Cattle industry can't grow without ROA
During the expansion of the swine industry, various programs were held through the Midwest to grow the industry and animal agriculture in general. The point was to illustrate the tremendous production opportunities in pork. Pounds of pork per pig...
During the expansion of the swine industry, various programs were held through the Midwest to grow the industry and animal agriculture in general. The point was to illustrate the tremendous production opportunities in pork. Pounds of pork per pig unit were on the rise. The costs were manageable and the income was positive.
Obviously, full bore ahead was the mandate. The presentations went well because the producers were interested in the details for improving swine production.
Production technology was certainly fine-tuned, if not even a bit futuristic.
Because these presentations were very popular, a potential investor from Chicago expressed an interest in investing in the swine industry. After all, with excitement and reasonably educated specialists fully engaged, the investment opportunity seemed very probable.
Administration certainly was excited and did what seems natural: Invite the potential investor to a swine seminar. As the meeting drew near, the discussion was good, the planning extensive and the coffee black.
As the meeting started, the production opportunities were well laid out and seemed to be going well. Suddenly, the investor stopped the meeting and asked: What would be my return on the assets I invest? The room fell quiet until someone ventured a response: Maybe a return of 2 percent. The investor thanked them for their time and hospitality and left, so the meeting was adjourned.
The story easily could be told utilizing the current beef industry. The industry is excited because the pounds of beef per producing cow are great, the costs are manageable and the income is positive.
Most of the excitement centers on increased gross margins that are outpacing expenses. Cattle prices are high and producers like the feeling.
The bottom line is the investment in the beef industry must meet the investor's targeted return on total assets (ROA), including land and improvements. If the industry cannot offer an adequate ROA, the industry will not grow.
The real answer to the question rests with the ability to complete the SPA process. Unfortunately, production seminars are more popular and the challenge to do a full financial analysis of a beef operation is time-consuming.
To paraphrase James McGrann, professor and extension specialist emeritus at Texas A&M University, indivi- dual producers must understand their cow-calf operating and total unit cost and return on ROA, including land and improvements. It's important to review the economics of expanding the cow herd if added debt is required for land purchases and breeding cattle investments. "Even at historical highs, calf prices in the cow-calf sector are characterized as a large investment with a low ROA."
Will the cow-calf industry expand? Will calf prices be high enough to achieve a target ROA? As Jim says, "Make your numbers do the talking." But keep the ear tags.
Editor's note: Ringwall is a beef specialist with the North Dakota State University Extension Service.