One of the industry's leading economists recently raised concerns with me about the use of the word "profit." His concern is the use of such words as "record profitability" or "record profits" in describing the economic status of the cow-calf sector the last several years.

What most of these measures use is strictly a comparison between record price levels and cash cost. Rather than profit, we should be talking about record cash flow. His point is such figures don't include depreciation or returns to owner labor and management.

He makes the point that cash margin and profits aren't the same thing; we should be using financial profit, which is the net to capital after all costs are accounted for. And, of course, even financial profits are a little misleading if the goal is to measure relative standard of living if un-adjusted for inflation.

He also believes the industry media's comparing of "profits" between the sectors is misleading. That's because there's no accounting of full costs (only cash costs) when describing cow-calf profitability, while we tend to use full costs when describing feedyard costs.

It's also misleading to compare feedyard and cow-calf operations on a per-head basis in the first place. A typical feedyard turns its inventory twice annually; a cow-calf producer has only one inventory turn. The only way to compare the two sectors, he contends, is to calculate return on investment (ROI). By using ROI and other standard financial accounting methodology, we can compare accurately across all sectors of the beef industry.

He's correct. All one must do is look at the flow of capital into the various sectors (the feeding industry has been a magnet for outside capital, while flow of capital to the cow-calf industry has been virtually non-existent) to understand which are the most financially viable segments of our industry.

Without question, the media, Extension personal, etc., have failed to use solid financial analysis in describing the status of the cow-calf sector. This tacit acceptance of the improper use of financial terms has been done for several reasons. For one, few of us want to admit to ourselves, family or friends the true historical ROI of this industry.

Most true financial measures indicate cows historically have been essentially a break-even proposition. The wealth created in the cow-calf sector has come via two primary routes -- land appreciation and selling a growing percentage of the animals produced on a non-commodity basis.

The financial reality is that in a true commodity business (and commodity still describes a large chunk of our business), prices tend to gravitate toward breakevens over time. It's both a blessing and a curse in the cow-calf industry that people love what they do so much that essentially they're willing to forgo any return to labor or management, or even depreciation.

It's for this reason that our inappropriate use of the word "profits" is, in fact, the most appropriate measure when trying to assess such things as herd expansion or herd liquidation. However, it leaves us with an incorrect and misleading picture of the true returns to the cow-calf sector.
-- Troy Marshall