During the Texas and Southwestern Cattle Raisers Association (TSCRA) convention, Justin Benavidez, assistant professor and extension economist at Texas A&M University, encouraged producers to consider their “why” before starting this new venture and provided some answers to questions that often arise when getting started.
Why do you want to do this?
That’s the first question producers need to ask themselves when contemplating a direct-to-consumer beef sales business.
During the Texas and Southwestern Cattle Raisers Association (TSCRA) convention, Justin Benavidez, assistant professor and extension economist at Texas A&M University, encouraged producers to consider their “why” before starting this new venture and provided some answers to questions that often arise when getting started.
“Are you trying to get a lot more profit? Are you trying to earn a little bit more per head? Why do you want to do this?” he asked. “Do you want to ‘stick it to the packer’ because their profit margins are too big? If there’s not [a] real concrete reason, then we’re going to start facing challenges right out of the gate.”
One of the attractive things to many producers about direct-to-consumer beef sales is the ability to become a “price setter” instead of a “price taker.” However, Benavidez cautioned that if accurate records aren’t kept, producers could be shooting themselves in the foot instead of someone else under-bidding their cattle.
“I think a lot of times, we don’t even know if we’re making a profit,” he said. “We have the tendency to lurch from loan payment to cattle sale to loan payment to cattle sale. We know if that load of cattle made money, we know if we sold it for more than we bought it for, but did we net make money? And I think that’s a challenge we face in any cattle enterprise, much less adding on beef sales. Recordkeeping is really, really going to be critical when you have the ability to set your own price.”
One place to start is looking at profits before direct selling. Producers should consider what they were making selling the live calf at weaning. Will they actually make more money in direct sales? “Just because you are getting a big check for the beef at the end of this chain doesn’t mean you’re making more profit than when you sold that live calf,” he noted.
To further illustrate, Benavidez pointed out that it is rare for all segments of the industry to make money at the same time and especially rare for one segment to make money for an entire cattle cycle. Producers are essentially accessing more of the marketplace in a direct beef sales business, and it is likely that they are losing money at a different stage of the business – the key is using a budget to evaluate those different parts of the enterprise.
Producers should keep a cow-calf budget, a feeder budget and a beef budget to know where, and in which enterprise, they are making money or losing money. Approaching it as if their cow-calf business is selling the calf to the feedlot version of their enterprise and the feedlot is selling the feeder calf to their beef business, allows producers to price their animals around where the market is pricing them.
Benavidez gave an example of a producers who owns his land (doesn’t have a high-interest payment on the land) and takes out a loan to feed his calves in a custom feedyard. Now the producer is financing the feed for those cattle with high interest rates, which to Benavidez’s point could be the very stage where the producer is losing money.
“So where are you financing with better rates?” Benavidez asked. “And how can you balance some of the revenue from one sector into another sector to make sure you’re making a profit wherever you can and utilizing lower interest rates? So [you’re] accessing cheaper money where it’s possible, right? So maybe it is cheaper to buy some hay and keep those calves up to a six-weight rather than putting them on feed at five-weight. There’s a bunch of different options to look at here.”
Comparing options
Producers can also use budgeting to compare enterprise options, so if they’re already direct selling through custom exemption, and they want to explore selling some retail cuts or selling shares of an animal in more of a wholesale market style, they can compare their outcomes using those budgets, he said.
Producers can also use those budgets to see if there is value in special advertising claims. Does adding a label and taking on its production requirements make revenue grow at a faster rate than costs? Using grass-fed beef as an example, Benavidez reminded producers that finishing cattle on grass will require a longer grazing period, which will necessitate lowering animal units or accessing more forage resources. Grass-fed beef also tend to have lower finishing weights and lower yield, but depending on the premiums for grass-fed beef, a producer may profit from switching their production model.
The way to evaluate whether to pursue those labels is balancing marginal revenue versus marginal cost. Marginal revenue is the additional revenue generated from each unit. So how much does the revenue change? How much more is grass-fed beef worth? How much does it cost to generate that additional pound of grass-fed beef? If it’s more expensive to generate a pound of grass-fed beef, does the markup actually give enough return to cover those costs?
“You can get some premiums for [grass-fed beef],” Benavidez said. “But you want to make sure you are not losing money by buying more hay to support additional larger animals, just to access those grass-fed revenues, which may or may not compensate for the additional expense.”
Price setting and risk management
Benavidez recommended producers spend ample time on pricing. He said producers will want to make sure they’re getting that break-even price with some additional markup to generate profit. In other words, the cost to grow the animal, plus whatever profit margin is desired.
Risk management will also become an important factor. Because producers will be accessing more of the marketplace, they will also be taking on a lot more risk. Benavidez reminded producers, “you will be owning these animals longer, which inherently gives them more opportunity to die on your dime.”
In conclusion, Benavidez told producers there are real opportunities in the direct-to-consumer business. He said, “you can make it as simple or as complicated as you want. If you’re already retaining ownership through the feedlot, you can just siphon off some of your calves and sell them as halves or sell the percentages of those live animals through custom exemption. I’m going to tell you honestly: You probably won’t get rich right off the bat. But you learn more about the industry, you’ll diversify some of your financials and you’re going to increase access to the retail dollar.”
Texas A&M AgriLife Extension released a new handbook detailing the legal and economic considerations for direct beef sales. It can be downloaded for free at Texas Ag Law - Direct beef sales handbook.
CONSIDER:
How will you sell your beef, and who is your intended market?
Selling percentage of live animal
- Pros: Allows for the use of custom slaughter facilities, no additional permitting requirement, less additional insurance needed, less hassle
- Cons: A lot of customers don’t want or can’t afford that much beef, watch facility quality, which can reflect poorly on you
Selling percentage of processed beef
- Pros: Less hassle
- Cons: Customers may not want as much beef, inspected facility required, permit required, additional insurance needed
Selling individual cuts
- Pros: Additional customer base options
- Cons: Inspected facility required, permit required, additional insurance needed, storage and inventory issues, much more work
