I hear a lot of folks who are both discouraged and frustrated by our country's financial situation. That isn't a totally irrational feeling; after all, record deficits are now expected to at least triple in the next decade. Coupled with trillions (yes, trillions) of unfunded liabilities, the situation offers every indication that those numbers will increase even more.
The problem is we've reached the point where there's simply no way to tax people enough to pay off that kind of debt. The only hope of ever getting the U.S. back into a financially viable position is to grow the balance sheet sufficiently that the debt can be managed. The precedent has already been set in this regard; we were in a similar position in the late 1970s but record economic growth enabled us to crawl out of the hole. But we did it with tax cuts and reducing spending, not more spending and entitlements.
For different reasons, cow-calf producers are in a similar position. Rising inputs and land values are outstripping efficiency gains, thus making operations less sustainable. While the U.S. government can't increase taxes enough to fix its problems, cattle producers can't rely on efficiency gains to keep pace with rising input costs. The U.S. government must grow the economy, and the U.S. cattle industry must grow demand to be successful.
That doesn't mean that as U.S. citizens we won't see increased taxes, or as producers we can let up in our efforts to have a competitive cost structure and strive to operate more efficiently. However, financial success for cattle producers will be determined by our ability to create and capture value. Being a low-cost producer will ensure survivability in the short term, but that focus will also result in an ever-shrinking industry.
Creating and capturing value must be our focus as managers. Since non-ag values have been growing at a much faster rate than ag values for our land and resources, this will likely mean an increased emphasis on capturing the non-ag values. This may require a change in focus because for most operations the non-ag value whether labeled lifestyle, recreation, environmental, tourism, etc., will be significantly higher than the ag value.
Recently I talked to a rancher who typically produces 300,000 lbs. of weaning age cattle to market; over the last couple of years he was generating around $285,000/year. His numbers indicated he had to increase his price received by nearly 30¢/lb. to make enough financial return to justify his efforts, increase production or reduce breakevens correspondingly. Those weren't viable options.
He then went back and figured what land values would need to be to generate a profit on the cows. The difference between the actual and this calculated land value was what he called recreational value. He found that on a per-acre basis, he had to generate almost twice as much from recreation per acre compared to what he was charging his cows per acre.
It was amazing to me that in just three years, he was able to generate over $16/acre for recreation; with the cows figured in, he was generating $25/acre. He actually had plans to aggressively expand his operation going forward using his new business model.
Interestingly, as he applied his new value-capturing mentality to the cattle side of things - improved genetics, retained ownership on more cattle, age and source verification, and several new marketing alternatives, he’s confident he will actually realize the $90,000 increase in value from the cattle side as well.