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The Economics Of Change

The powers of observation, imagination, evaluation and choice employed by today’s cow-calf operators have set in motion a tide of structural change toward lower-cost production. It’s the type of business evolution that happens once in a generation.

An economic analysis of hundreds of records from Alberta Agriculture’s AgriProfit$ program data shows how beef producers in central and northern Alberta have improved the cost effectiveness of their businesses in the 10 years from 1998 to 2007, and points to the opportunities for profit-driven change in the future. Low-cost operations were contrasted against the average of all participants in the region to drive the message home.

Beef operations can be profitable

Weak calf prices and rising expenses may have recently dampened some of the optimism that characterizes the beef industry, but northern and central Alberta beef farms fared reasonably well. The return on assets averaged about three per cent over the 10 years for all farms, and four per cent for low-cost operations.

Clearly the drought in 2002 and BSE in 2003 substantially reduced average return on assets for these beef operations but in doing so those two events forced many producers to fundamentally alter their businesses to reach a sustainable lower-cost level.

They adapted to changing times.

Graze rather than feed

One big change was the move to late-fall, winter and early-spring grazing since grazing is a much more cost-effective way of wintering cows than hauling feed to them in a drylot. Low-cost producers led this change but the trend was apparent across all farm income groups.

In 1998, the average cost gap beween drylot and grazing for dry matter alone was 66 cents per animal unit day (AUD) on all farms and 46 cents for the low-cost group. By 2007 with the shift to more aftermath and swath grazing the dry-matter cost gap had shrunk to 20 to 30 cents per AUD for all groups. And that was before any of the other costs of drylot feeding — time, fuel and equipment — were added. Not surprisingly, extended-season grazing with native, perennial and annual forages was more often practised by low-cost producers, but lower operating and fixed costs were registered in all herds on the program.

AGRIPROFIT$

AgriProfit$ is a business analysis and research program operated by Alberta Agriculture. Par ticipating Alber ta producers receive a confidential business analysis of their operations, as well as benchmarks and applied economic analysis information that will help to identify where and how to start budgeting for change. In return, agricultural professionals have access to the pooled data for purposes such as regional benchmarking, economic analysis, identifying opportunities and monitoring trends. There are similar programs for agricultural businesses in other provinces. For more information, contact Dale Kaleil at 780-427-5390 or visit www.agric.gov.ab.cato access AgroProfit$ fact sheets.

The fact a cost gap persists means more savings are possible as producers continue to fine tune their grazing systems and find cheaper winter-feeding methods to complement their grazing.

Grazing can be profitable

It is easy to overlook the role of grazing land in the success of cow-calf operations but in this analysis the land often helped generate profits for the farm even when the herd struggled to show a return. A signifi cant opportunity exists for Alberta cow-calf operators who use a systems approach to managing the herd and grazing resource.

The experience of the AgriProfit$ program indicates that cow-calf producers tend to ignore the profit motive for their land when grazing their own herd. They also appear to undervalue their own grazing as compared to field crops.

As rising input costs applied pressure producers adapted their systems to lower costs and increase productivity, both in intensive and extensive operations. Grazing costs per animal unit month stayed stable through the 10 years.

When a realistic market value is applied to grazing production, it is consistently profitable. Given the emerging improvements in grazing systems and technology that are coming, profits should continue to improve.

The key elements that drove this structural change to the cow-calf sector are still in place: reasonable farm-level profitability, a feeding-to-grazing days cost gap; and profit potential within grazing enterprises, particularly with a systems approach. The challenge for individual producers is to observe their unit production costs, imagine various feeding and grazing system options, evaluate the long-term economics of these options and package them in a way to meet their profitability and risk objectives.

Dale Kaliel is a senior economist with Alberta Agriculture and Rural Development.

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