Beef & sheep business management

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1 Beef & sheep business management Animal Science 144 Beef Cattle & Sheep Production R. D. Sainz Lecture 13 Outline Business management Costs & returns Breakevens Marketing: Packers Channels Pricing Strategic alliances The cattle cycle 1

2 Profitability - feedlots Profitability cow-calf calf 2

3 3

4 Cowboy economics PROFIT = INCOME - EXPENSES Income: Maintain high productivity Improve marketing Limited control over prices Expenses: Low cost is key to profitability Feed costs normally 60-65% of total Breakevens Profit = income costs Profit = (lbs sold x price) costs Profit = {[(% calf crop x weaning wt) x price] + [(lb market cows and bulls) x price]} costs Breakeven price = annual cow cost average weaning wt x % calf crop 4

5 Breakevens Breakeven buying price = selling price average gain x cost of gain Breakeven price = Breakevens annual cow cost - value of market cows and bullssold average weaning wt x % calf crop % net calf crop = no. calves weaned no. cows in breeding herd (previous year) Breakevens So, to increase profit, increase lbs sold increase price decrease costs Ways to reduce costs: Reduce harvested and supplemental feed costs Use rotational grazing Use the right genetics Reduce labor costs Implement a strong herd health program 5

6 Marketing channels 6

7 Packer concentration Marketing Live weight Cash market 53.6% Marketing agreement 0.6% Carcass weight 37.2% 7.6% Formula (grid) 9.2% 91.6% Grid (formula) pricing Attempts to set prices for cattle based upon their value on the rail (carcass yield and grade). Mechanism for price discovery. 7

8 Grid pricing $/cwt Yield Grade Quality Grade Prime CAB Choice Base Select Standard Kansas State study: Grid pricing 202 pens of cattle 2.5% would benefit being sold on a live basis 58.9% best sold on a carcass (dressed) basis 38.6% best sold on a grid Grid pricing Concerns about formula pricing: The base price is derived from the previous week s market. Since the grid provides heavier discounts than premiums, the pressure tends to be downward over time. This is exacerbated by the growing amount of captive beef supplies, which reduce the need for packers to bid on the cash market. The USDA has studied packer concentration and cattle prices, and has not found any significant effect. Nevertheless, many producers remain skeptical. 8

9 Strategic Alliances 9

10 Strategic Alliances Advantages: information flow price discovery rewards for quality (+ or -) > 60 alliances currently operating in the US, e.g. Beef Works (Cargill) Monfort Integrated Genetics Farmland Supreme Beef Alliance Precision Beef Alliance Angus America Alliance Marketing alternatives direct sale retained ownership closed cooperatives marketing groups branded beef programs 10

11 Partnership for Quality Harris Ranch Beef >20,000 acres 1,300 employees Farming, feedlot, packing plant, thoroughbreds, hotel, restaurant Feedlot: 1 square mile, 100,000 head capacity >200 million lbs beef/year Partnership for Quality Attention to all aspects of the beef production chain, starting with the genetics, and continuing through slaughter and final preparation. Three profit centers: Fertility & maternal Growth performance Carcass quality Partnership for Quality Bulls: selected in consultation with HR board Marbling EPD +0.5 or greater Ribeye EPD 0.1 to +0.2 Backfat EPD +0.2 maximum Weaning weight EPD +25 minimum Yearling weight EPD +40 minimum Moderate-framed cattle Positive scrotal EPD and/or minimum 35 cm s. c. on yearling bulls Milk and birth weight according to producer s requirements Structurally sound; moderately thick or thicker muscling; good feet & legs; minimum sheath; deep rib; adequate capacity. 11

12 Partnership for Quality Calves: Cow-calf producers may sell outright to HR or retain ownership through the feedlot. Either way, they receive a grid price (based on carcass yield and grade), plus genetic and seasonality premiums. $1/cwt premium for calves sired by bulls meeting the HR criteria $1/cwt premium for feeders delivered to the feedlot between Nov. 1 and April 10 Retained ownership: Financing Vaccination protocol Feedlot performance data Carcass data 100% of the carcass merit premiums Partnership for Quality Feeders sold to feedlot: Grid prices based on California Cattle-Fax feeder cattle prices $1/cwt premium for calves vaccinated according to the protocol $2/cwt premium for calves weaned prior to shipping 25% of carcass merit premiums Carcass data Also: joint venture with Harris Ranch Partnership for Quality Harris Ranch Beef >20,000 acres 1,300 employees Farming, feedlot, packing plant, thoroughbreds, hotel, restaurant Feedlot: 1 square mile, 100,000 head capacity >200 million lbs beef/year 12

13 Future Beef Industry & academic leaders $250 million start-up funds Alliance included Seedstock producers Cow-calf producers Stocker operators Feedlots Packers 5 plants to be built (1st opened in Aug. 2001) Supermarket chain - Safeway Pharmaceutical company Fort Dodge Genetics/biotechnology company Celera AgGen Future Beef Members made a commitment to Use recommended bulls Use approved health products according to a recommended health program Feed cattle to specified carcass targets (Select quality grade, yield grades 1 & 2) Slaughter & process cattle using best management practices Pre-cleaning Electrical stimulation Acid washing Pelvic suspension? Market all beef through Safeway stores Future Beef Result: bankruptcy 13

14 Feeder Cattle (FC, CME) Monthly Price Chart 14