What Are The Costs/Economics of Finishing Animals For The Freezer?

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1 J. Walter Prevatt, PhD Extension Economist and Professor Auburn University The ABCs of Raising Animals For The Freezer Multiple Locations, Auburn University November 9 & 16, 2010 Economics is the study of allocating scarce resources among competing uses to produce goods and services for consumers! Economics is the study of rational producers that allocate scarce resources among competing uses to produce goods and services for rational consumers! Romance is not included in the study of economics! 1

2 The economics of finishing animals for the freezer can be as simple as VOLUME and MARGIN! Finishing Animals For The Freezer Beware: 1) Direct meat marketing involves more time than commodity meat marketing 2) Direct meat marketing incurs more costs than commodity meat marketing 3) Direct meat marketing requires more labor than commodity meat marketing 4) Direct meat marketing requires more management than commodity meat marketing 5) Direct meat marketing is more risky than commodity more marketing Why would you want to produce and market meat directly to the consumer? 2

3 Why would you want to produce and market meat directly to the consumer? 1) You have the time available 2) You can provide or have access to additional labor 3) You have the capital to invest in this endeavor 4) You have the management ability to be successful 5) You are willing to accept the risks associated with direct marketing for the opportunity to get paid for your full factors of production (production, financial, legal, personal, managerial, price, etc.) Why would you want to produce and market meat directly to the consumer? Some Factors to Consider: You have the desire and commitment to do this job. You can provide or have access to additional labor. You have the capital to invest in this endeavor. You have the management ability to be successful. You are willing to accept the risks associated with direct marketing for the opportunity to get paid for your full factors of production. (types of risk may include production, financial, legal, personal, managerial, price, etc.) The Costs and Returns of Producing and Marketing Meat Directly to the Consumer Depends on How You Measure Them! On Measuring Costs and Returns: Returns Over Cash Expenses (ROCE) (Gross Revenue Cash Expenses) Net Farm Income (NFI) (ROCE Depreciation +/ Inventory Adj.) Net Income (NI) (NFI Opportunity Costs) 3

4 The Economics of Finishing Animals For The Freezer: Is your idea feasible? 1) Write down your goals be realistic, describe what you want to accomplish (level of net income $xx,xxx per year, profit x years out of 10 years, etc.) 2) Production & Financial plans develop an enterprise budget with as much detail as possible to help determine if your idea is feasible 3) Marketing plan determine what you plan to produce, describe who you plan to market it to, how and where you plan to market your product, how to price your product, etc. 4) Organize a team to help you evaluate your plans and offer suggestions/express concerns 5) Sensitivity analysis identify the sensitive variables and evaluate their impact on net income for a one unit change in each sensitive variable Scenario One Example Budget One Beef Animal Sold Live Decision aids may be found at: Select Beef Budgets Assumptions Scenario One, Example One (Beef Sold Live): Grain fed production system Grain fed production system 40 head of feeder cattle 750 lbs. initial weight 180 days of feeding 3.0 lbs. average daily gain 1.5 % death loss 1,238 lbs. slaughter weight 4

