31 July 2009

3 minute read

North America

Key drivers supporting the `economics of change' are farm level financial strengths and the potential for herd cost reductions through integrated herd and grazing systems.

"This 10-year analysis involved sifting and sorting hundreds of records from the AgriProfit$ Business Analysis and Research program," says Dale Kaliel, senior economist: production economics with Alberta Agriculture and Rural Development, Edmonton. "Trends in year-to-year farm financial performance, along with the economics of cow herds and grazing systems were evaluated. To bring further focus, the average of all participating beef farms was contrasted with low cost farms, those with herds in the lower half of total production costs."

During the period of 1998 to 2007, the overall farm level return on assets averaged about three per cent while the low cost group averaged four per cent.

"The drought in 2002 and BSE in 2003 substantially reduced the average return on assets," says Kaliel. "The upside is that these events kick-started a change process in the industry. Producers began to look long and hard at how they were producing cattle. They were driven to fundamentally change their businesses and production systems, taking them to a sustainable, lower cost level."

The low cost group led the transition, shifting to less days feeding and more days grazing. This was driven by the notion of a feed-to-grazing cost gap. Providing feed dry matter from grazing sources, at market value, is more cost effective than acquiring and delivering feed in a drylot.

Observations on the shift in grazing practices over time include:

from 1998 to 2002, shifts were incremental. Producers added grazing days through practices such as aftermath grazing and small swath grazing parcels
• particularly in the low cost group, as time progressed, shifts in grazing systems appeared with more purposeful combinations of native, perennial and annual grazing options
• in the latter years, both groups revealed lower average herd operating and fixed costs linked generally to adjustments in feeding systems (types of feeds, labour use, machinery required)

"There is opportunity to bring further cost effectiveness to cow herds by addressing this feed-to-grazing cost gap," says Kaliel. "Up until this point, gains have come mainly from applying production options that were easy to identify and implement. Closing this gap further will require on-farm economic assessments of:

• grazing systems available to producers, relevant to their operations and locale
• winter feeding systems that complement the grazing opportunities
• other related production systems, such as types of feed used and calving season

These assessments will lead to long term, truly integrated systems."

The role of grazing land in the success of north and central Alberta cow/calf operations is easily overlooked. Grazing lands that support Alberta cow herds have helped profitability at the farm level even though the herds within many of these operations have struggled. These grazing systems in these businesses are dynamic from an economics perspective. They include a multitude of elements that change within the system, across years, and among farms.

"Producers often ignore the profit motive for grazing land when it's used by the cow herd," says Kaliel. "Grazing land is often undervalued as a profitable land use compared to field crops. Costs per AUM are relatively stable as systems adapted, dealing with pressures of rising input expense, required productivity gains and balancing between intensive versus extensive options.

"When a realistic market value is applied to grazing production, it is consistently profitable. Given emerging grazing systems thinking and technology options this will continue to improve."

This economic analysis shows that the significant profit opportunity for Alberta cow/calf operators is linked to a systems approach to managing the herd and the grazing resource.

"Over the past 10 years, economics has both driven and led a significant change in the Alberta cow/calf industry," says Kaliel. "Using economics as a management tool paves the way to sustainable profits with manageable risk."

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