Grass-fed and Organic Beef: Production Cost and Profit Potential

Prices offered for grass-fed and organic grass-fed beef are higher than for conventional beef, but production costs, in many cases, are also higher. Producers need accurate costs of grass-fed beef production to determine the necessary selling price for economic sustainability of their enterprise. In 2008 and 2009, on average, producers in this study needed to receive $209 per hundredweight of live market animal to breakeven. When study participants were grouped into three production costs categories; lowest, mid and highest; farmers/ranchers in each cost classification category needed $92, $182, and $358 per hundredweight of beef produced, respectively, to break even.

Introduction:

Consumers are becoming more aware of their health and what they eat. Meat products from cattle consuming grass are lower in total fat and have higher levels of omega-3 fatty acids and conjugated linolenic acid (CLA) (Daley et al., 2007 in press; Clancy, 2006). The lower fat content of meat and milk products from grazing cattle may reduce the risk of cancer while the omega-3 fatty acids may reduce the risk of heart disease (Clancy, 2006). Due, in part, to these reported health benefits, a growing number of consumers are demonstrating a preference for milk and meat products from grass-fed animals. In addition, some consumers prefer meat that was produced without supplemental hormones or antibiotics. Others are interested in these meat products because of the positive environmental impacts of pasture-based production systems.

Demand for both organic and grass-fed beef is increasing in the U.S. Consumer purchases for organic meat, poultry, and seafood increased 139 percent from 2003 to 2004, and consumers have paid premiums of 15 to 200 percent more for organic meats (Mayer, 1999). Continued demand for organic beef is projected at 20+ percent per year. Demand for grass-fed beef is also increasing, though growth projections are difficult to quantify. Both organic and grass-fed marketing companies have been challenged to find an adequate supply in the U.S. to meet their markets (Churchill, 2006; Moody, 2005).

Higher prices offered for these products appear attractive, but production costs, in many cases, are also higher than for conventional beef (Williams, 2006). Production costs and the margin between these costs and price have not been well defined or documented for grass-fed, organic grain-fed or organic grass-fed beef production streams.

This project is a needed next step in understanding production costs and effective methods of producing organic grain-fed, grass-fed and organic grass-fed beef. We need observations from commercial farms that are selling grass-fed and organic beef. Models that have been developed are starting points to guide our data collection. Working directly with farmers and ranchers is the best, if not only, way to collect accurate, real-life numbers for costs of production and to document the specific production methods that make specialty beef production profitable on those farms. Farms and ranches do not have one universal standard procedure for financial or production record keeping, nor for business analysis. Standardizing and collecting these records is initially a slow process, but will allow accurate documentation of these factors and development of production budgets and farm/ranch case studies that can provide guideline for other farms considering these production alternatives.

Established farmers must have reliable information about not only production techniques and the needed genetics, but about both cost of production and realistic market prices in order to make informed decisions about entering any of these specialty beef production streams. This information is even more critical for beginning farmers. Beef is a keystone enterprise on many sustainable farms, but excellent management is needed by early-career farmers and others functioning under limited financial resources to generate profits.

Ag professionals, advisors and ag lenders can also benefit from this information. Subsequent work will be needed following the project to extend this information to these audiences.

The market for natural beef began within the past 30 years. This market, and additional markets for further differentiated organic and grass-fed beef, have grown considerably in the last five years. In a recent survey, 65 percent of Americans want a guarantee that meat products have no added hormones or antibiotics and 59 percent say they would buy more natural beef if its origin is guaranteed to be from a trusted source and raised naturally without added hormones or antibiotics (Whole Foods, 2006).

With increased demand for more clearly differentiated beef products, including organic meats, the USDA National Organic Program (NOP) set standards for production of organic beef, which must be fed organic feed, cannot receive hormones or antibiotics, and must be certified through an agency that complies with the USDA's NOP. In 2006, the U.S. Department of Agriculture proposed to standardize grass-fed marketing claims stated by producers and processors in the market place (Docket No. LS-05-09). These standards have not yet been adopted.

