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

Final Report for LNC07-289

Project Type: Research and Education
Funds awarded in 2007: $149,966.00
Projected End Date: 12/31/2010
Grant Recipient: Iowa State University
Region: North Central
State: Iowa
Project Coordinator:
Mary Holz-Clause
Iowa State Unversity Extension
Co-Coordinators:
Dr. Margaret Smith
Iowa State University
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Project Information

Summary:

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:

Introduction, Rationale and Literature Review

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).

Project Objectives:

We will document the costs of production and profit potential for grass-fed, organic grass-fed, and organic grain-fed beef in the upper Midwest by working with farmers in Nebraska, Iowa, and Wisconsin and will prepare production budgets for all three of these beef production streams. With example costs of production and current prices offered for these products, producers and potential specialty beef producers will be able to project potential profits from entering these markets.

We will also document the production methods on the farms of cooperating producers. This information and interview with the farmers will be used to craft case studies of fourteen specialty beef operations. We will shed light on production and management techniques that contribute to these farms’ success. We also plan to identify some constraints to the adoption of grass-fed, organic grain-fed, and organic grass-fed beef and challenges to profitable production.

In addition to the physical products—–budgets and case studies——produced, we will also build capacity among our beef producers and Extension personnel. We predict that participation in the project will increase the knowledge and confidence level of Extension advisors, better enabling them to help other clients achieve success in grass-fed and organic beef production. Farmer participants will have the financial numbers and increased confidence built from better understanding of their own operations to share their experiences with others.

All beef producers in the upper Midwest have the potential to benefit from the project results. Opportunities for change for conventional beef operations, characterized by small to no profit margins, are few. Grass-fed and organic may offer viable alternatives. In the Central region of the United States (from eastern Nebraska and further east), producers most likely to enter the organic beef marketplace are those already raising organic crops, and who may already raise cows and calves. Movement into organic beef production would not require major changes to their operations. In the western areas of the North Central U.S., where pasture is more readily available, ranchers could shift fairly quickly to grass-fed production. Conversion to certified organic production would be a longer process. However, the finishing portion of these specialty beef production streams is the most challenging and likely will require the highest management levels and steepest learning curve for farmers and ranchers.

The geographic scope of this project, ranging from well-watered Wisconsin to dryland western Nebraska, increases the scope and potential applicability of our results. From the limited size of our farm/ranch sample, we can not provide definitive answers as to profitability, but can shed great light on profit potential and management needed to become profitable across this range of conditions. To date, beef producers have been slow to enter these production streams perhaps due to lack of interest, but more likely due to the lack of information available about how to produce in these different production streams and how profitable that production may be. The rate of market growth, to date, has apparently not been a constraint.

It is difficult to predict increased adoption of these production practices and more producers entering these marketing streams. Our objective is to provide solid, reputable information to prospective producers and beginning farmers, to help them make the best decisions possible for their beef operations. We cannot predict the future, but, with the current market demand of organic and grass-fed beef, we postulate that serious, dedicated producers can learn form current producers’ experiences and develop systems to produce specialty beef at a profit.

The increased production of grass-fed, or grass-finished beef, would have clear environmental benefits. Where cropland is seeded to perennial forages and grazing is managed to optimize cattle growth, soil erosion is reduced and soil quality increased. In addition, organic beef are typically fed more forage than conventional beef, and in the North Central region, production is most often associated with organic crop rotations. The soil benefits from extended crop rotations, such as those in organic systems, that include small grains and forages has also been well documented (Karlen, et al., 2006). Increased profit for beef, particularly in systems where management is rewarded, would help keep farms profitable and help to attract new farmers to agriculture.

Results from this study will illustrate the potential profit for grass-fed and organic beef and will document the management needed to achieve this level of profitability. Profit levels and/or increased management needed may explain the slow entry into these production streams. We predict that profit levels may reveal the need for improved management and changes to production practices, additional cost control measures for production, or increased prices paid for these beef animals.

