Margins are Tight

[pandiana]

This is an excerpt from an American breed magazine. Figures are in American dollars.
Beef Industry Trends
Trend 6: Margins are Tight

Segment Profit Margin per head (10 year average)
Cow Calf $13.00 per head
Feeder $10.00 per head (includes yardage)
Packer $5-7.00 per head

Profit margins are historically tight and getting tighter. All three segments of the beef business are extremely competitive resulting in very low profit margins. From conception to consumption, the average return per animal is a mere $30 per head. These extremely narrow margins are forcing dramatic increases in consolidation at all three levels in order to get enough gross profit. Put another way, a single person would have to process, feed or raise the following to earn a $25,000 salary based on the 10 year average: Cow calf - 1923 cows, Feeder - 2500 feeders, Packer - 3571 carcasses.

Trend impacts:
1. Consolidation will continue to happen. Operations will have to get larger to earn enough income.
2. Increased difficulty for entry into the cow-calf businesss. Transfer of ownership from one generation to another or outside investors are the only viable opportunities for entry into the business.
3. Absentee ownership will become more widespread.
4. All of the cattle feeding profit is due to yardage. This makes retained ownership or custom feeding economically challenging.
5. Increased coordination among segments is likely to take place to offset the extremely tight margins in each of the three segments. Two of the four major packers (Swift & Company and Excel) are already coordinating genetics from conception to retail. Swift & Company is already coordinated with the second largest cattle feeder and is buying back feeder cattle sired by bulls sold through Swift Integrated Genetics. Excel Corporation, the nation's second largest packer owns Caprock Cattle Feeders (fourth largest feeder) and is purchasing genetics sired by Power Genetic bulls.
Don Schiefelbein, AGA Executive Director Don's brother Tim is a Marketing Director with Swift

[cowman]

Now lets see...If I can figure out how I could possibly feed 1923 cows in a day by myself and calve them out I can make as much as the kid pumping gas down at the local station? Of course I'd need about 10,000 acres of grass and another 3000 or so of hayland. I guess between the haying and feeding I could be slightly busy! Sure hope none of those 1,923 cows gets footrot or pinkeye.

[ValueChainFX]

I think those numbers are some BS based on BS! If these were the "Real Margins". Calculations wouldn't even be as complicated as the cowman just pointed out! Maybe if these were the margins big business would get out of the industry. That just will not happen. I do believe we will see tight partnerships develop, and I do believe we will see, less waste in the system, and those producers that are wanting to make real margins will not listen to the BS and do their own math! The industry may be in trouble based on the present challenges, but those that want to will survive despite those that stand in our way!

[cowman]

Yea these figures are a little bit out of whack! When they say consolidation is the way of the future they are probably right but I just wonder where they are going to find the idiots to run all those cows? It seems to me the bigger cow/calf guys have taken a pretty good beating the last couple of years and many of them are now either a lot smaller or broke. The 600 cow herd has slipped back to 250 and lots of people would bail if they could.
Quite frankly cow/calf is a no brainer. In the good years you can survive but does it make up for the bad years? I went to a grazing seminar once where the speaker said you needed 250 cows or you would never make it. Now 250 cows is a lot of work and takes up a lot of land. Can one person do it? And is it worth it? Did you ever notice if you ever have something else you want to do that is when a darned heifer decides to have some calving problem? Or if you are going somewhere the darn cows decide that is the time to get out and leave the country? Maybe grain farming sucks but I've never had the barley try to get in with the cows!

[pandiana]

Very glad to hear that you'all think these margins are out of line. What do you think the real margins are?

[rsomer]

Some years ago I made a spreadsheet to calculate the value of a bred heifer, partly because I didn't believe the numbers being presented to me by Harlan Hughes when he spoke at a meeting here in Alberta. His calculations were blatantly incorrect.

