To identify in this article the number of inefficiencies in a Dairy Farmer’s or a Cattle Rancher’s operation that annually lead to each operator directly giving away equity value are too many to describe. However, by vetted calculation of our applicable operations, we can state, with empathy, that $17 Billion Dollars is a bit too much, even by US Government budget standards. As one misquote attributed to Senator Everett Dirksen goes, a billion here and a billion there and pretty soon we’re talkin’ ‘bout some real money!
Think about this comparison for just one moment: $17 billion dollars in value, in direct profit, would place dairy farmers and cattle ranchers at number 7 on the Fortune 500 list of most profitable companies. In other words, that ain’t hay.
At first reading of the comments above, some may deem it a harsh, judgmental statement that does not reflect accurately on the many American farmers and ranchers utilizing every method possible to enhance value at their site. So, before you decide to ignore this article, rest assured I’m not throwing a blanket statement over the two industries. However, make no mistake, the dollar amount values not being captured by the two sectors are an accurate reflection of most all operations in the US.
Many of us make it our business to purchase from the dairy farmers and beef cattle ranchers who offer their products direct from the farm to the table. Many of these operators are producing the highest quality of food for our families, realizing the highest value from their products, returning to a much more sustainable land operation than previously utilized and have greatly reduced their operational inefficiencies. Yet, as we all know too well, these few operators are considered very, very small and a niche market nationally.
It took me only a few years, and countless discussions and location visits, to identify major valuations of equity that were, quite literally, being handed over to other operators rather than being captured by the original asset holders in the dairy and cattle industries. This has been the case for too many years to count and was certainly the case last year as it is today.
When I speak of giving away $17 billion of value, I’m looking at two separate areas of profit only: one being the annual crops a dairy farm or cattle ranch grows and, two, being the actual value of the culled dairy herd and the beef cattle going to market. In this article, we will speak only on the culled dairy herd and the beef cattle going to market. We are not reporting on the billions of dollars in the down-stream value of the hard products in dairy (fluid milk, flavored milk, buttermilk, butter, cheese, yogurt, ice cream, etc.) or the wholesale and packaged beef products value from the beef cattle rancher’s side.
On the dairy side of the table, there are some 9.3 million head of milking cows in the US today with California representing 1.78 million of that number. Today across the nation, most certainly in California, dairy farmers are selling their raw milk to processors for thirteen dollars and change per hundredweight. In most every case the dairy farmer is taking a loss. The days of wine and roses, just a few years back in 2014, of dairy farmers receiving over twenty four dollars per hundredweight seems like a lifetime ago.
For the uninitiated, a hundredweight of raw milk from the dairy farmer equals 11.6 gallons of bottled milk. This should give you some perspective of how tough it is for the dairy farmer today and where the milk revenue and profit are actually landing. Without question, when a dairy farmer rests at night, their thoughts are filled with worries.
Back in the 70s there were over 150,000 dairy farmers across the US. Today there are only 42,000 such operations. Generally speaking the total head count of milking cows has remained level. However, production has increased due to better genetics, nutrition, environment and technology.
If you segment the nation into regional sectors, you will see that the fastest growth in population is in the Southeast region. Yet, if you review USDA reports, you will see that Southeast US multi-generational family farmers are exiting the business at a faster clip than other regions of the country. For this article we will not discuss the varied reasons, of which there are many. Those reasons would be best analyzed at a round table discussion conference.
A dairy farmer, generally speaking, will cull approximately 30% of their milking herd every year for one reason or another. That equates to about 2.79 million head culled last year across the entire US. Of that number, California represented approximately 534,000 head culled last year.
When a cow is culled from the milk producing arena by the dairy farmer (the original asset holder) it is then taken to auction and sold. As any other commodity, the price of sale is market based supply and demand, as we all know. For the sake of argument, whatever that sale price is, give or take a few dollars, it is accepted as a fair price at the time and place (again, depending on which side of the table you’re on)…all things being equal. Once that sale is complete and the dairy farmer is paid for the cow, he/she no longer receives any up-stream or down-stream revenue from that animal.
