$550.00 $501.90 SEGMENT SECTOR GROSS MARGIN % SHARE OF TOTAL VALUE CREATED
Backgrounder / Grasser / Feeder
They say you often have to repeat things three times before it will stick in your head, so needless to say many still do not get it. The highway robbery of your equity is not happening at the packer level but at retail. I just hope after I lay out these numbers, which were part of Charlie Gracey’s presentation in Red Deer recently, it will actually sink in.
This presentation from Charlie so beautifully illustrates the gross value of a finished animal and where all the money goes. The only question I had after the exercise was how can we reverse things. Aside from building specific branded-beef programs that gain customer loyalty, I haven’t quite figured it out yet.
Two notes before I get started. First, the numbers I present are based on gross margin and not net. Secondly, for every 100 lbs. of live weight, there will be a 58.5 per cent cold carcass weight yield equivalent. After boning and breaking this carcass, the saleable boneless beef will drop by another third, so in the end every 100 lbs. of live weight will yield 42.7 lbs. of saleable boneless beef.
To calculate the gross margin and the share allocation, I start by out-ling the steps from birth, to box, to plate. As we all know, it all starts at the cow-calf level, so let’s assume using this year’s numbers and balancing for heifers and steers, a 550-lb. equivalent calf is worth $1/lb. or $550/head. This we will call the cow-calf gross margin. Next is the backgrounder/grasser/feeder gross margin. To calculate it, we take the finished value minus the procurement costs to buy the calf. For this I have assumed this particular steer finishes at 1,340 lbs., and sold at current prices to the packer, is worth $78.50/cwt. In other words the finished steer has a gross value of $1,051.90 and created a gross margin of $501.90 between leaving the ranch and before it goes the packing plant. Depressed yet? Just hold on.
Now comes our nasty packer. They have bought this steer from the feeder for $1,051.90 and go to work turning it into boxed beef. What do they get for it? Using a 58.5 per cent yield, this particular steer will produce a 784-lb. carcass. The CanFax reported price for box beef for the first week of February was $1.49/lb. hanging. In other words, this steer will produce $1,164.80 of boxed beef value. Add to this a drop value of $75/head for offals and hide, and the gross value created at the packer level for our steer is now $1,239.80. The gross margin calculated by subtracting the procurement cost of the steer is $187.90/head for the packer.
Now that we have made it past the nasty packer we are on to our, “hometown advantage” — the friendly neighbourhood retailer. To calculate their margin, we first must calculate the total meat equivalent that comes from a 784-lb. carcass. Using the rules presented earlier, our steer should produce about 572 lbs. of retail beef. Obviously in this mix there is everything from tenderloin to regular ground beef and their values trade at opposite ends of the spectrum. So being conservative, I will assume that the average value for this beef at retail will be $5.26/lb. and by multiplying 572 lbs. at this value we find that the gross margin created is now $3,008.72! The net margin? Take away the procurement value of $1,164.80 from the packer, and the gross margin at the retail level is $1,843.92/head!!!
I mentioned earlier, the packer received a $75 drop value per head. This needs to be added to calculate the entire value created by our steer. So adding this back, our $550 steer has created a gross value of $3,083.72 through the chain from ranch gate to consumer plate.
What are the percentages? Primary production from birth to slaughter takes 34.1 per cent, the packer 6.1 per cent and the retailer 59.8 percent of the gross margin.
Now, we all know every sector has costs and no doubt these numbers are not all net profit. What this exercise clearly shows is the pie is big enough, it’s just there are certain sectors getting a larger slice than others. Some are starving and others are getting fat!
What’s even more ironic are the production timelines to create these gross margins. For the cow-calf producer it is one year to create the margin from a 550-lb. calf, for the retailers it can be as little as three days from the time it enters the store until it is carried out the door by Joe Consumer. Ironic how those who own the product for the shortest time take the largest share. Adding insult to injury, our sector, which gets the smallest chunk of the pie, pays for the marketing and promotion of those taking take the largest chunk.
Charlie says he has done this gross margin exercise since the mid 70s. At that time the retailer’s chunk of the gross value was 19 per cent. In the mid 80s that number jumped to 35 per cent, in the 90s it was 42 per cent, and now it is over 50 per cent! I know everyone continues to bash and blame the packers for our predicament. All I say is look at their gross margin and calculate in their costs of doing business. Your equity is disappearing further up the food chain.
Speaking of the food chain, my friends at Loblaw’s are not too happy about what I previously wrote. Their first comments to me as to why they are not carrying more Canadian product was they could not source enough AAA product for their commodity programs and there was not an adequate supply of natural beef. Then they said our beef industry is a North American one and they must remain cost competitive. Translated, it means receiving over 50 per cent of the pie is not enough.
I know many are still crying the BSE Blues, but this seven-year song is getting old. There are much bigger issues and I hope this exercise shows where the dollars are going.
Dr. Christoph E. Weder is a purebred Angus breeder in the Peace region of Alberta and also runs SVR Ranch Consulting. He is also a founding member of Prairie Heritage Beef Producers For additional info check out www.spiritviewranch.com