In addition to providing valuable information for others, this process will also benefit the project collaborating farmers and ranchers, shed additional light on their operations, and generate ideas for their personal business management.

Cooperators

Click linked name(s) to expand
  • Terry Gompert
  • Laura Paine

Research

Materials and methods:

More than 50 grass-fed beef producers in Iowa, Nebraska and Wisconsin were invited to participate in this two-year project. Twelve producers completed 2008 data for their operations, and 11 completed both 2008 and 2009 data. Producers were reimbursed a stipend after completion of each year’s data. Data collected and analysis was similar to the Iowa State University (ISU) Beef Cow Business Records Standardized Performance Analysis (SPA) computations, with minor changes.

Twenty-five data sets were used in the final calculations. Operations that were cow herd only, finish only, or that were in the process of major inventory changes were excluded from the data set. Only three operations utilized grain in the finishing phase of their operations. In addition, changes in the National Organic Program rule for required minimum pasture intake have required feedlot-finished organic cattle operations to change their systems form those represented by farms during this study. Because of this small subset representing the grain fed, organic production stream, these data sets were also excluded from the project summary.

University Extension Field Beef specialists in Iowa, the Wisconsin Department of Agriculture grazing specialist and contract employees in Nebraska and Wisconsin met one-on-one with producers to organize production and financial records for their beef enterprises and to document costs and sales.

A challenge in the development of this project was consistent terminology and decisions related to which phases of beef production to use. Many organic and grass-fed operations include the entire life cycle, from breeding through harvest with very little differentiation between phases. However, to compare all the different types of grass-fed operations and to compare to conventional production, operations were divided into two distinct phases: the cow herd and the finishing phase. This method necessitates assigning a weight and value to the calves as they transfer from one phase to the next in order to ‘credit’ the phase that produced the weight gain without a true sale value. A few producers actually weighed calves at weaning but most simply estimated the weaning weight.

The value of weaned calves was determined and standardized using the USDA Market Reporting Service for the first January auction each year of the study at the Tama Livestock Auction, Tama, IA. This auction market is approximately in the geographic center of the three states involved. Based on market prices, breeding animal inventory values were set at $900 for cows and $1,300 for bulls.

Harvested forage is based on a comparison to hay, so any high-moisture forages were converted to 85 percent dry matter. Grazing costs were calculated in one of two ways. Where local rental rates were available, we used that rental rate for pasture land. When producers were not renting land and could not provide local rental rates, such as for producers who owned their land, we used 4 percent of land value. Animal Unit Months (AUM) are used as the standard measure of grazing days and density. One AUM was calculated as 1,000 pounds of body weight grazing for 30 days. Animal Unit Month adjustments involved calculation of grazing days which was multiplied by the beginning body weight of that class of cattle and then converted to AUM. Pasture feed expenses were allocated to the cow herd or finishing herd based on the average number of cows throughout the year, and the average number of growing or market animals throughout the year.

For comparing costs of production, an average of the 2008 and 2009 Suggested Closing Inventory Prices for Crops from the USDA Market Reporting Service were used to standardize feed prices (Table 2).

Depreciation of equipment was calculated at 10 percent of the value of all machinery and equipment multiplied by the percent that had been allocated to the beef operation. Buildings and improvements depreciation was 5 percent of the value of buildings multiplied by the percent allocated to the beef operation. Depreciation was allocated to enterprises at the same rate as family labor. Cow depreciation was calculated at 5 percent of the beginning value of the cow herd. Interest charges were the percent of non-land interest paid that was allocated to the cow herd or finishing herd.

Participants did not record the number of cows exposed to bulls in the breeding season prior to 2008, so all reproduction values used the number of bred and open cows in the herd on January 1, 2008 as the number of cows exposed to bulls the year before.

Factors considered critical for success in conventional beef cow operations were regressed against cost of production to determine the degree of variation explained.

