The implications and options for increased costs on beef farms in 2022

Summary

• There will be significant increases in costs on beef farms in 2022; in two worked examples, cost increases of almost 40% are estimated.
• In these examples, increased output prices are unlikely to offset the increase in costs at farm level.
• The first step to managing 2022 is the completion of a financial budget that evaluates the financial performance of the farm during 2022.
• All options should be considered with the major focus on making greater use of grazed grass for the remainder of the year, and finishing animals at pasture prior to rehousing for a second winter.

Introduction

The year 2022 has brought about unprecedented input cost increases, the likes of which Irish farmers have not seen before. Inputs began to rise dramatically in late 2021 with chemical fertilizer prices increasing by €300-€500 per tonne by Christmas followed by further price increases in spring to the point where the majority of fertilizers were costing in excess of €1,000 per tonne. Although the cost of concentrate feed, milk replacer, diesel and polythene also increased over this period, they did so at a much slower rate. Consequently, the impact of these price rises was not initially felt by Irish farmers finishing cattle, rearing calves etc. during the early months of 2022.

Beef prices have also risen considerably; prices rose by over €1/kg carcass between January and May 2022, which has given those farmers finishing cattle over the late spring and summer period a much bigger margin than expected. Assuming an average carcass weight of 350 kg, each animal slaughtered would be earning an additional €350 in May and June compared to January 2022, and nearly €600 per head extra compared to spring 2020.

The main issue facing Irish beef farmers operating various production systems will be beef prices next autumn and spring, and to what extent production cost increases can be covered by beef price rises; ultimately, that is what will determine profit margins for cattle finished in spring 2023. On top of that, what can farmers do now to mitigate the impact of rising costs?

A number of worked examples are outlined in this paper which highlight how various beef systems will fare out in the current environment of record input costs. Our focus is on overall production costs and actions farmers can take to mitigate price rises.

Budgets

Commercial farm performance data and information for 2021 was used for the budget baselines and starting points. For comparison purposes a number of assumptions were made in relation to input levels and price increases on feed, fertilizer, contractor charges and all other associated areas of expenditure within a typical beef farming system. For the purpose of this paper, it is assumed that in 2022 farmers will purchase the same or similar amount of inputs/services as in 2021 but at much higher prices as is currently the case. Calf purchase prices in 2022 for dairy-beef systems were broadly similar to 2021. Fixed costs were assumed to increase marginally overall, with diesel being the biggest increase across beef farms as the increases in electricity costs have a small effect due to relatively low usage.

Budget assumptions

• Meal: €260/tonne in 2021, and €400/tonne for 2022.
• Contractor charges: increase by 25%.
• Fertilizer prices: 2.5 times higher on average.
• Other variable and fixed costs: minor increases.
• Input level: Assumes the same volume of inputs are used on farm.

Dairy calf-to-beef systems

For the purposes of analysis, costs from the Teagasc Green Acres dairy calf-to-beef demonstration farms 2021 Profit Monitor data have been used as the baseline for comparison purposes for the dairy calf-to-beef systems. The 12 farms are located nationwide and encompass a wide range of scale, land type, stocking intensity and calf-to-beef systems, which encompass 24- to 30-month spring-born steer and heifer systems, 19-month bull systems and autumn-born steer systems. Average farm size is 52 hectares (ha) with an average stocking rate of 2.3 livestock units (LU)/ha and live weight output of 608 kg/LU. Within this group there is a range of farm sizes from 24 ha to 92 ha and profitability ranged from €51/ha to €1,342/ha net profit excluding direct payments. From Table 1 it can be seen that the production costs increased substantially, by 37%, in 2022 when compared to 2021.

Table 1. Production cost comparisons for dairy calf-to-beef systems (€/kg live weight, using Green Acres demonstration farm data)

₁ Estimated based on 2021 quantities for sales and inputs at 2022 prices. 2Includes milk replacer. 3Assuming a carcass yield of 0.51 kg carcass/kg live weight.

The biggest cost increases are for fertilizer (+150%), purchased feed (+53%) and contractor charges (+25%). Given the wide range in production systems operated by the Green Acres farmers, the impact of increased costs will differ markedly from farm-to-farm. The spring steer 24-month finishing system and bull beef systems are quite exposed to large cost rises in meal and fertilizer. In contrast, farms where a large proportion of cattle are slaughtered off grass, or where indoor feeding periods are short, are likely to have lower increases in production costs. The programme farmers have been examining ways to reduce inputs. Examples include improving soil pH to increase the efficiency of fertilizer, making high quality silage (>75% dry matter digestibility, DMD) to reduce concentrate feed requirements and, in the longer term, incorporation of both white and red clover to reduce reliance on inorganic fertilizer nitrogen inputs.

Suckler calf-to-weanling systems

Output tends to be more limiting for suckler calf-to-weanling farms with many farmers in this system operating at a low stocking rate (<1.5 LU/ha). Although fertilizer application rates are relatively low, suckler calf-to-weanling systems remain exposed as price increases for weanling sales are limited by the low levels of live weight sold and cow maintenance costs. Profitability has typically been low in this system so any major increase in input costs will require a very large increase in weanling prices to cover additional costs. A typical suckler-to-weanling system, based on a well-managed suckler calf-to-weanling system completing the Teagasc eProfit Monitor, is described in Table 2. Average farm size was 24 ha, with 28 suckler cows and the stocking rate was 1.9 LU/ha. For this farm, the increase in fertilizer prices (+150%) will have the biggest effect on variable cost increases this year if the same quantity is purchased. Concentrate feeding has less impact for most suckler calf-to-weanling enterprises as the quantities purchased are generally small; nevertheless, there is an estimated 53% increase in concentrate costs. Contractor cost increases (+25%) will have a bigger effect on profitability than concentrates in a weanling system as most of these farms will typically have low levels of owned machinery and rely on contractors to carry out most of the intensive field work such as silage harvesting, slurry spreading, reseeding and hedge cutting. Overall, cost increases of 38% are estimated for this system. Weanling prices up to June 2022 have risen by around 15% versus 2021; based on Table 2 this rise may not be enough to maintain profitability in 2022.