The spreadsheet assumed the heifer was being purchased by a lawyer or doctor, that is the animal was being pastured on supervised rented pasture, custom fed in the winter with yardage and custom calved. The original heifers purchased were retained and a herd maintained of equal size for years into the future. Replacements mostly came out of the herd but were bought when needed to maintain herd size. Bulls were purchased.

Cash costs once the herd was established worked out to between $450 and $550 per cow per year. That purchased bulls, pasture, winter feed, yardage, medicines, vet bills, trucking, bar code ear tags, check off and so forth. Any returns above those costs would be contribution towards profit since there were no fixed costs in the example I used. No land, buildings, equipment etc. as everything was done custom. This should represent the high cost scenario.

Gross cash returns averaged about $550 per cow, remembering that not every cow had a calf every year and there was some death loss. Also heifers were being kept for replacements and not sold for cash. After income taxes were paid net cash returns averaged about $35 per head.

Again, the scenario I used would be assumed to be the highest possible cost, least profitable situation. The $35 per head net after tax cash flow would be considered a hypothetical minimum based on normal market conditions.

[rsomer]

I am sorry people for my previous post. I apologize. Twenty lashes with a calculator is what I deserve for figuring the profit of a cow as $35 a head profit even if it is better than $13. Anyone cattleman knows there was more money in the cattle business than that in the past few years. Even in years when we were supposedly loosing money we still paid income tax every year. Its not that the numbers are wrong they are just describing the economics of one way of raising cattle when everyone is really doing it a different way. I guess this BSE thing has got me spooked, I know better than that.

[rsomer]

pandiana: In response to your question I am putting up some numbers on breakeven per cow which provide a different view of cattle margins than the article or profit calculations which I think just give B.S. information and actually caused me some moments of terror when I thought about how much payments I need to make.

These are my numbers but changed enough to keep my privacy. If I had no debt and my wife worked the cattle business would be a lot better. :--)

Margins are tight for me but it is because of my debt, not because there is no money in cows. I have considerable debt payments to make and although I have not included the numbers basically everything beyond the costs I have shown is money that is needed for income tax and debt repayment. No money left for new pickups and stock trailers for me. What profit I make comes out of the principal portion of the debt repayments.

Everyone’s numbers will be different. I grow all my own feed and have enough land to keep my cows, no rented pasture. Remember the breakeven is based on a per cow exposed to a bull basis, I need to take home net cattle cheques after deductions worth that much times the cows in my herd. Since I don’t get a 100% calf crop adjustments need to be made to get a breakeven per calf but again everyone’s operation is a little different here too.

Hope this is of interest and helps someone.
Per Cow
Building Repairs 2.50
Custom Work 10.00
Electricity 12.50
Feed, Supplements 7.50
Fence Repairs 30.00
Freight 2.50
Heating fuel 7.50
Insurance 22.50
Legal, Accounting, Prof. Fees 15.00
Licenses 5.00
Livestock Purchases 25.00
Machinery Gas, Diesel and Oil 45.00
Machinery Repairs 45.00
Memberships and Subscriptions 1.00
Office Expenses 4.00
Property Taxes 22.50
Rent - Equipment 7.50
Small Tools and Hardware 15.00
Seed and Plants 30.00
Supplies 3.50
Telephone 15.00
Meetings and Conventions 0.75
Twine 4.50
Vet. Fees, Medicine 30.00
Wages 0.00
Living 100.00
Total Before Debt Repayment
Capital Purchases, Income Tax $463.75

[pandiana]

Thanks for your candid replies. I will take some time to digest these numbers.

[pandiana]

Another point, the article that was discussed here last year http://www.nytimes.com/2002/03/31/magazine/31BEEF.html, talked about a 'pasture to plate' lifetime of a market steer through one of the feedlots (50,000 plus) in feedlot alley in Kansas. It seems to me their margins quoted something like $2.00 per head. I would have to reread the article at a cost of $2.95 US to confirm these numbers, but maybe some of you will remember.