What Are The Costs/Economics of Finishing Animals For The Freezer? 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: Direct meat marketing involves more time than commodity meat marketing Direct meat marketing incurs more costs than commodity meat marketing Direct meat marketing requires more labor than commodity meat marketing Direct meat marketing requires more management than commodity meat marketing 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? You have the time available 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 (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.)

On Measuring Costs and Returns: 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?” 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.) 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”

Scenario One, Example One (Beef Sold Live): 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

--Dollars per head sold-- 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 + 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 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

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”

Grass-fed or Grain-fed production system 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.)

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”

Marketing less-than the 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.

Pounds of a given cut will vary widely among animals *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.

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 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

Thank You For Your Attention! Questions ?

What Are The Costs/Economics of Finishing Animals For The Freezer? 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