One of my favorite economists always points out that my constant references to return on investment (ROI) are nothing more than red herrings. He is absolutely right that ROI, or return on assets (ROA), are not financial measures that drive most economic or individual business decisions in our industry. It’s always been about cash flow as measured by direct income minus direct expenses, or tax considerations, or land appreciation.
There are a lot of categories of beef producers, from hobby farmers to those with inherited land bases, who don’t use ROI or ROA in their decision-making model. While my economist friend is right, I think the lack of expansion and even the predicted slower rates of expansion are a result of a subtle shift in the influence of these indicators.
The fact that expansion hasn’t yet taken place does argue that people are looking at the business differently than in the past. While I was fortunate to meet with a lot of producers this week where the next generation was coming back into the operation and committed to the cattle industry, as a whole, we are seeing the average producer age increase. In many cases, producers are nearing retirement age with no one to come back to the operation.
This isn’t a new trend but it is accelerating. What we’re seeing is that since the purchase of stand-alone production units isn’t typically a financially viable option, these lands will either be kept in original hands, leased out or sold to investors who are looking at the land from a land-appreciation viewpoint rather than ag production.
Admittedly, on its face this does not seem like a drastically different model than in the past, but I’d argue that it’s actually significantly different. In the past, land appreciation largely accrued to those who owned the cattle. This means that breakeven cattle enterprises that today are viable and make sense won’t be in the future. If cattle ownership and land ownership are increasingly separated from an economic standpoint, then cattle ownership will have to become more profitable.
Secondly, as input prices, price risk and market volatility increase, it requires larger promises of returns than in the past to make similar decisions. For $50/head profit, one could invest in a $600 cow; but when the cow costs $1,500, the bull $4,000, the feed truck $65,000, and the ground costs $2,500/acre, then it becomes a little different story.
Lastly, there are a lot of cattle that have been run in traditional diversified ag operations. Many times, cattle enterprises have provided spending money or even ensured viability of farming operations in tough times. There is value in diversification.
Today, farming looks a lot more attractive, both as a revenue source and from a profitability standpoint. Many producers who have had livestock production enterprises as a small part of their enterprise are deciding that the amount of work required doesn’t measure up to the limited financial reward. That was a luxury many didn’t use to have.
These factors, along with some other structural changes in our business, I believe are creating a new way of looking at our business, where ROI or ROA are becoming more than simply red herrings.
-- Troy Marshall
Source : BEEFmagazine
http://beefmagazine.com/cowcalfweekly/0114-changing-industry-roi/
