answer is clearly yes those acres will be broke and grow grain again. That has huge implications for our industry and policy development.

The increase in the size of the cow herd and in feedlot bunk space subsequent to 1995 was directly related to a dramatic decrease in the price of feed grains as a result of the removal of the Crow Rate and subsequent Western Grain Transportation Act. Ethanol has effectively reversed that.

It comes down to this. Unless the Alberta Livestock and Meat Agency and other export focused efforts can effectively influence the price of a 600 calf to increase to $1.50 or more within two years we are going to see grass acres and cow numbers decrease to pre 1995 levels, probably lower. That means we will basically be producing for our domestic needs with limited beef available for export.

I do not want to suggest that prices for a 600 pound calf will not be $1.50 in 2010. But if that target cannot be reached than those grass acres are going to switch to grain. The Canadian cow herd is presently around 5 million head. Calf price this week are still around $1.00 a pound. Should be higher next week but I said that last week. Roughly figuring it will take $2.5 billion more per year from some source of revenue, marketplace or government support, to keep those grass acres from being broke. The few bucks the cow calf producer is going to receive from AFRP2 in January will not even be a drop in the bucket. Presently I see Alberta Government pouring all its resources into exports and maintaining feedlot bunk space. But if something does not happen at the farm gate level, and it needs to happen darn fast, the grass acres and cow numbers simply will not be there to supply any significant export market. Ethanol has fundamentally changed our industry just like the removal of the Crow Rate subsidy changed the grain industry. Unless weaned calf prices can and do increase to historically high levels (I would not bet on that as grain prices will remain historically high due to ethanol) we are going to see a contraction in grass acres and herd size in the same magnitude that the grain sector experienced post Crow Rate and pre ethanol.

I think that reality is being overlooked.

[grassfarmer]

Sorry farmers_son, I thought your post was another philosophical "cost of production" one, instead it appears to be just another kick at the ALMS can.
If you are just picking numbers out of the air for returns from grain production maybe the same applies to your beef projections?

None of your statements re ethanol, cost of grain or prices of calves are new to us, they all seem pretty obvious and generally accepted by all players in the industry.
However your post moves from the sublime to the ridiculous when you demand that the ALMA must influence the 6 weight calf price up to at least $1.50lb within 2 years. This is the same ALMA/ALMS that you are spending producer checkoff dollars fighting against the introduction of? So you oppose it and don't want it yet it MUST increase the returns for your calves?? This from an organisation that at last years Fall Producer Meetings handed out a print out explanation to cow/calf producers how lucky they were to be receiving as much as 80 or 90 cents for their 5 weight calves given the cost of grain and poor feedlot profitability. Funny all of the sudden that ABP is seeking to become the champion of cow/calf producers interests given that for the last 5 years you have worked solidly against them.
Saying that the Alberta plan MUST raise calf prices also rather highlights the lack of solutions forthcoming from the ABP - we have your ideal market situation right now - "open and free" access to the US market, the best in the world as you always tell us. If that can't give producers over $1/lb for calves it rather indicates your central policy has failed producers. At least the AB Government realises that and is attempting to do something about the situation.

This post highlights how far out of touch, out of ideas and out of time the ABP as an organisation really is. I suggest you keep your eyes peeled for a landmark document that will be published by the NFU in around a months time - it will shed light on what is really happening in the beef industry and suggests some possible solutions. By reading it it will become obvious that ABP not only don't have any answers to the pertinent questions of the day - they don't have a clue what the questions are.

[grassfarmer]

Another thing to ponder on is how will the ethanol lunacy be affected by the oil price dropping to $70 a barrel?? It might not pay to get too hung up on the side effects of an ethanol industry in case it shuts down just as quick as it started up.

[farmers_son]

Grassfarmer…I apologize. I started a thread on production costs and you were good enough to reply with some positive suggestions. I should not then have mentioned ALMS, even if it was only once. ALMS/ALMA was really secondary to the discussion anyway.

The message is unless calf prices rise there will not be enough cows in this country to export beef to anywhere. You would think that was obvious but no one is talking about it at the Government level and the shift from grass to grain seems to be going right over Government’s head.

Canada hung unto our cows through BSE because there was no viable alternative. Grain sucked in 2004-2006. Some people like Grassfarmer are dedicated cattle producers and will not switch to grass and some acres are really not suited for grain and will remain in grass. But make no mistake about it, the improved fortunes of the grain industry due to Ethanol is going to force change in the cattle industry. The majority of Canada’s cows are in Alberta and Saskatchewan, quite a few of those grass acres can grow grain. It is not going to be business as usual for the Canadian cow herd unless calf prices do rise. I have suggested calf prices may have to rise as high as $1.50 to keep our cow numbers from dropping to pre 1995 levels. I did not say they must rise.

But on the topic of numbers. I did some break evens on keeping our calves. It looks great. I do not know what numbers the big feedlots are using but my cost of gain for this year looks like 60 cents per pound, certainly no more. Assuming a 600 pound calf at $1.00 a pound my breakeven for a 1400 fat steer is 77 cents. The fat price last week was around 98 cents. If I could get 98 cents for the fat calf I would clear almost $300 per calf. That is more than I make keeping the cow.

Now if the mega feedlots were to pass some of those million dollar cheques down to cow calf producers it certainly looks like 600 pound steers could bring in around the $1.40 range and still earn the big feedlot $50 clear on every calf. $1.50 calves is not pie in the sky when our dollar is below 80 cents.

It looks like the feedlots are making money, it looks like the packers are making money. However if they want to fill their plants and their pens in the next two years calf prices are going to have to rise. And maybe they will.

But if they don't it would be foolish to think the cows won't go down the road. If calf prices stay near the $1.00 a pound range the rancher will head out to the field with the disc.

[farmers_son]

I meant some people like Grassfarmer are dedicated cattle producers and will not switch to grain. Sorry.

[grassfarmer]

That's OK farmers_son,I knew what you meant!

[farmers_son]

You may be interested in this site on breakevens for ethanol:

http://www.ces.purdue.edu/extmedia/ID/ID-339.pdf

Ethanol as a replacement for MTBE is profitable even at lower oil prices and higher corn prices. Apparently the U.S. is still subsidizing ethanol which will ensure more corn will end up in gas tanks. At least 20% of the U.S. corn crop goes into ethanol.

The effects of ethanol related higher feed grain prices on the livestock feeding sector has been discussed at length. What has not been discussed is the double effect that ethanol has on the cow calf sector which on the one hand is hurt by lower weaned calf prices due to higher grain costs and on the other hand is losing cow numbers as grass acres are being broke to produce grain destined for the gas tank.

The Canadian cow herd has around 5.6 million cows in 2008. Look for that number to fall to around 3.2 million cows by spring 2010. And as always the fellow that can hold onto the cows tail will probably reap the benefits but it may take as much as 10 years for that to happen.

But if you have debt you will have little choice but to break up any grass acres fit to grow grain. There simply will not be enough money in a cow to pay down any debt. And with 3.2 million cows there will barely be enough cattle in this country to meet our domestic requirements much less supply exports.

Unless 600 pound calf prices rise and soon.