(Laura McKenzie/Texas A&M AgriLife Marketing and Communications)
There is a growth market for “program cattle” for weaned calves and feeder cattle produced and marketed under a specific production system. Today, we will discuss the potential benefits of implementing these programs in your operation, and the importance of using a partial budget to analyze how profitable can be on your ranch.
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Program Cattle Economics – Added Revenue Versus Added Cost
There is a growth market for “program cattle” for weaned calves and feeder cattle produced and marketed under a defined production system. More buyers are looking for preconditioned weaned calves, stockers, and feeders that meet a specific group of customers’ requirements. These buyers are looking for a high-quality source of cattle produced under certain conditions (no antibiotics, hormone-free, natural beef, etc.).
Today, we will discuss the potential benefits of implementing these programs in your operation. We will use the Weaned Calf Program Evaluation tool: https://agecoext.tamu.edu/resources/decisionaids/beef/ (Program Cattle Economics, Program Cattle Partial Budget, and Analysis, by Dr. Jim McGrann). You find all the information you need to evaluate these programs in your operation in that link.
Program cattle is a broad name placed on weaned calves, feeders, or stocker cattle produced and marketed with special requirements to fit specific markets. The buyers specify those production practices, which usually require third-party verification.
Partial Budget Analysis – Added Revenue Versus Added Costs
Usually, there is a “price premium” or added value in sourced and aged program cattle. However, the price premium is not a measure of profitability if costs are unknown. The new program includes added costs to meet those market requirements.
The producer needs to evaluate if the cattle production and marketing alternative program are more profitable. Added revenues should be greater than the added costs for compliance with the required program production system.
Getting data and information on paper is the first step to considering alternatives.
Sources of Added Revenue
Program cattle added revenue comes from more than one source. The most direct source is the price premium we obtained for producing through those specific management practices. Higher net weight, lower marketing costs, and moving our marketing off from the lowest season pattern price will also impact our revenue. Table 1 shows the difference in revenue calculated for a specific program. We estimated a premium price and a higher weight in this example. We also took into account a lower price for a higher-weight calf.
Table 1. Added Revenue Sources Example.
Program cattle also provides more marketing channels and better opportunities to negotiate prices and weight slides conditions in the contracts. It also gives us the chance to get better paid for using superior genetics. Ranchers also benefit from using information from their new record-keeping data to improve their genetics and marketing.
Getting into some of these programs will change our production system and revenues sources. For example, suppose you will not be able to use growth-promoting products. In that case, you should also account for an average daily gain reduction.
Sources of Added Costs
The first step is to alternatives is describe the current system, then the program cattle changes. Veterinarians can assist you in getting the appropriate health program and meeting compliance requirements. Most cattle programs require third-party verification. Each program’s requirements are usually found on its web pages.
Added costs can be divided into added capital investments, enrollment and verification fees, and the new system’s annual operating costs.
The annual investment costs include the depreciation of the capital investments. For this example, we considered the yearly depreciation costs of investing in new fencing, water systems, computers, electronic reader, and other software required for this new alternative. However, the level of this depreciation is highly variable on each ranch, its existing facilities, and technology. In some cases, there is a zero added capital investment to get into these new alternatives, which makes them much more attractive (Table 2).
Table 2. Example of Added Costs for Weaned Program Calves
Also, we considered higher management and labor costs. Most importantly, we assumed that the rancher had the management skills in their operation to face this new project. If this is not the case, we should account for consulting fees. We strongly advise everyone getting into these programs to include their vets in these decisions and consult with the third-party verification providers and experienced producers.
Partial Budget Analysis
A partial budget is a method to calculate the added revenue versus added cost changes in the current production and marketing system required to participate in the value-added program. Our example shows a positive Net Revenue Change of $25.43/Head for this ranch operation (Table 3). However, as we mentioned before, changes in revenue and costs are different for each ranch depending on its cattle genetics, management skills, and existing facilities already in place. We also need to consider a value-added market for your current genetics, herd size, breed, experience, skills, the impact of a new health plan, resources, and time to do it.
Table 3. Net Revenue Change Example
Available programs might be different depending on the location of your ranch. Not all of them might be suitable for your operation. They require more management, labor, and paperwork than non-program cattle. In many cases, these programs are excellent alternatives to increase your net profit, but be sure to analyze them before. We need to evaluate each alternative to determine if Added Value (price premium and total revenue) is greater than Added Cost over the current production and marketing system. This tool will help you go through these steps and analysis.