Case Study 3: Bottom Line Profitability for Grassfed Steers

This case study uses economic data from the two previous case studies to compare profitability from two marketing channels for this 50-head cow-calf operation in western Washington. Calculating profitability for a complex, multi-year enterprise like grassfed beef may be easier if the enterprise is broken down into separate, distinct enterprises, as we do here. In this case study, we integrate annual profitability estimates from the cow-calf enterprise (Case Study 1) and the hay enterprise (Case Study 2) with data on raising the yearling steers from 575 pounds to 800 pounds, then finishing the 800-pound steers and marketing them in two ways: 1) directly to customers through the custom exempt channel (selling partial or whole carcasses), or 2) via the USDA-inspected process as boxed beef for retail channels, including restaurants. Profitability for each component is estimated on an annual basis. 

The enterprise budgets that we’ll discuss with this case study are available here.

In this case study, our 50-head cow-calf operation yields 24 weaned steers each year that enter the yearling production cycle at approximately eight months of age and 575 pounds. These grassfed steers gain 225 pounds over the next 9–10 months. At approximately 800 pounds, the yearling steers then enter the finishing stage for another six months, in which they gain another 350 pounds. At the end of this approximately two-year period they go into the USDA-inspected marketing channel as boxed beef for retail sales, or into the locker beef custom exempt marketing channel and are sold as whole, halves, or quarters. 

Beef producers could purchase calves and yearlings from other producers, or raise calves and yearlings themselves. We separate these various phases in order to account for different costs, especially feed, as the steers grow. They could also sell the steers at any point along the cycle. Tracking costs of production like this is helpful in knowing when it will be most profitable to sell your animals. In this example, animals are “purchased” from the preceding phase, either the cow-calf enterprise or yearling enterprise, although no actual transaction takes place. This process helps to isolate and estimate costs for each phase. We illustrate this concept in the two Gross Returns entries in the budget sheet Yearling Enterprise Budget, Grassfed Beef Operation. The first entry shows the farmer is “purchasing” the steer calves from the cow-calf enterprise when they weigh 575 pounds, for $1.70 per pound, so it’s a cost to this enterprise. At the end of this phase, these same calves are assumed to weigh 800 pounds and are valued at $1.50 per pound. These numbers represent an estimate of fair market value rather than actual revenue. In the two different finishing enterprises, these yearling calves will be “purchased” for $1.50 per pound.

In this example, we assume that each year the producer markets 24 steers at approximately 24 months of age. The average returns from the production cycle for the two marketing channels are highlighted in light blue in the budget sheet Summary of Returns from Direct Marketing 2-year-old Grassfed Steer Operation. On average, annual net returns over total costs for the USDA-inspected steers sold as boxed beef were $154 per head or $3,692 for 24 head, while steers sold as locker beef averaged -$358 per head or -$8,586 for 24 head. These annual net returns are average returns for years one and two, and they represent profit over all costs of production. However, these returns are specific to the producers who provided all the data at the time we created these budgets. Each producer will have a unique set of circumstances and will need to create their own estimates of profitability. 

In this example, the producer who wanted to market USDA-inspected grassfed beef required the additional investment of a cold storage facility, estimated to cost $30,000 and have a 15-year life. They also had additional expenses for USDA inspection services, cut and wrap, marketing, etc., as outlined in the budget sheet Grassfed USDA-Inspected Beef Enterprise Budget. The more traditional method of direct marketing beef using custom exempt services, in which the consumer technically buys a portion of the animal and pays for all processing expenses, is outlined in the budget sheet Grassfed Direct Marketed Locker Beef (Custom Exempt) Enterprise Budget.

While the returns from both of these enterprises appear profitable on an annual basis, as demonstrated by the two marketing budgets, we haven’t included the expenses (net loss) from the growing phase prior to the fattening stage. Average annual returns from this approximately two-year production cycle, including non-cash costs, are positive only for the USDA-inspected marketing method. However, you would need to tailor these estimates to your own situation. In reality, you may choose to market some of your steers through a USDA-inspected process and some through the custom exempt process.

Given the long production cycle of beef enterprises, it’s critical to conduct a thorough, multi-year economic analysis in order to estimate profitability. When producers sell directly to consumers at a loss to their operation, they’re basically subsidizing their customers’ grocery bill with their own labor and capital. Customers are willing to support working farms in their region by paying more for locally produced meat, especially from producers who use sustainable practices. In the long run, if you aren’t charging enough to cover your costs with a decent return on your investment, everyone loses. 

A transparent process of documenting all production costs would help justify a fair price for the custom exempt beef. Using the enterprise budgets in this example, our producer could calculate how much to charge to cover all costs as follows:

Even $4 per pound would cover the owner’s labor when valued at nearly $20 per hour. Since all of these budgets are integrated, this type of breakeven analysis is straightforward.