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Cow-Calf Economics Have Changed

Posted Nov. 1, 2008

People who study change and its causes have observed that change is often caused by a disturbance. Production agriculture is in a period of rapid change, with an economic environment that many have never experienced. If the agricultural industry is changing, what has been the disturbance? A few of the disturbances are the Renewable Fuels Standard, higher incomes in the highly populated countries of China and India, a lower value of the U.S. dollar relative to other currencies and higher oil prices. These "disturbances" are causing us to change the way we produce food and fiber.

No other sector in production agriculture has felt these disturbances more than the cow-calf sector. Corn, the primary ingredient for finishing cattle, has tripled in price in only a few short years. Corn prices have influenced other feed inputs, such as byproduct and protein feeds. This has escalated prices, causing the cost of gain in feed yards to double. This phenomenon is causing cattle feeders to bid less for calves and yearlings, thus lowering revenue to cow-calf producers. Prices for fertilizer and fuel have also soared. Add in the increases in steel prices for T-posts and barbed wire, and one can quickly see that cow-calf producers, especially those who rely heavily on introduced forages, are in a bind.

The Food and Agricultural Policy Research Institute, an agency that develops long-term projections for agricultural commodities, foresees negative cow-calf profitability for the five years starting with 2008.1 They predict profitability to decline to a low in 2010, with a $70 loss per cow. This is a considerable difference from the $150 per cow profit experienced during 2004 and 2005.

So is there anything cow-calf producers can do to increase their chances of survival over the next five years? The answer is yes. There are several possibilities, some of which will be more reasonable to incorporate than others. In the end, each producer will need to analyze his or her own situation and determine which changes are the most logical and economical.

There are two basic components that determine profit - revenues and costs. One producer may choose to concentrate on the revenue side while another producer may choose to concentrate on the cost side or even work on both revenues and costs. There are a couple of production practice changes that seem most applicable to all producers. One of these is applying fertilizer to introduced forages, i.e., bermudagrass, for the purpose of providing enough forage to graze another cow. Unless a cow-calf producer is producing animals that have some kind of added value substantially above the commodity price, then it is unlikely they can afford to purchase any nitrogen fertilizer, much less phosphorus. It may be justified in the short run to apply fertilizer to allow for an orderly plan of partial destocking of the breeding herd rather than have a fire sale. Otherwise, cow-calf producers need to consider running fewer cows and fertilizing less, if at all.

Another potential area to add profitability is to grow calves to heavier weights. Historically, value of gain has been in the range of 50¢ to 60¢ per pound. Today's market is roughly paying $1 per pound. High cost of gain in feed yards is causing them to place heavier calves. This has driven up the price of 800- to 900-pound calves relative to 500- to 700-pound calves. The market is giving cow-calf producers a strong signal to add weight to calves with grass. In many situations, the added value of gain will even justify the use of fertilizer.

Many choices exist for cow-calf producers to incorporate new or different production practices in order to survive the next five years. Necessity is a huge motivator for creativity and invention. Agricultural producers are among the best at facing change and I am optimistic about the future.

1Food and Agricultural Policy Research Institute-University of Missouri. Baseline Update for US Agricultural Markets. Columbia, Mo.: FAPRI-MU, 2008.