| ||After "surviving" the last few years of lower cattle prices and margins, Alberta cow/calf operators are asking, "why do we keep cows?" Some of the more common reasons I hear from cattlemen are:
Although profit is generally the driving motive, quite often the decision to be in the cow/calf business involves a combination of these reasons. Any long term evaluation involves a practical assessment of both the tangibles (profitability; asset growth) and the intangibles (a way of life; an asset to pass on to the next generation).
- to make money
- to use idle grassland (or, my land suits grazing better),
- to diversify the farming operation, or
- I like the way of life.
Farm families that recognize, understand and value the trade-offs between each of these have taken the first step in effectively managing their cow/calf operations.
To put this into perspective, let’s take a closer look at the historical economic performance of Alberta cow/calf enterprises.
The following discussions should:
Is there money in the cow/calf business?
- provide benchmarks for you to judge your operation’s performance,
- pose a few hard questions about the business, and
- speculate on answers to "why do we keep cows?"
How have Alberta cow/calf enterprises fared over the past five years? Based on our AgriProfit$ research program results, Figure 1 shows:
From 1995 through 1998, average returns to equity from cow/calf operations were negative. This was driven mainly by the lower prices associated with the cattle cycle "bottoming out".
- average Alberta cow/calf enterprise returns to equity* (in $/lb. weaned)
- [* "Return to Equity" (R to E) is the margin (profit) remaining after all costs (including unpaid operator/family labour) are paid.]
- average Central Alberta fall-run steer calf prices.
Prior to this period historical information indicates that cow/calf enterprises earned modest profits. Forecasts for 2000 and 2001 are for calf prices to remain stable in the range of 1999 levels. This will likely translate into a continuation of the positive margins posted at the end of Figure 1.
Management makes a difference
The facts and figures related to the cow/calf business are rather sobering. Earning a living in this business is difficult. However, a look at the "top managers" show that a dollar can be turned.
The averages displayed in Figure 1 can be deceiving. Producers who aggressively manage their operations certainly performed better than these averages.
For instance, "top managers" on the AgriProfit$ program had net returns roughly $0.30 per lb. higher in both 1998 and 1999 than averages shown in Figure 1.
Cost control important
Why do we see such a difference? Cost control is fundamental to economic success of cow/calf operations. Producers need to assess the pros and cons of each input, and each asset, used by the cow/calf enterprise. There should be both short and long term payback coming from their use. This is likely the root of the difference between the "averages" and the "top management group".
Contribution to the "whole farm" picture
Often, cow/calf enterprises are only one component of farm operations. How did the AgriProfit$ participants, with cow herds, fare when we look at combined net earnings of all their farm enterprises (ie. for the "whole farm")?
Figure 2 shows the farm level "return on assets" for producers on the AgriProfits$ program. From 1995 through 1999, the rate of return to all farm assets was positive even though cow/calf enterprises suffered some degree of losses during the same period. The cow herds weren’t a "dead weight" ... they made a contribution. But how?
Effective resource use implies that all farm assets are as fully utilized as possible. Each enterprise contributes to covering ownership costs. One example of this might be that revenues from a cow herd will cover part of the fixed costs of assets needed to grow forage crops. Another is the cow herd grazing land that has no other alternate use. The act of grazing creates value where none existed before.
Role of diversification
Having a diversified operation means that positive returns for one enterprise can balance the negative returns of another over time. Healthy crop and forage receipts may offset depressed beef revenues.
In total, a cow/calf enterprise can provide stability in farm level income. This is likely what happened with our AgriProfit$ participants.
Can we value a "way of life"?
The last reason noted at the outset for keeping cows was "I like the way of life". This article indirectly suggests that there is a trade off, in terms of foregone "earnings", to be in the beef business. We recognize this value ... but defining how a beef operation can sustain both income and quality of life needs is best covered in another issue.
The home stretch
All together, this overview provides an indication that success in the cow/calf business, measured in economic terms, is earned by day-in/day-out focused management. Dr. Michael Boehlje from Purdue University once said,
"Family farmers of the future will be defined by their management of labour, production and marketing opportunities and less by their own labour and land holdings."
The reasons for keeping cows yesterday may be the same as today ... but, the economic and financial performance required in the future will be more demanding.
- Overall, cow/calf operations have weathered a few years of poor prices. Those producers who have practiced cost control have more likely fared better than the "average".
- Strong, stable calf prices over the next few years should result in continued positive net returns for cow/calf enterprises.
- Cow herds can play a significant role in "harvesting" income from lower-value resources, such as land suited for grazing. The higher the investment dedicated to the cow/calf enterprise, the more difficult this becomes.
- Implementing good economic and management information will significantly improve your bottom line.