My favorite 12 year old likes to buy blue jeans at The Buckle. I always have to take a deep breath before we go shopping because the price tag blows me away. When I look at her size 24 blue jeans and the amount of cotton material used to make them, I wonder where the $100.00’s goes that I pay for them?
Does it go to the cotton farmer? Does it go to the designer or the person that sews the jeans? Does it go to the retailer that I purchase them from? While I am unsure of the breakdown of where the proceeds go, I am pretty confident that each one of the people that I named gets a part of my $100.00 bill. Did all of them make a profit from the sale—most likely that depends on the cost that they accrued at each level of the jean making process…
Last week a Business Week reader asked me, “Is it true that cattle make only $20 per animal? That just doesn’t sound right to me. When I buy a New York steak from the market I typically paid around $6 – $7. That is one piece of steak. Where did the money go?”
Raising cattle and growing beef is a complex business. Like my daughter’s blue jeans, there are many different people involved in the creation of the steak before it ends up at your market or grocery store. The following is a blue print of the beef that comes from my farm…
Stage 1: The cow-calf rancher (like Al and Sallie Atkins in my Calf #718 blog series) is the first phase of the beef production cycle. This rancher has a cattle breeding herd and cares for the calf from birth to approximately 8-12 months of age.
Stage 2: The feed yard farmer (like me) is the second phase. I feed the animal until he is ready for harvest (another 4-6 months).
Stage 3: The packing plant (like US Premium Beef / National Beef) is the third phase. It is at this phase that the animal is harvested and becomes beef.
Stage 4: The retailer / food service company is the final phase. This company brings the product to your dinner table either via the grocery store or the restaurant.
At each one of these stages, there are revenues and costs that determine the profit or loss. Each one of us (the rancher, the feed yard, the packing plant, and the retailer) hope to be profitable with every animal at every stage. The quote of $20.00 per head that appeared in the article was an average profit number for my stage (the feed yard) of the beef production cycle. If each partner at each of the 4 stages were to make $20.00 per animal, that would be a total profit of $80.00.
Considering that it takes approximately 18-21 months and thousands of dollars for one of my animals to move through the 4 stages and become beef, that is a relatively small profit margin. Additionally, during that time frame, enormous volatility exists in the cost of my feed ingredients and the market values for my animals. From a business perspective, this volatility is one of my top three challenges as I grow beef. Sometimes I make $120.00 per animal, sometimes I lose $100.00— I hope to see an average profit of $20.00 per head over the long run…
Long term financial sustainability in farming is intrinsically tied to saving during the good years in order to survive the bad ones…Hopefully, in the long run, there are more good years than bad. My daughter’s cool blue jeans and her future college education are depending on it!