We calculate that after each and every culled dairy cow is sold at auction, the dairy farmer leaves $1,100 on the table. In other words: the dairy farmer willingly gives away, at bare minimum, $1,100 of equity value to the down-stream market that should normally be kept by the original asset owner, the dairy farmer.
The two major down-stream profit sectors, as we know, are the meat market and the cattle hide market.
The meat down-stream value of that culled cow, the profit earned after the sale at auction, is approximately $600 per unit.
The cattle hide down-stream market value is approximately $500 per unit.
Bare minimum combined profit valuations: $1,100 per asset unit.
On the meat side, this revenue/profit can easily be captured by the dairy farmer if they would merely adapt and change their operations to add this income stream. Just a few tweaks and you’re there.
On the hide equation, I’m not speaking of merely curing the hides and then selling them, in bulk, to the Mexican or Asian markets. What we have determined is the wisdom of contracting to have the hides cured in the US and then directly shipping them to a specific country in Western Europe for tanning, product design and production. With centuries of experience and generations of families involved, once the hides are tanned and finished goods are produced by the artisans (acknowledged by all in the fashion industry as the absolute best in the world), the value of the hide is dramatically, significantly increased.
By our calculation, if you take the 2.79 million head of culled dairy cows and multiply that by $1,100 per head that equals $3.069 billion dollars in direct profit that was not realized by the US dairy operator. Of that number, California dairy operators gave away $587 million dollars that should have gone to their bottom lines and most certainly invested/spent throughout the state economy.
On the beef cattle side of the equation, in 2015, some 29 million head of cattle were sent to market in the US. That number will not come as a surprise to the many cattle ranchers and feed lot operators in the top 10 beef cattle producing states. It certainly is no surprise to California operators such as Tejon Ranch, Mapes Ranch or Harris Ranch.
If we calculate the 29 million head of beef cattle at $500 dollars per unit of lost profit on the hides, that number equals $14.5 billion dollars that should have been kept by the original asset owners.
Again, these valuations are based on our vetted operational revenue/profit stream flows. With just a little tweaking of one’s operation, and/or a little collaboration, a dairy farmer can realize an additional profit of $1,100 per asset unit while a beef cattle rancher can realize an additional profit of $500 per asset unit.
Wouldn’t it be a greater, more liquid, more valuable market place for the dairy farmer and the beef cattle rancher if they were to adapt and tweak their operations accordingly? By doing so, each operator could go to sleep at night, gleefully, repeating the great line from Dickens’ Tale of Two Cities: “It is a far, far better thing that I do,….”
As an aside, during my five year employment tenor at the Stanford University Management Company, our responsibility was to manage the University assets: the real estate and the endowment funds. Our charge was to increase the value of the University’s assets so the University team could operate the institution at the absolute highest level of education while offering student financial aid to all in need. To finance the University goals and objectives our internal thinking at the Management Company was this: “We never give away anything of value for free! That’s the University’s job!” So, perhaps for the reason stated, you should better understand why I am so displeased with the dairy farmers and beef cattle ranch operators.
Speaking from experience, this ain’t no way to run a railroad. This ain’t brain surgery.
Our company has established the inter-linked value chains required to capture the added value I speak of and add income to any dairy farmer or cattle rancher. Regardless of where you operate in the US, with just a few tweaks to your operation, you could soon be adding considerable revenue and profit to your business operation. As one of our dairy operators said to me, he welcomed the opportunity to be a market maker and not a market taker. I should hope that those of you who read this article share the same sentiments.
Our team at GDM Distributors (my brother Darron, Greg Lambert, Dr. Said, Carla Brooks, Dr. Gipson, myself) are well versed on the flow through steps required to identify and eliminate and/or reduce inefficiencies while adding revenue to your business enterprise. We welcome the opportunity to discuss all related business topics.
For a more complete understanding of who we are and what we offer, please take the time to take a detailed dive into our website.