With a market potential for organic and grass-fed beef, increasing grassland from acres leaving the CRP program, and an increasing awareness of the benefits of grass to the environment, beginning and expanding farmers are attracted to this niche market to diversify their operation while sustaining the land. However, challenges arise in producing organic cattle or cattle consuming strictly forage. Organic feeds are higher priced than their conventional counterparts. For grass-finished beef, producers must grow, manage, and store high quality forage all year to maintain cattle on pasture; raise an animal that finishes choice or better with optimal meat yield; and produce meat at a competitive cost. Specialty beef marketers are trying to market grass-fed animals at 18-24 months of age. There is a high preference for slaughter cattle younger than 24 months to supply tender meat to consumers. In addition, animals marketed under 24 months old that achieve meat yield and quality standards, will improve profitability due to the shorter feeding period

Organic and grass-fed cattle have lower rates of gain and take longer to finish to a choice grade compared to cattle finished on grain, in part, because they do not receive antibiotics or growth hormones. In additional, producers of organic beef may need to purchase certified organic feedstuffs if these are not produced on-farm, thereby adding to production costs. Therefore, it may cost approximately 25 percent more to produce cattle in one of these systems compared to conventional beef production (Mayer, 1999). Fernandez and Woodward (1999), in a Minnesota feeding study, calculated 39 percent higher costs of finishing organic calves vs. conventional. Producers of organic, natural, or grass-fed beef must market their beef with a premium in order to be profitable (Acevedo et al., in review; Paganini, 2004; Boland, 1999). This fact points to the need for beef genetics and production systems that contribute to early finishing and the ability to efficiently gain weight on forages.

The largest costs in cow-calf production in the Midwest are feed costs, as determined by Standardized Performance Analysis (SPA) (Strohbehn, 2001), a beef production and financial performance analysis system. Production costs are documented in conventional cow-calf systems and likely do not differ much for specialty beef production streams. The largest difference in production costs occur between the period of weaning to finishing. The costs to raise calves from weaning to market weights for the specialty production systems have not been well documented. Additional costs may include marketing, processing meat, and transitioning to the production method. The costs to produce organic, organic grass-fed, and grass-fed beef must allow for a profit margin between production costs and the prices offered in the marketplace.

Consumers are willing to pay premiums for natural beef. Colorado research indicated that 38 percent of consumers surveyed would buy natural steak at a 10 percent price premium, and 67 percent would buy natural ground round at 12 percent price premium (Grannis and Thilmany, 2000). These premiums paid for grass-fed and organic meat appear attractive, but production costs, in many cases, are also higher than for conventional beef (Williams, 2006). Specialty beef marketers in the upper Midwest in 2006 were willing to pay farmers from $1.75 per pound of carcass weight for grass-fed beef animals, $2.00 per pound for organic grain-finished animals and $2.20 pound for organic grass-finished animals (Acevedo et al., in review). These production costs and the margin between these costs and prices have not been well defined or documented for this specialty production stream.

To determine breakeven costs and estimate profitability, production costs and sale prices must be known or estimated. Comerford (2006) is currently looking at benchmark production data for grass-fed beef in the Northeastern U.S. This project is evaluating and adapting production alternatives which will then be reported to producers who are raising grass-fed beef. Wells (2004) developed a learning team of farmers, researchers, and personnel from extension, the NRCS, and NCAT/ATTRA to study how decisions were made in whole farm planning for grass-fed beef. Through this work, production data were evaluated. No financial data was collected or analyzed in either of these projects. Martz (1997) found pasture-based beef finishing systems to be a profitable practice; however, animals were slaughtered at lighter weights and had less finish, and therefore had to be sold into niche markets to avoid discounts received in conventional markets. Case studies for California-based organic cow-calf (Harper et al., 2005) and cow-calf/grass-fed beef (Larson et al., 2004) present sample costs for these types of operations. This information is to help producers make production decisions, calculate potential returns, prepare budgets, and evaluate producer loans. Field (2005) has also compiled information about niche beef production in Colorado and made it available to agricultural professionals and ranchers, but costs of production were not included. An enterprise budgets has been developed with the use of models at Iowa State University to determine profit potential for natural, grass-fed, and organic beef and to identify the constraints and potential profitability of entering into one of these markets (Acevedo et al., in review).