Profit remains the primary challenge to sustainability in the cow-calf sector.
Forget whether the cattle cycle remains. Ignore permanently higher corn prices and the trade-off with distillers grain. Put all the rest of the usual wonderments on the shelf, too.
Arguably, the primary challenge to sustainability within the cow-calf sector, if not sustainability of the sector itself, is simply economic profit.
“No one can start a ranch business with ranch earnings and expect to earn $60,000 before self-employed and income taxes. With a 2% return on investment in ranching, it would require $3 million in equity. Assets earning 2% can service only limited debt,” says Jim McGrann, noted Texas A&M University (TAMU) livestock economist and professor emeritus. He owns Ranch Management Economist, a ranch business consulting firm.
“Increase in land values does make landowners wealthy but makes it prohibitive for young ranchers to enter the sector without equity contribution from parents or off-ranch income,” McGrann explains. “The high cost of estate transfer means it’s difficult to hold ranches together between generations.”
Meander through history and the case can be made that it’s always been this way. Outside money capitalizes the beginning stages of a full-time ranch, then bequeaths the equity opportunity to the next generation.
Of nearly 800,000 cow-calf operations, just 7%, or 53,772 operations, account for 74% of product sales, McGrann says. Small cowherds with fewer than 100 cows account for 90% of the operations and about 50% of the beef cows. Herds of less than 50 cows account for 77% of beef-cow operations (2007 Agriculture Census).
The same concentration exists in agriculture overall. McGrann points out that less than 6% of farms, or 125,000 farms, accounted for 75% of the total U.S. agricultural output in the 2007 Agriculture Census.
It boils down to money
The challenge for those few full-time outfits revolves around business at least as much as production.
“Financial sustainability of a business is measured by the ability to maintain equity and generate a net after-tax positive income and cover withdrawals for owner/operator labor and management,” McGrann says. “The reason withdrawals and distributions are important in evaluation of business sustainability is because frequently the ranch business must provide income for living withdrawals.”
By that measure, McGrann says, folks often fool themselves into thinking the industry is more profitable than it actually is. One reason, he says, is that cash costs and cash profit often reported in the industry ignore depreciation and withdrawals for living expenses or compensation to the owner/operator. He explains depreciation is typically one of the four largest ranch expenses.
“Be very cautious when using reported cattle industry breakevens, net income and profit projections,” McGrann says. “Most frequently, beef cattle breakevens don’t include all costs, and profit values overstate true financial profitability. Developers of these values often ignore self-employment and income taxes, returns to management and labor and overhead costs.” He adds, full time ranchers can use withdrawls for family living as a proxy for management compensation.
When all costs are accounted for, McGrann says, few cow-calf enterprises are profitable. As part of the Young Leadership Series for the Texas and Southwestern Cattle Raisers Association, McGrann and colleagues from TAMU, Oklahoma State University and the Noble Foundation examined profitability. He explains, “In reality, less than 4% of the beef cow-calf operations make their sole living from the cow-calf enterprise. This means that the industry can produce at least 50% of the feeder cattle and not be profitable to owners. These calves support the feedyard and packing industry and lower consumer cost of beef.”
The cow-calf sector is an investment business, and return on investment is what attracts capital for growth, McGrann says. Lack of profitability explains the nation’s decade-long phase of cow liquidation.
“Loss in beef demand due to the recession, rising production costs, high estate taxes, and the animal rights movement, on top of the normal drought and volatile cattle price conditions, are reducing profit potentials in the beef cattle sector, which historically hasn’t been profitable,” McGrann says.
Concentration & infrastructure
Growing concentration, especially in the cow-calf sector, is one reason Barry Dunn terms the industry’s infrastructure as “fragile.” He’s dean of South Dakota State University’s College of Agricultural and Biological Sciences.
Think here of the outside inputs necessary for efficient cattle production and marketing. For instance, transportation, labor with the necessary skill set, access to veterinary services, and access to packers are all becoming limited in some parts of the country. That’s before considering the lost dollars and intellectual resources for research, Extension education and all of the rest.
“As an example, at what point does the cow-calf sector become too small to attract research investment from pharmaceutical companies and the like?” Dunn wonders.
Dunn points to the recent multi-million dollar investment by a South Dakota agricultural cooperative to construct massive unit train car loading facilities for distillers grains. “They could have used the money to build a feedlot or put toward a beef-packing plant, but they chose to invest in these facilities,” Dunn says. “As an industry, I don’t think we should ignore that kind of investment choice.”
Yet, concentration itself continues to offer the industry, and its producers, advantages.
“Economies of scale will continue to bring concentration in agriculture. This concentration contributes to efficiency of production and distribution and lowers food costs to consumers,” McGrann explains.
“Modern agriculture with well-trained human resources and machinery provides an opportunity for tremendous economies of scale. If the ranch business is too small to capture economies of scale, it won’t be competitive in the marketplace. Leasing land, outsourcing grain harvesting and application of chemicals and fertilizer that require specialized machinery are ways to achieve economies of scale. Good management cannot overcome the constraint of limited resources.”
For perspective, McGrann adds, “Larger operations that capture the economies of scale can generate 3-7% return on assets (ROA). In the business world, that’s not a highly profitable investment; 15-20% ROA would be a high operating return.”
On the production side, the sustainable cow-calf model McGrann envisions continues to revolve around reproductive efficiency.
“Weight isn’t as important as live calves that will perform to meet market demands,” McGrann says. “The weaning rate based on exposed cows should be calculated for each calf crop. Managers should also identify losses from breeding to calving and weaning, and finding cost-effective ways to reduce these losses.
“Intense management based on calculations will be the driving force behind operating profitably. For cow-calf operations selling weaned calves, the best performance measure is pounds of weaned calf produced per female exposed, or average weaning weight times weaning percent,” he says.
But, McGrann also believes sustainability favors those who add pounds to calves through retained ownership. “Production systems have to optimize the use of the grazing resources in producing these calves. Retained ownership can add pounds at a lower cost than through high-milking cows,” he says.
The business side of the equation is at least as important as production, though. “These operations really have to operate as a business first. Finance, marketing and personnel management just have to be priorities,” McGrann says.
“Good analytical skills demand good data. That’s one reason some cow-calf producers avoid marketing and retained ownership. The business model I envision must be strong in these areas,” he adds.
Editor’s note: Find Young Leadership Series resources at: http://agfacts.tamu.edu/~lfalcone/TSCRAYLS/YLSMainMenu.htm