Production costs were calculated on both financial and economic bases. Financial analyses include only cash or ‘out of pocket’ costs and do not include family/operator labor or depreciation. Financial analyses do include interest paid on any loans. Economic costs include all cash costs and include family/operator labor and depreciation charges.

Results were summarized averaged over all farms for the two years of the study. In addition, farms recorded were sorted into thirds by lowest, mid and highest costs of production for finished, market beef animals. Averages for these three groups for farms/ranches are also reported.

Research results and discussion:

Grazing Costs
Grazing production costs across all farms averaged $22 /A not including land cost. Costs including land charges were 67$ per acre (Table 3). This component is particularly crucial to grass-based beef operations. On average, producers had 1,507 acres in grazing production that supported 2,186 Animal Unit Months (AUM) of grazing annually. Total pasture costs were $7 per AUM not including land and $22 per AUM with land charges included. Land charge was the greatest cost for grazing, averaging $15 per animal unit per month (AUM).

Table 4 summarizes production and financial information of the cow-herd enterprise. Total economic costs per cow averaged $769 or $190 per cwt produced. Feed costs represent an average of 63% of these costs. Operations averaged an 86% calf crop weaning percentage.
Summarized in Table 5 is the weaning to market summary. This includes feed consumption, grazing days and the hours of labor per head.

The final section (Table 6) is an overall summary of the entire beef operation, where both the cow herd and the finishing operations are combined to show the costs for the full system. Both financial and economic costs are calculated per hundredweight of market beef sold, and are adjusted for cull breeding stock sales. Financial costs include feed, operating and paid labor. Economic costs include financial costs plus depreciation on equipment, facilities, and cattle, and family operating charges. Given the integrated nature of many of these operations, this table represents the most reliable and complete summary of data for both beef production and costs.

Economic cost per hundredweight of beef produced, adjusted for cull breeding stock sales, was used as the comparison for all data and is on the X axis. Adjustments are made for breeding stock sales because sales of breeding stock may make one year look more profitable, but will reduce the future earning potential of the operation.

Iowa State University SPA data identifies the top 10 critical factors in determining cow herd profitability, so those were also tested against this set of data. Figure 1 shows that economic cost of the breeding herd per cow defines 13% of variability in the economic cost per hunderedweight of the full operation.

While the only way to have a market animal to sell is to wean a live calf, the weaning percent rate only explained 1% of the variability in total cost of market beef produced (Figure 2). This doesn’t negate the importance of weaning rate, but reflects that other factors have more impact on costs of production of the market animal.

Differences in grazing periods for cow herds accounts for 12% of the variability in the cost of overall beef production (Figure 3). However, grazing days for the wean-to-market herd accounted for only 9% of the overall cost of production (Figure 4). This suggests that effective utilization of grazing, especially during the cow-calf phase is an important contributor to lowering cost of production.

Significance of herd size is often questioned in calculating profitability. In this set of records, herd size predicts 19% of the variability in total costs (Figure 5). It appears from the figure that herd size above about 30 to 50 cows has a sizeable impact on cost variation, but little impact below a 30-cow herd size.
Total cost of all feed fed to the entire operation (Figure 6) predicts 25% of the variation in total costs. This is a factor of both the amount of feed fed and the cost of the feed. This further emphasizes the importance of feed cost in determining the overall cost. This includes both stored feed used and grazing costs.

These data demonstrate considerable variation in the cost structure of grass-based operations. It is reasonable to assume that branded markets should garner a premium for process verified production. Producers need to carefully monitor their costs to ensure that the premiums are sufficient to cover additional cost they may incur in production.

Participation Summary

Educational & Outreach Activities

Project Outcomes

Project outcomes:

Economic Analysis

See Results and Discussion section of the report.

Any opinions, findings, conclusions, or recommendations expressed in this publication are those of the author(s) and do not necessarily reflect the view of the U.S. Department of Agriculture or SARE.