5 40 HEAD: GRAIN FINISHED SLAUGHTER CATTLE BUDGET; ALABAMA, ESTIMATED COSTS AND RETURNS; USING RECOMMENDED MANAGEMENT PRACTICES; 750 LBS. BEG. WT.; 3.00 LBS. ADG.; 180 TOTAL DAYS FEEDING PERIOD; 1125 LBS.STOCKED/AC; 30 DAYS OF BACKGROUNDING FEED REQUIRED; 1.50 HD. STOCKED/AC; 150 DAYS OF SUPPLEMENTAL FEED REQUIRED; 1.50 % DEATH LOSS; 1238 LBS. ENDING WEIGHT W/ 4 % SHRINK PRICE OR TOTAL $/HEAD % OF ITEM HEAD UNIT QUANTITY COST/UNIT VALUE/COST SOLD TOTAL 1. GROSS RECEIPTS SLAUGHTER CATTLE CWT $44,419 $1, % 2. VARIABLE COST FEEDER CALVES CWT $27,000 $ % WINTER GRAZING ACRE $0 $0 0.0% SALT & MIN. CWT $351 $9 0.8% HAY TON $900 $23 2.0% VET & MED HD $700 $18 1.6% BACKGROUNDING FEED TON $1,080 $28 2.4% SUPPLEMENTAL FEED TON $9,000 $ % LABOR HR $1,650 $42 3.7% LAND RENTAL ACRE $0 $0 0.0% MARKETING EXPENSES HD $1,950 $50 4.4% BEEF PROMOTION FEE HD $59 $2 0.1% EQUIPMENT (REPAIR) DOL. $60 $2 0.1% INTEREST ON OP. CAP. DOL. 17, $1,023 $26 2.3% TOTAL VARIABLE COSTS $43,772 $1, % 3. INCOME ABOVE VARIABLE COST $648 $17 4. FIXED COST GENERAL OVERHEAD HD $100 $3 0.2% WINTER GRAZING ACRE $0 $0 0.0% INT. ON BLDG. AND EQUIPMENT DOL. 1, $92 $2 0.2% DEPR. ON BLDG. AND EQUIP. DOL. $264 $7 0.6% OTHER F.C. ON BLDG. & EQUIP. DOL. $23 $1 0.1% TOTAL FIXED COSTS $478 $12 1.1% 5. TOTAL COST OF ALL SPECIFIED EXPENSES $44,250 $1, % 6. NET RETURN ABOVE TOTAL COSTS $170 $4 VALUE OF SLAUGHTER CATTLE PER HEAD ($/HD SOLD) $1,139 COST OF PURCHASED FEEDER CALVES PER HEAD ($/HD SOLD) $ CWT. OF GAIN/HD. SOLD; GROSS MARGIN $447 ($/HD SOLD) TOTAL PRODUCTION COST PER HEAD ($/HD SOLD) $442 VALUE OF GAIN PER CWT. ($/CWT) $95 COST OF GAIN PER CWT.: TO COVER VARIABLE COSTS ($/CWT) $92 TO COVER TOTAL COSTS ($/CWT) $94 NET RETURNS PER HEAD SOLD: ABOVE VARIABLE COSTS ($/HD) $17 ABOVE TOTAL COSTS ($/HD) $4 BREAKEVEN SLAUGHTER PRICE: TO COVER VARIABLE COSTS ($/CWT) $91 TO COVER TOTAL COSTS ($/CWT) $92 MAXIMUM FEEDER PURCH. PRICE: TO COVER VARIABLE COSTS ($/CWT) $92 TO COVER TOTAL COSTS ($/CWT) $91 Table C. The effect of a unit change in the quantity or price of a given factor on net returns per head sold for the grain-fed beef system. Item Unit Change Grain-Fed Beef System --Dollars per head sold-- Death loss + 1% -$6.92 Interest ees rate ae + 1 point -$4.84 Avg. daily gain # +$16.56 Grain price Feeder price Slaughter price +$10.00/ton -$ $1/cwt. -$ $1cwt. +$

6 Scenario One Example Budget Two Beef Animal Sold Live Decision aids may be found at: Select Beef Budgets Assumptions Scenario One, Example Two (Beef Sold Live): Grass fed production system 150 Days, Length of Finishing Program 40 Acres 850 Lbs. Stocked Per Acre 850 lbs. Average Weight of Feeders $80.00/cwt. Feeder Price 2.75 lbs. Average Daily Gain 3.00% Percent Shrink $100.00/cwt. Slaughter Price 1.00% Death Loss 1,263 lbs. slaughter weight Locally Produced Beef Enterprise Grass-Fed Costs & Returns DATA ENTRY IN BLUE! 150 Length of Finishing Program, Days 40 Acres 850 Lbs. Stocked Per Acre 850 Average Weight of Feeders, Lbs. $ Feeder Price, $/cwt Average Daily Gain 3.00% Percent Shrink, % $ Slaughter Price, $/cwt. 1.00% Death Loss, % $8,500 Operating Costs $1,000 Fixed Costs $10,000 Family Living Withdrawal $1,000 Growth Cap./Retirement 6

7 Locally Produced Beef Enterprise Grass-Fed Costs & Returns Item Total $ $/Head* Slaughter Cattle Revenues $47,760 $1,225 Feeder Calves $27,200 $697 Operating Costs $8,500 $218 Fixed Costs $1,000 $26 Family Living Withdrawal $10,000 $256 Growth Cap./Retirement $1,000 $26 Total Cost/Price Objective $47,700 $1,223 Net Income $60 $2 * Adjusted for death loss. Assumes the beef animal is sold live. Scenario Two Beef Sold In The Meat (Hanging Carcass) Decision aids may be found at: Select Beef Budgets Assumptions Scenario Two (Beef Sold as a Hanging Carcass): Grass fed or Grain fed production system Average Live Weight 1,300 lbs.. Average Live Weight Price $1 00/lb Average Live Weight Price $1.00/lb. Average Dressing Percentage 62% (of live wt.) Average Meat Yield Percentage 50% (of carcass wt.) Average Harvest & Proc. Costs $0.45 / lb. (of carcass wt.) Transp. & Misc. Costs $0.03 / lb. (of carcass wt.) Office & Administrative Costs $0.02 / lb. (of carcass wt.) Sales Costs $0.05 / lb. (of carcass wt.) 7

