Transcript The Economics of Producing Locally ….

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
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 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
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
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)
The Economics of Finishing Animals
For The Freezer: “Is your idea feasible?”
1) Write down your goals – be realistic, describe what you want
2)
3)
4)
5)
to accomplish (level of net income - $xx,xxx per year, profit
“x” years out of 10 years, etc.)
Production & Financial plans – develop an enterprise
budget with as much detail as possible to help determine if
your idea is feasible
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.
Organize a team to help you evaluate your plans and offer
suggestions/express concerns
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 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
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
ITEM
1. GROSS RECEIPTS
SLAUGHTER CATTLE
2. VARIABLE COST
FEEDER CALVES
WINTER GRAZING
SALT & MIN.
HAY
VET & MED
BACKGROUNDING FEED
SUPPLEMENTAL FEED
LABOR
LAND RENTAL
MARKETING EXPENSES
BEEF PROMOTION FEE
EQUIPMENT (REPAIR)
INTEREST ON OP. CAP.
TOTAL VARIABLE COSTS
PRICE OR
TOTAL
COST/UNIT VALUE/COST
$/HEAD
SOLD
% OF
TOTAL
HEAD
UNIT
QUANTITY
39.00
CWT.
12.38
92.00
$44,419
$1,139
100.0%
40.00
CWT.
ACRE
CWT.
TON
HD.
7.50
0.00
13.50
15.00
40.00
90.00
200.00
26.00
60.00
17.50
$27,000
$0
$351
$900
$700
$692
$0
$9
$23
$18
61.0%
0.0%
0.8%
2.0%
1.6%
TON
TON
HR.
ACRE
HD.
HD.
DOL.
DOL.
9.00
75.00
200.00
0.00
39.00
39.00
120.00
120.00
8.25
25.00
50.00
1.50
17,042.55
0.0600
$1,080
$9,000
$1,650
$0
$1,950
$59
$60
$1,023
$28
$231
$42
$0
$50
$2
$2
$26
2.4%
20.3%
3.7%
0.0%
4.4%
0.1%
0.1%
2.3%
$43,772
$1,122
98.9%
3. INCOME ABOVE VARIABLE COST
4. FIXED COST
GENERAL OVERHEAD
WINTER GRAZING
INT. ON BLDG. AND EQUIPMENT
DEPR. ON BLDG. AND EQUIP.
OTHER F.C. ON BLDG. & EQUIP.
HD.
ACRE
DOL.
DOL.
DOL.
40.00
0.00
1,831.25
TOTAL FIXED COSTS
5. TOTAL COST OF ALL SPECIFIED EXPENSES
6. NET RETURN ABOVE TOTAL COSTS
VALUE OF SLAUGHTER CATTLE PER HEAD ($/HD SOLD)
COST OF PURCHASED FEEDER CALVES PER HEAD ($/HD SOLD)
4.69 CWT. OF GAIN/HD. SOLD;
GROSS MARGIN ($/HD SOLD)
TOTAL PRODUCTION COST PER HEAD ($/HD SOLD)
2.50
8.88
0.0500
$648
$17
$100
$0
$92
$264
$23
$3
$0
$2
$7
$1
0.2%
0.0%
0.2%
0.6%
0.1%
$478
$12
1.1%
$44,250
$1,135
100.0%
$170
$4
$1,139
$692
$447
$442
VALUE OF GAIN PER CWT. ($/CWT)
$95
COST OF GAIN PER CWT.:
TO COVER VARIABLE COSTS ($/CWT)
$92
TO COVER TOTAL COSTS ($/CWT)
$94
ABOVE VARIABLE COSTS ($/HD)
$17
NET RETURNS PER HEAD SOLD:
ABOVE TOTAL COSTS ($/HD)
BREAKEVEN SLAUGHTER PRICE:
MAXIMUM FEEDER PURCH. PRICE:
$4
TO COVER VARIABLE COSTS ($/CWT)
$91
TO COVER TOTAL COSTS ($/CWT)
$92
TO COVER VARIABLE COSTS ($/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
Interest rate
Avg. daily gain
+ 1%
-$6.92
+ 1 point
-$4.84
+ 0.1 #
+$16.56
+$10.00/ton
-$21.89
Feeder price
+ $1/cwt.
-$7.92
Slaughter price
+ $1cwt.
+$12.38
Grain price
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 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.
$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 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
$10,000
$256
$1,000
$26
$47,700
$1,223
$60
$2
Family Living Withdrawal
Growth Cap./Retirement
Total Cost/Price Objective
Net Income
* 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 system
Average 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.)
$0.05
*The dressing and m eat yield percentages are very sensitive variables. Use conservative
estim ates for these variables. For instance, grain-fed and grass-fed anim als m ay have different
dressing percentages. Additionally, the m eat yield percentage varies w ith anim als of different
yield grades. This exam ple assum es a Yield Grade 3 anim al is 50 percent of the carcass w eight.
Locally-Produced Beef Enterprise Estimates
DATA INPUT
Average Live Weight, Lbs.
1,300
Average Live Weight Price ($ Per Lb. Live Wt.)
Cost/Hd =
$1,300
Average Dressing Percentage (of live wt.)*
Carcass Wt =
806
Average Meat Yield Percentage (of carcass wt.)*
Lbs. of Meat =
403
Average Harvest & Proc. Costs ($ Per Lb. Carcass Wt.)
Cost/Hd =
$363.52
Transp. & Misc. Costs ($ Per Lb. Carcass Wt.)
Cost/Hd =
$24.18
Office & Administrative Costs ($ Per Lb. Carcass Wt.)
Cost/Hd =
$16.12
Sales Costs ($ Per Lb. Carcass Wt.)
Cost/Hd =
$40.30
$1.00
62%
50%
$0.45
$0.03
$0.02
$0.05
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 Pound
Animal Production Costs
$1,300.00
$1.61
$3.23
Harvest & Processing Costs
$363.52
$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
$1,744.12
$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 system
403-Lb. Carcass, Total costs of $1,744.12
Fajita/Stir Fry - $4.99/lb. & 10.5 lbs. per carcass
Ground Beef - $2.59/lb. & 234.1 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.
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
Steak
Roast Tenderloin Totals*
Item
Stir Fry
Lbs. Per Carcass
$ Per Lb.
Total $
10.5 234.1 19.3 32.2 90.0 16.1
402
$4.99 $2.59 $8.50 $7.50 $4.59 $11.00
$52.29 $606.43 $164.42 $241.80 $413.12 $177.32 $1,655.37
Beef
Steak
*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, 2009.
Selected Beef Cuts Sold
Item
Fajita/
Stir Fry
Ground NY Strip
Beef
Steak
Ribeye
Steak
Beef
Beef Estimated
Projected Does it
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 $11.00
Total $
$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 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)
7)
8)
9)
10)
11)
12)
http://www.misa.umn.edu/vd/bixplan.html
http://www.agmrc.org/agmrc/
http://www.ams.usda.gov/directmarketing/
http://www.attra.org
http://cpa.utk.edu/default.htm
http://www.iowaagopportunity.org
http://www.ciras.iastate.edu/BeefManual/intro.html
http://agmrc.org/agmrc/business/strategyand
analysis/romancevsreality.htm
http://www.foodmap.unl.edu/report
files/HowToDirectMarketInternet.pdf
http://www.cadefarms.org/pdf/Produciton%20Manual.pdf
http://www.sare.org/bulletin/marketing/
http://www.uky.edu/Ag/AgEcon/pubs/ext_aec/ext2000-13.pdf
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