Making Money The Hard Way
DR. ANDREW P. GRIFFITH
KNOXVILLE, TENNESSEE
Our society has yet to figure out that not everything and everyone is equal from the worldly perspective. We seem to have a subgroup in our society that thinks everyone should have the same opportunities, monetary resources, knowledge, and any other physical resources. However, this is simply not the case. “If money grew on trees” is a common saying. It is clear there would be extremely wealthy people and poor people from a monetary standpoint if this were the case since trees are abundant in the Eastern United States, but trees are not as common in other parts of the country.
Many people would prefer their monetary resources to come easy, but the cattle business tends to fall in the category of “making money the hard way.” The included graph illustrates what cow-calf returns over cash cost have looked like on average the past 30 years. Except for the current time period and the 2014-2015 time period, it is clear the average return to the breeding herd is rather small. Additionally, it is important to remember this is an estimated return over cash cost, which means there are producers that exceed these values and producers who are below these values. It would appear the return to labor and management would be rather small.
A similar pattern is evident based on average annual returns to cattle feeders. Based on LMIC calculations for Southern Plains cattle feeders, the average annual return has ranged from a loss of about $150 (2015) to a positive profit of nearly $275 (2014). Over the past 30 years, 24 of those years have average annual returns ranging from a $100 loss to a $100 gain. This means it takes volume to generate much income in the positive return years and there is little to no incentive to feed cattle in the other years. It is not just the feedlot that struggles with these profits. Many other margin operators struggle to generate a living wage without having a significant volume of cattle.
Please do not misunderstand what is being said here. Profits can be made in the cattle business. There are strategies to support consistent profits in the cattle business, which may include being a low-cost producer, managing price risk, or reevaluating the sector of the business in which someone participates. However, it is not a get rich quick scheme nor is it a way to make some easy money.
Based on LMIC projections (included graph), it would appear the next few years will be strong from the profitability standpoint for cow-calf producers. Cow-calf producer who experience strong profitability the next few years should consider what improvements could be made on the operation to enhance profitability when prices soften during the next cattle cycle. In other words, what can be done in the years of strong profitability to reduce the current year tax burden but also promote stronger profits in the years when revenue may decline? This may include pasture renovations, better genetics, fencing infrastructure, or investing in technologies that reduce labor.
During a period of strong calf prices, margin operators including stocker and feedlot operations tend to have similar margins as they do in years of low calf prices. The only difference is there is a larger investment on the purchase side, which means the rate of return on the investment is smaller. Furthermore, this means margin operators take on greater financial risk when cattle prices are high compared to when cattle prices are low.
In summary, every sector of the cattle business can be profitable, but it is not a get rich quick type of business. It is not as easy as sitting behind a computer screen and writing articles like this one. It generally has a higher probability of returning dollars than playing the lottery, but winning the lottery would be easier money. Profitability will not be consistent across all operations, because every operation is not equal. ∆
DR. ANDREW P. GRIFFITH: University of Tennessee