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.

[ValueChainFX]

In the agriculture business we all know that we need to know our input costs! The challenge is how do we do these calculations?

We have had some suggestions as to what we need to include in these costs when we do them, but when it comes down to the bottom line, it doesn't take a mental accounting giant to know we all need to do something to make the bottom line better!

Big companies have cubicles set up for their creative accountants that can always come up with what ever number works for them! Is the business tough ... you bet it is! So we do need to cut our costs and increase our bottom line! I don't think anyone will disagree with that! So now the question is how do we do that?

We can do what we have always done and hope the status quo will work. (Doing the same thing over and over again expecting different results is the definition of insanity!)

We can hope the government helps us out! (Hello, unless you change your name, register your business in the US or have some pal that can manipulate some program to work for you in some government program that really doesn't do much for the primary producer, forget this option!)

Sell your soul to one of the big guys or a medium size company that has learned to control their (your) market segment. (You may get enough income to make it through one or two more seasons!)

Or figure out a way that will allow you to take back your farm, cut your input costs, increase your profits, become less dependent on the vultures and build your own niche market by duplicating tight business practices. Can this be done, I think so but don't think it can be done by any one person on their own!

Keep in mind I'm a radical, I'm a dreamer, I still believe in Canadian agriculture and I know that some people are going to sit on the fence and watch, some people will want to do something and some people will do everything they can to stop you from trying!

[cowman]

I think a person needs to be very realistic when figuring out prices. If you can sell your hay for $80/ton then that is what you need to charge the cow for it. If you can rent that pasture out for $30/mo/cow then she needs to pay that too. You can get that price while sitting on your butt!
So what are your real costs?
Winter feed 35lb. hayX$.04X200 days
=$280
Straw 15
Feeding equipment 20
fuel oil repairs 20
salt and min 12
fence/corral repairs 12
breeding costs 30
vet costs 20
pasture $30X 5.5 months165
interest/depreciation
on cow(over 7 years) 131

TOTAL $705

This has not included anything like labor, electricity/phone/heat/taxes/acct. etc.
You are making money owning the pasture and the hayland(maybe?) but are you really making anything on the cow?
When you take into account open cows,dead cows/calves, dud bulls etc. it lowers the "profit" quite a bit!
Now last year when hay got up in that $150/ton range and straw at $100/ton the "profit" got downright negative!
Now $705/calf quite frankly just doesn't cut it anymore. So if you have a 500 lb.(those April/May calves) calf you need $1.41/lb. to make $705! Steers are worth 10 to 12 cents more than heifers and outweigh them by about 50 lbs. So taking a wild guess I'd say you need $1.50 for that steer calf, at the very least. And I doubt that is going to happen this year!
But I've heard lots of old boys say they grow their own feed and have their own pasture so they don't need to make much! This is a business of idiots...and I guess I have to include myself in that definition, because here I am!

[rsomer]

cowman: I won’t touch that "This is a business of idiots" line although its tempting. I’ll just say that I disagree.

Your comments on needing to cost grass and hay at market prices is the crux of the debate. I firmly believe this is an incorrect approach for farmers to use when determining costs. For me to argue against using market based costing is actually difficult because the ag specialists do it all the time and using market costs if a market exists is a well accepted method of determining costs. But it is wrong for the cow calf producer, here’s why.

You can’t sell the hay and grass and feed it to the cow too. The two are mutually exclusive which is a fancy term for not being able to have your cake and eat it too. You can do one or the other but not both. If your cows are eating all the hay and grass you can grow it is irrelevant what you could have sold it for, it has already been consumed.

If you are actually selling or buying your hay and grass figure in market prices. But if you are consuming your produce by selling calves figure in the cost of producing that calf, not a product you aren’t selling.

When I was a kid there was basically no market for grass and hay or at best only a poor local market. Since the invention of round bales and better roads with easier movement of cattle and feed, grass and hay now have a market. Has that by itself changed the cost of raising a cow? Not one bit although it has provided an alternative market for the feed and the producer now has a choice of raising cattle or raising feed. Again, the producer has to choose which market they are in, most can’t be in both.

Can you imagine a trucker whose business is hauling cattle calculating in as a cost on every load hauled what he could have made if he had instead been hauling a load of grain and then wondering why he wasn’t making any money hauling cattle. No different for a farmer who every time he sells a calf he calculates what he could have made if he was in the feed selling business as a cost against that calf.

The profit center/market based approach to costing is incorrect for most cattle producers. First, most cattle farms achieve what profitability they can by being integrated, vertically integrated if you will, that is avoiding the cash market place wherever possible by supplying as many inputs internally as they can. Although external markets do exist for the various commodities produced, those markets are commodity markets which flucuate dramatically in short term cycles. As the cow calf industry is a long term investment determining the costs and profitability of the overall investment based on short term external markets is inappropriate. Yes some years selling grass may be more profitable but the producer cannot get into and out of cows quickly enough to take advantage of that exception. As a result the value of grass and hay is irrelavent unless the producer actually has to go out into the cash market as happened to many in 2002. But that is not the norm.

In addition to the products a farm produces and consumes internally for which an external market exists, for example grass, hay, grain, calves, backgrounded calves, fat calves and even manure, the farm also provides services to the overall operation. Those services for which an external market now exists includes custom calving, custom feeding, custom fencing. Why stop at calculating what the grass could have been sold for as a cost against the poor cow. Lets keep on and charge the feed against her at custom feeding rates instead of just selling her the hay. And when I am out fencing I am making a $500 or $1000 a day custom fencing for myself. Custom calving, why when the calf hits the ground I just bill out $25 against old 116W. And then figure out why I am not making any money raising cows. After a while most should see that it just gets to be nonsense.

[grassfarmer]

rsomer: your argument makes a lot of sense to me. There was a classic case in Scotland a few years back when a big estate that had integrated livestock operations for generations changed the land management company they worked with. A young whizz kid came in and could prove on paper that the estate would pay better by basically selling everything at market price with no stock. They laid off the staff, sold the livestock, rented out pasture and now I don't think it's looking such a clever move. If the pasture market turns down you have to accept that price - they can't afford to get back into livestock. The whizz kid is long gone of course and has no responsibility for the mess he made - basing his predicted rental income on figures attainable in another part of the country. As an old shepherd once commented to me "aye ye can prove anything with a bit of paper and a pencil"

[pandiana]

I guess, in the back of my mind I am still trying to respond to cowman's post about 'why should the tax payer pay?.' If most cattle farmers are doing alright and making a living wage, they I have to ask also why should the tax payer pay? But on the other hand, if what I hear from many of these postings is correct, and what my calculator figures, these are tough time for very many farmers. But is it a disaster? Getting a handle on actual dollar figures is rather nebulous as many of you have pointed out but how else to you make an educated assessment of whether the industry is in trouble or not?