j. walter prevatt, phd extension economist and professor auburn university the abcs of raising...
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What Are The Costs/Economics of Finishing Animals For The Freezer?
J. Walter Prevatt, PhDExtension Economist and Professor
Auburn University
The ABCs of Raising Animals For The FreezerMultiple Locations, Auburn University
November 9 & 16, 2010
What Are The Costs/Economics of Finishing Animals For The Freezer?
Economics is the study of allocating scarce resources among competing uses to
produce goods and services for consumers!
What Are The Costs/Economics of Finishing Animals For The Freezer?
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!
What Are The Costs/Economics of Finishing Animals For The Freezer?
The economics of finishing animals for
the freezer can be as simple as
VOLUME and MARGIN!
Finishing Animals For The FreezerBeware:1)Direct meat marketing involves more time
than commodity meat marketing2)Direct meat marketing incurs more costs
than commodity meat marketing3)Direct meat marketing requires more labor
than commodity meat marketing4)Direct meat marketing requires more
management than commodity meat marketing
5)Direct meat marketing is more risky than commodity more marketing
What Are The Costs/Economics of Finishing Animals For The Freezer?
Why would you want to produce and market meat directly to the consumer?
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 labor3) You have the capital to invest in this
endeavor4) You have the management ability to be
successful5) 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)
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
What Are The Costs/Economics of Finishing Animals For The Freezer?
Scenario One – Example Budget One
Beef Animal Sold Live
Decision aids may be found at:http://www.ag.auburn.edu/agec/pubs/budgets/
Select “Beef Budgets”
Assumptions – Scenario One, Example One (Beef Sold Live):
Grain-fed production system40 head of feeder cattle750 lbs. initial weight180 days of feeding3.0 lbs. average daily gain1.5 % death loss1,238 lbs. slaughter weight
40 HEAD: GRAIN FINISHED SLAUGHTER CATTLE BUDGET; ALABAMA, 2009.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 % OFITEM HEAD UNIT QUANTITY COST/UNIT VALUE/COST SOLD TOTAL
1. GROSS RECEIPTS SLAUGHTER CATTLE 39.00 CWT. 12.38 92.00 $44,419 $1,139 100.0%
2. VARIABLE COST FEEDER CALVES 40.00 CWT. 7.50 90.00 $27,000 $692 61.0% WINTER GRAZING ACRE 0.00 200.00 $0 $0 0.0% SALT & MIN. CWT. 13.50 26.00 $351 $9 0.8% HAY TON 15.00 60.00 $900 $23 2.0% VET & MED HD. 40.00 17.50 $700 $18 1.6%
BACKGROUNDING FEED TON 9.00 120.00 $1,080 $28 2.4% SUPPLEMENTAL FEED TON 75.00 120.00 $9,000 $231 20.3% LABOR HR. 200.00 8.25 $1,650 $42 3.7% LAND RENTAL ACRE 0.00 25.00 $0 $0 0.0% MARKETING EXPENSES HD. 39.00 50.00 $1,950 $50 4.4% BEEF PROMOTION FEE HD. 39.00 1.50 $59 $2 0.1% EQUIPMENT (REPAIR) DOL. $60 $2 0.1% INTEREST ON OP. CAP. DOL. 17,042.55 0.0600 $1,023 $26 2.3%
TOTAL VARIABLE COSTS $43,772 $1,122 98.9%
3. INCOME ABOVE VARIABLE COST $648 $17
4. FIXED COST GENERAL OVERHEAD HD. 40.00 2.50 $100 $3 0.2% WINTER GRAZING ACRE 0.00 8.88 $0 $0 0.0% INT. ON BLDG. AND EQUIPMENT DOL. 1,831.25 0.0500 $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 $1,135 100.0%
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) $692
4.69 CWT. OF GAIN/HD. SOLD; GROSS MARGIN ($/HD SOLD) $447
TOTAL PRODUCTION COST PER HEAD ($/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.
ItemUnit
ChangeGrain-Fed
Beef System
--Dollars per head sold--
Death loss + 1% -$6.92
Interest rate + 1 point -$4.84
Avg. daily gain + 0.1 # +$16.56
Grain price +$10.00/ton -$21.89
Feeder price + $1/cwt. -$7.92
Slaughter price + $1cwt. +$12.38
What Are The Costs/Economics of Finishing Animals For The Freezer?
Scenario One – Example Budget Two
Beef Animal Sold Live
Decision aids may be found at:http://www.ag.auburn.edu/agec/pubs/budgets/
Select “Beef Budgets”
Assumptions – Scenario One, Example Two (Beef Sold Live):
Grass-fed production system150 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 EnterpriseGrass-Fed Costs & Returns
DATA ENTRY IN BLUE!150 Length of Finishing Program, Days40 Acres
850 Lbs. Stocked Per Acre850 Average Weight of Feeders, Lbs.
$80.00 Feeder Price, $/cwt.2.75 Average Daily Gain
3.00% Percent Shrink, %$100.00 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
Locally Produced Beef EnterpriseGrass-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.
What Are The Costs/Economics of Finishing Animals For The Freezer?
Scenario Two
Beef Sold In The Meat (Hanging Carcass)
Decision aids may be found at:http://www.ag.auburn.edu/agec/pubs/budgets/
Select “Beef Budgets”
Assumptions – Scenario Two (Beef Sold as a Hanging Carcass):
Grass-fed or Grain-fed production systemAverage Live Weight - 1,300 lbs.. 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 - $0.05 / lb. (of carcass wt.)