8 Locally-Produced Beef Enterprise Estimates DATA INPUT Average Live Weight, Lbs. 1,300 Average Live Weight Price ($ Per Lb. Live Wt.) $1.00 Average Dressing Percentage (of live wt.)* 62% Average Meat Yield Percentage (of carcass wt.)* 50% Average Harvest & Proc. Costs ($ Per Lb. Carcass Wt.) $0.45 Transp. & Misc. Costs ($ Per Lb. Carcass Wt.) $0.03 Office & Administrative Costs ($ Per Lb. Carcass Wt.) $0.02 Sales Costs ($ Per Lb. Carcass Wt.) $0.05 *The dressing and meat yield percentages are very sensitive variables. Use conservative estimates for these variables. For instance, grain-fed and grass-fed animals may have different dressing percentages. Additionally, the meat yield percentage varies with animals of different yield grades. This example assumes a Yield Grade 3 animal is 50 percent of the carcass w eight. Locally-Produced Beef Enterprise Estimates DATA INPUT Average Live Weight, Lbs. 1,300 Average Live Weight Price ($ Per Lb. Live Wt.) $1.00 Cost/Hd = $1,300 Average Dressing Percentage (of live wt.)* 62% Carcass Wt = 806 Average Meat Yield Percentage (of carcass wt.)* 50% Lbs. of Meat = 403 Average Harvest & Proc. Costs ($ Per Lb. Carcass Wt.) $0.45 Cost/Hd = $ Transp. & Misc. Costs ($ Per Lb. Carcass Wt.) $0.03 Cost/Hd = $24.18 Office & Administrative Costs ($ Per Lb. Carcass Wt.) $0.02 Cost/Hd = $16.12 Sales Costs ($ Per Lb. Carcass Wt.) $0.05 Cost/Hd = $40.30 Locally-Produced Beef Enterprise Estimates Table 1. Estimated costs for locally-produced beef enterprise, Alabama, ,300 Lbs. 806 Lbs. 403 Lbs. Live Wt. Carcass Wt. Meat Yield Wt. Itemized Costs $ Per Head $ Per Pound $ Per Pound Animal Production Costs $1, $1.61 $3.23 Harvest & Processing Costs $ $0.45 $0.90 Transp. & Misc. Costs $24.18 $0.03 $0.06 Office & Administrative Costs $16.12 $0.02 $0.04 Sales Costs $40.30 $0.05 $0.10 Total Cost to Customer $1, $2.16 $4.33 8

9 Scenario Three Beef Sold By The Cut Decision aids may be found at: Select Beef Budgets Scenario Three Beef Sold By The Cut! Marketing less than the Whole Animal will quickly provide you with a reality check when you sell beef by the cut! We need to sell everything including the moo if possible! Assumptions Scenario Three (Beef Sold by the Cut)*: Grass fed or Grain fed production system 403 Lb. Carcass, Total costs of $1, Fajita/Stir Fry $4.99/lb. & 10.5 lbs. per carcass Ground Beef $2.59/lb. & lbs. per carcass NY Strip Steak $8.50/lb. & 19.3 lbs. per carcass Rib eye Steak $7.50/lb. & 32.2 lbs. per carcass Beef Roast $4.59/lb. & 90.0 lbs. per carcass Beef Tenderloin $11.00/lb. & 16.1 lbs. per carcass *Pounds of a given cut will vary widely among animals. You will need to monitor these values to determine a conservative average estimate. 9

10 Table w. Estimated costs for locally produced beef sold by cuts, Alabama, Selected Beef Cuts Sold Fajita/ Ground NY Strip Ribeye Beef Beef Estimated Item Stir Fry Beef Steak Steak Roast Tenderloin Totals* Lbs. Per Carcass $ Per Lb. $4.99 $2.59 $8.50 $7.50 $4.59 $11.00 Total $ $52.29 $ $ $ $ $ $1, *Pounds of a given cut will vary widely among animals. You will need to monitor these values to determine a conservative average estimate. Data entry is hi lited in blue. Table wx. Estimated costs for locally produced beef sold by cuts, Alabama, Selected Beef Cuts Sold Fajita/ Ground NY Strip Ribeye Beef Beef Estimated Projected Does it Item Stir Fry Beef Steak Steak Roast Tenderloin Totals* * Totals* Check? Lbs. Per Carcass <= 403 Yes $ Per Lb. $4.99 $2.59 $8.50 $7.50 $4.59 $11.00 Total $ $52.29 $ $ $ $ $ $1, >= $1, No *The numbers in the estimated totals column and projected totals column must follow the inequality signs in order for the cattle farmer to be fully compensated for all costs. Final Thoughts 10

11 Final thoughts: Write down your goals and objectives be realistic, revise them when necessary Write down your production and marketing plans Organize a team (business partners, trusted friends, professionals, Extension, or consultants)to help you assess your plans and make suggestions/express concerns Know your physical, financial, and management capabilities and limitations Get mentally tough learn how to deal with criticism, low performance, unpleasant situations, failure, etc. Measure performance and identify opportunities for improvement Be willing to consider, evaluate, and adopt change to meet the goals and objectives of your operation Additional Sources of Information 1) 2) 3) 4) 5) 6) org 7) 8) analysis/romancevsreality.htm 9) files/howtodirectmarketinternet.pdf 10) 11) 12) 13.pdf 11

12 J. Walter Prevatt, PhD Extension Economist and Professor Auburn University The ABCs of Raising Animals For The Freezer Multiple Locations, Auburn University November 9 & 16,