Table 2. Production cost comparisons for a suckler calf-to-weanling system (€/kg live weight) using data from a high-performing farm recording data on the Teagasc eProfit Monitor

1Estimated based on 2021 quantity of sales and inputs at 2022 prices. 2Assuming a carcass yield of 0.55 kg carcass/kg live weight.

Winter finishing budgets

Teagasc produce winter finishing budgets each year to provide an indication of costs and margins attainable in these systems (Table 3). The price of ‘store’ cattle in 2022 is approximately 40-50 c/kg live weight greater than 2021. Variable and fixed costs have increased by 50% and 42%, respectively. Overall, based on the assumptions in this analysis, total production costs have increased to €6.12/kg carcass weight. Clearly, it would be prudent to have a contract with processors to de-risk winter finishing systems.

Table 3. Production cost comparisons for Teagasc Winter Finishing budgets

Managing through 2022

As we are now over mid-way through 2022, possibilities to ‘remove’ costs from beef production systems are reducing. However, it must be recognised that there are options that can be taken on board – doing nothing is not an option. The first and most important step for any farmer is to get an understanding of the impact of the cost changes on the farming operation, and from there necessary decisions can be taken to reduce the exposure to the increased costs. The overall budgeting process should ensure that all options are evaluated for the farm as a whole and may signal that longer term diversification will be needed. As can be seen from the budgets shown in Tables 1, 2 and 3, production costs have increased considerably in 2022. The next section of the paper will detail some of the options possible for farmers but should not be viewed as the only alternatives; rather the objective is to prompt discussion and consideration of options.

Cost focus

As outlined in the budgets there is a dramatic increase in the costs of production, with the sale price increase not counteracting the increase in costs. In the dairy calf-to-beef budget, costs have increased by 37% with feed and fertilizer accounting for most of the increases. Similarly, in the suckler calf-to-weanling system, costs have increased by 38% with feed and fertilizer again being the main driver of cost increases. The increases are dramatic and require a clear focus on cost control. In the analysis we assumed the same level of inputs however, in practice, the impact of these price increases will have been to reduce inputs and in particular fertilizer use on beef farms. Ideally, this would be facilitated by soil testing and particularly addressing soil pH levels where required. Concurrently, soil test results can be used to facilitate more targeted application of inorganic fertilizers with the objective being to reduce fertilizer application levels. Application of fertilizers can be further reduced by grass budgeting and matching application rates to grass and grass silage availability and demand.

Using cheaper forms of fertilizer (switching from CAN to protected-urea to meet nitrogen fertilizer requirements) can also lead to significant savings. Key to ensuring costs are reduced in 2022 on beef farms is increasing grazing ‘pressure’ to increase grass quality and utilisation, while at the same time increasing performance from high-quality grass, thus reducing purchased feed requirements. Long-term, the strategy should be built around ensuring soil fertility is optimised, as well as through the incorporation of clover into the swards.

By consulting with agri-input merchants and processors you may get a better picture of where costs and beef prices are likely to go. Along with your adviser complete a partial budget before making any decisions. It will help you examine costs against potential outputs.

Earlier sale of finishing cattle

Weanling sales are commencing and this is providing some indication for suckler calf-to-weanling systems of prices that can then be factored into budgets. The scenario around finishing spring-born cattle at 24 months of age is less clear. In order to reduce the demand for winter feed and reduce the level of exposure to price volatility and increased feed costs, the opportunity to select a proportion of the animals due to be finished at 24 months of age for earlier slaughter (e.g. at 19-20 months) should be explored. The criteria used to identify suitable cattle for earlier ‘finishing’ should be live weight and ‘condition’ (fatness) of the animals. Farmers need to assess if ‘forward’ stores, particularly heifers, are beginning to build fat ‘cover’. Farmers can make a decision to feed these cattle that are ‘building up’ fat deposits with extra concentrate for a short finishing period, either at grass or in the shed, and slaughter at a younger age. Live weight needs to be assessed also before farmers decide on feeding cattle to finish. Farmers are advised to weigh all forward stores now. The advantage of finishing these animals before the ‘second’ winter includes reduced requirements for silage and expensive concentrate, as well as having a clearer picture of factory prices. On a heifer or steer system, finishing off grass as opposed to out of the shed will reduce feed costs by €1.20 - €1.50/head per day. It could be expected that carcass weight will reduce as a result of this earlier finish; however, the objective is to reduce costs to a greater extent than any reduction in carcass value.

Selling poor-performing high-value animals

Current cull cow carcass prices are at unprecedented levels. In 2022, an option is to identify high-value but low-performing suckler cows to be removed from the herd. For example, there is little justification for retaining non-pregnant cows post-weaning. Furthermore, cows with functionality issues (e.g. udder problems, lameness), docility problems or weaning light calves should be identified for culling. A further consideration for many farmers will be the genetic merit of their herd and in particular older cows; cows that have lower genetic merit are likely to carry inferior genes for suckling systems and this can also be a factor included in culling decisions. These animals could potentially be replaced with heifers of higher genetic merit that will calf at two years of age. The advantage here is that there is a reduction in feed demand as younger/smaller animals will require less feed and the animals that they are replacing currently have a very high economic sale value