If you look almost anywhere in the U.S. at the production budget for, well, for any livestock operation, the number one cost is always feed costs. In beef, cow, calf, if you look at most of the U.S., the largest single line item in the budget is winter feed costs.
That isn't always necessarily true. Three years from now, it will not be the largest single line item in a cow-calf budget. Anybody know what will be three years from today? What's the biggest cost of being in the cow business going to be?
Something called cow depreciation. It's the loss of value. Right now people are paying $2,000, $3,000, $4,000 for cows. Three years from now, it's called cow. They're going to be worth $1,200 maybe. And so all that lost value becomes the biggest...
What? Why is that in three years? It's the cattle cycle. It's just, you know, right now we are, and we're going to talk about, I think we're going to talk about these record high prices that we have right now that in reality are not a record price at all.
Okay, so those are our biggest costs, and because most farmers and ranchers aren't spreadsheet geeks, they don't actually know what it costs them to produce and feed hay. If everybody knew what it cost to make and feed hay, a lot of people would go out of business.
Now, SPA stands for Standardized Performance Appraisal. And SPA was a record-keeping system that was developed in the late 80s, 1990s. And it was supposed to become what every beef producer in the country used for their production and financial records.
Well, those things never pan out because, by and large, as a group, we're really not that progressive. We're not that forward-thinking. We enjoy, you know, riding our horse, playing with our dogs, pushing cows around.
We don't enjoy keeping financial records of what we're doing. And so most people don't know what it actually costs to make and feed hay. So here we're back to this. This is a record. It's from the University of Illinois, and you look at it, it's 2008, it's kind of outdated, but it's an assessment.
There were 158 farms, cow-calf farms, that were participating in this record-keeping system. So this is taken from 158 CalCAF operations. And the way, and I've been involved with research committees that do stuff like this, is, anybody ever hear of bog sat, you know, we talk a lot about modeling and what AI can do and all that kind of stuff.
Anybody ever hear of Bogsat modeling? B-O-G-E-S-A-T? Bunch of guys sitting at a table. So a bunch of guys were sitting at a table and talking about, you know, what are possible factors that will affect profitability in the cow-calf business.
And in this particular committee in Illinois, I believe it was either 26 or 28 parameters they identified that thought, well, this might be affecting profitability. And then you can statistically sort from, if you have a database, a record system, you can sort out what are the factors that are different between these properties that can be used to explain why there's a variation in profitability.
And then I'm showing the top eight here. Top of the list, 57% of the variation in profitability is explained simply by, I don't know, actually I do know why. I usually travel with my own remote and I know exactly how that fits in my hand and where the buttons are and I never have to look at it.
This one is just slightly shorter than mine and so when I'm just normally holding it and talking with my hands, because believe it or not, my grandfather's name was Perusi. Italian and so you know talk with my hands.
What I failed to mention is, well, that was my grandmother's fourth husband. Not her first husband, who was my grandfather. And before you think, you know, she was just, you know, some kind of hussy.
My grandfather died in 1929 from typhoid when he was 29 years old. So I never knew that grandfather. The only husband of my grandmother that I ever knew was Tommy Peruzzi. So, okay, so, but, so I do talk with my hands and I keep hitting that back button.
I was trying to figure out why isn't this working? Oh, it's because I'm clumsy. All right. So 57% of the variation in profitability is explained by differences in feed cost. And number two on there is depreciation costs.
And I was talking about, you know, cow depreciation, that in a few years is going to be the biggest cost of being in the business. Every time we come off the peak of the cattle cycle and animals start losing value rather than appreciating in value, we go through a period where for a couple of years, cow depreciation cost actually exceeds feed costs.
But this is not cow depreciation. This is equipment and facility depreciation. You know, I think yesterday I may have said there's only four necessary ingredients for making meat, milk, and fiber, solar energy, water, soil minerals, and carbon dioxide.
Nowhere is it required that you have tractors and equipment and all of this other stuff that most CalCAF operators seem to have. Those are not necessary for being in the business, but most people have them and they have too much of it.
That's why the number two determinant of profitability across these 158 farms in Illinois was depreciation because they just owned too much stuff. Number three, it says operating cost, and that kind of rolls everything in.
I don't know exactly what that one really entails. But number four there, calf weight. What do most cow calf producers like to brag about? Yeah, what the weaning weight is. Less than 5% of the variability across these 158 herds could be attributed to weaning weight.
And I have seen, you know, looked at over the years many, many, many of these types of analysis. In the last 30 years, I have not seen what I would consider a valid analysis that had calf weaning weight at any more than 10% of the influence on profitability.
Usually it's in about that 4% to 7% range. Yet we're obsessed with weaning weight. Now, just looking at the feed cost number and the calf weaning weight and thinking about the month of January, we're just after New Year's, what starts showing up in the mail?
Your tax forms, but also the bull catalogs. All the seedstock outfits are sending you their bull catalogs. And it's a cold winter's evening, and you're in there, it's nice and cozy by the wood stove, and you got two choices.
You can start looking at your accounting records and figuring out your taxes, or you can look at bull catalogs. Which is more interesting? Oh yeah, let's pick out that bull that's going to be a game changer for our herd.
We're looking at all the EPDs and the pretty pictures of the bulls out in the greengrass. I mean it is January and it's snowing, unless you're in Mississippi. And it just, oh yeah, let's get a new bull and let's push our weaning weights up another 27 pounds.
Will not contribute to your profitability. You better be figuring out what's it costing you to raise those calves rather than who their daddy's going to be because it isn't that important. And we can work down through here and we get to number eight at less than 1% of the variation in profitability is herd size.
Get big or get out. Oh, you got to have at least 500 cows to make the living. This doesn't suggest that. It suggests that it's largely a non-factor, the scale of operations. The biggest cow outfit in the United States that I have consulted with when I started working with them was running 14,000 cows and losing a million dollars a year.
Just because you got 14,000 cows doesn't mean you're going to be profitable. Just because you have 50 cows doesn't mean you have to be losing money. It's the business model. It's how are you operating that determines whether or not you're going to be profitable, not simply the number of cows you have or the size of cows you have or the weight of calves that you wean.
Those, yeah, they're important, but they're nowhere near the top of importance. So I've already mentioned I grew up a Flatland, Illinois crop farmer with hogs. The only livestock I had any association with growing up was hogs.
I'm not a born rancher. I haven't been around cattle my whole life. I pretty well started learning about cattle when I went to the University of Missouri on the faculty as a pasture researcher. I had to start figuring out what cows were.
And my research assignment when I came to the University of Missouri was make beef cattle competitive with soybeans on highly erodible land. Well, how am I going to do that? I did have a basic understanding of profit.
Profit is income minus costs. And then we have all the nuances that come around that. But that's basically what it is, income minus costs. We were coming out of, so I started at University of Missouri January 1, 1981.
The 1970s saw the highest cattle price we have ever seen in this country. And to this day, in inflation-adjusted dollars, the cattle cycle peak of 1973 is the highest price of beef we have ever seen in this country, both at the production level and in the supermarket.
Okay, let that sink in. With the prices we have today, these are not the highest prices we've ever seen. For Fed cattle, and that slide might come up later, I don't remember what's in it here, for Fed cattle to be the same value that they were in 1973, the price needs to be about $340 100 weight.
This record high price we have right now at 244, it's about, I think, 68%. In terms of consumer buying power, the beef price today is 68% of what it was in 1973. For us at the farm production level, the value of what we're producing is only two-thirds of what it was in 1973.
That's why we have to change a business model.
