Beef production is the most important sector in the entire U.S. agricultural economy. On average over the last 5 years, in terms of cash receipts, beef production was 60 percent larger than poultry and egg production, its closest animal-product competitor. It was also 37 percent larger than the nation’s entire corn crop; in fact, it was larger than the combined total of all feed grain production in the United States. In total, beef production accounted for 18% of total agricultural cash receipts in the United States over the past 5 years. Beef production is ubiquitous—it is present in every state in the union. The United States is also home to the world’s largest fed-cattle industry, and it is the world’s largest consumer of beef. Despite the beef industry’s iconic status in the United States, it is not without its challenges. To sustain this way of life, to sustain rural/local economies, and to continue providing a healthy and nutritious product, the beef industry must also be economically sustainable. This report has three primary objectives: 1) To identify and evaluate the major factors impacting the economic sustainability of cow/calf production using data from representative ranches located across the United States; 2) Evaluate farm transition scenarios to determine which are most likely to result in a successful ownership transfer; and 3) Provide a snapshot of trends in the financial well-being of cow/calf operations.
Evaluation of Factors Impacting Economic Sustainability
For more than 30 years, Agriculture Food Policy Center (AFPC) has developed and maintained a database of representative farms and ranches in principal production regions of the United States. A refined Delphi interview process which resembles a focus group interview was used with a local facilitator to assemble a panel of 4-6 farmers/ranchers who were similar in crops grown, acres farmed, soil types, type of farming practices, and cow herd size, who were considered to be leaders in their community, and operate in the same county or adjacent counties. The panel was interviewed as a group, so they had a chance to discuss differences in costs and other inputs to arrive at a consensus set of values that describe a representative farm/ranch, which is representative of the panel. Every two years, the panel of producers meets to update their data to describe the operation and to validate that the representative farm/ranch firm-level simulation model is correctly simulating their operation. This report used the representative ranches as the basis for the analysis.
Impact of Profitability on Generational Transfers
To achieve the objective of this section, various transition scenarios were imposed on the representative ranches, and the impacts of each scenario were evaluated on a simulation that ran from 2020 to 2028. For each scenario, the following key output variables (KOVs) were reported: average net cash farm income (NCFI), ending cash, real net worth, and debt-to-asset ratio. NCFI is reported as the average from 2020 to 2028. Ending cash, real net worth, and debt-to-asset ratio were all 2028 end-of-simulation values. Before simulating various transition plan scenarios on the representative ranches, KOVs—including real net worth, ending cash, debt-to-asset ratio, and net farm income—were evaluated for the baseline scenario for each ranch to determine the ranch’s current financial position (these results are presented in Section 1). The same KOVs were evaluated for the various scenarios imposed on the representative ranches. For each scenario, it was assumed that, prior to transition:
The ranches were evaluated for two primary scenarios for various combinations of total number of heirs and number of heirs that continued to operate the ranch after both parents passed away. The heirs that continue to operate are referred to as “on-farm” heirs, and the heirs that do not continue to operate are referred to as “off-farm” heirs. Each scenario was evaluated for the ratios of on-farm heirs to total number of heirs.
Snapshots of Trends in the Financial Well-Being of Cow/Calf Operators
Using the August 2022 Food and Agricultural Policy Research Institute Baseline price projections, ten representative ranches in varying financial conditions were examined to determine the overall economic sustainability of cattle operations. The study assumed a farm is in a good (green) financial position when it has less than a 25 percent chance of a negative ending cash balance and less than a 25 percent chance of losing real net worth. If the probabilities of these events were between 25 and 50 percent, the farm was classified as marginal (yellow). A probability greater than 50 percent places the farm in a poor (red) financial position.
The analysis of ten representative cattle ranches showed variations in profitability influenced by differences in regional climates, market conditions, and management practices. While feed costs were the most significant expenditure across all ranches, green ranches spent an average total of $1.86 per pound of calf sold, with feed, labor, and land costs amounting to $0.69, $0.41, and $0.22 respectively per pound of calf sold. The yellow ranches had higher total costs per unit by $1.24, mainly due to increased feed and labor expenses, and red ranches exceeded the average by $1.42 in all cost categories. Despite these variances, green ranches, even with lower calf prices, demonstrated good financial health, emphasizing the critical role of cost management in an environment where producers cannot influence market prices.
Transition planning is essential. Ranches generally achieved positive financial outcomes when they optimized the number of on-farm heirs, with one or two on-farm heirs being ideal when there were multiple heirs. Without this, ranches would fare better with a higher number of on-farm heirs to alleviate the financial burden of buying out other heirs.
The projections for 2023-2031 suggested an increase in costs for wages, supplies, repairs, and herbicides, although feed and fertilizer costs may decrease. However, wage increases will likely continue to challenge profitability. Despite these cost pressures, the outlook for cattle prices is promising; projected prices for cull cows, feeder steers, and fed cattle are to be at their highest in 22 years. Land values, however, are expected to remain static.
Economic sustainability in beef production hinges on effective management of feed and land costs, the primary drivers of profitability. In Western states, the rising costs and competition by outside interests for public grazing lands poses challenges, and on occasion pushes operations to less profitable areas. Labor costs for a cow-calf operation vary with the extent of required herd management. Producers must consider and be realistic about the number of operations the ranch can support. Transition planning is crucial, especially for ranches with mixed on-farm and off-farm heirs, to prevent a potential buy-out scenario. Producers should engage early in transition planning, involve experts, and have clear communication with heirs to sustain the family farm/ranch legacy. The “right plan” is dependent on factors that greatly vary across operations. Anticipated increases in cattle prices and reductions in key input costs may boost future economic sustainability for U.S. cattle operations.