Locally-Produced Beef Enterprise Estimates
DATA INPUT
Average Live Weight, Lbs. 1,300
Average Live Weight Price ($ 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.) $0.05
*The dressing and meat yield percentages are very sensitive variables. Use conservative
estimates for these variables. For instance, grain-fed and grass-fed animals may have different
dressing percentages. Additionally, the meat yield percentage varies with animals of different
yield grades. This example assumes a Yield Grade 3 animal is 50 percent of the carcass weight.
Locally-Produced Beef Enterprise Estimates
DATA INPUT
Average Live Weight, Lbs. 1,300
Average Live Weight Price ($ Per Lb. Live Wt.) $1.00Cost/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.) $0.45Cost/Hd = $363.52
Transp. & Misc. Costs ($ Per Lb. Carcass Wt.) $0.03Cost/Hd = $24.18
Office & Administrative Costs ($ Per Lb. Carcass Wt.) $0.02Cost/Hd = $16.12
Sales Costs ($ Per Lb. Carcass Wt.) $0.05Cost/Hd = $40.30
Locally-Produced Beef Enterprise Estimates
Table 1. Estimated costs for locally-produced beef enterprise, Alabama, 2009.1,300 Lbs. 806 Lbs. 403 Lbs.
Live Wt. Carcass Wt. Meat Yield Wt.Itemized Costs $ Per Head $ Per Pound $ Per PoundAnimal Production Costs $1,300.00 $1.61 $3.23Harvest & Processing Costs $363.52 $0.45 $0.90Transp. & Misc. Costs $24.18 $0.03 $0.06Office & Administrative Costs $16.12 $0.02 $0.04Sales Costs $40.30 $0.05 $0.10
Total Cost to Customer $1,744.12 $2.16 $4.33
What Are The Costs/Economics of Finishing Animals For The Freezer?
Scenario Three
Beef Sold By The Cut
Decision aids may be found at:http://www.ag.auburn.edu/agec/pubs/budgets/
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 system403-Lb. Carcass, Total costs of $1,744.12Fajita/Stir Fry - $4.99/lb. & 10.5 lbs. per
carcassGround Beef - $2.59/lb. & 234.1 lbs. per
carcassNY Strip Steak - $8.50/lb. & 19.3 lbs. per
carcassRib-eye Steak - $7.50/lb. & 32.2 lbs. per
carcassBeef Roast - $4.59/lb. & 90.0 lbs. per carcassBeef Tenderloin - $11.00/lb. & 16.1 lbs. per
carcass
*Pounds of a given cut will vary widely among animals. You will need to monitor these values to determine a conservative average estimate.
*Pounds of a given cut will vary widely among animals. You will need to monitor these values to determine a conservative average estimate.Data entry is hi-lited in blue.
Table w. Estimated costs for locally produced beef sold by cuts, Alabama, 2009. Selected Beef Cuts Sold
Fajita/ Ground NY Strip Ribeye Beef Beef Estimated
Item Stir Fry Beef Steak Steak Roast Tenderloin Totals*
Lbs. Per Carcass 10.5 234.1 19.3 32.2 90.0 16.1 402$ Per Lb. $4.99 $2.59 $8.50 $7.50 $4.59 $11.00Total $ $52.29 $606.43 $164.42 $241.80 $413.12 $177.32 $1,655.37
Table wx. Estimated costs for locally produced beef sold by cuts, Alabama, 2009. Selected Beef Cuts Sold
Fajita/ Ground NY Strip Ribeye Beef Beef Estimated Projected Does it
Item Stir Fry Beef Steak Steak Roast Tenderloin Totals* * Totals* Check?
Lbs. Per Carcass 10.5 234.1 19.3 32.2 90.0 16.1 402 <= 403 Yes$ Per Lb. $4.99 $2.59 $8.50 $7.50 $4.59 $11.00Total $ $52.29 $606.43 $164.42 $241.80 $413.12 $177.32 $1,655.37 >= $1,744.12 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.
What Are The Costs/Economics of Finishing Animals For The Freezer?
Final Thoughts
Final thoughts: Write down your goals and objectives – be
realistic, revise them when necessaryWrite down your production and marketing
plansOrganize 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 Information1) http://www.misa.umn.edu/vd/bixplan.html2) http://www.agmrc.org/agmrc/3) http://www.ams.usda.gov/directmarketing/4) http://www.attra.org5) http://cpa.utk.edu/default.htm6) http://www.iowaagopportunity.org7) http://www.ciras.iastate.edu/BeefManual/intro.html8) http://agmrc.org/agmrc/business/strategyand analysi
s/romancevsreality.htm9) http://www.foodmap.unl.edu/report files/HowToDirect
MarketInternet.pdf10) http://www.cadefarms.org/pdf/Produciton%20Manual
.pdf11) http://www.sare.org/bulletin/marketing/12) http://www.uky.edu/Ag/AgEcon/pubs/ext_aec/ext2000-
13.pdf
Thank You For Your Attention!
Questions ?
What Are The Costs/Economics of Finishing Animals For The Freezer?
J. Walter Prevatt, PhDExtension Economist and Professor
Auburn University
The ABCs of Raising Animals For The FreezerMultiple Locations, Auburn University
November 9 & 16, 2010