Module III Section D The Economics of Livestock Production
Section D: The Economics of Livestock Production
- Projected Outcomes
- Background / Lessons
- How does sustainable agriculture affect the costs of animal production?
- How does sustainable animal agriculture affect production levels?
- How does sustainable animal agriculture affect prices?
- Government payments
- Economic impacts beyond the farm
- Struggling farmers and exploited workers
- Environmental costs
- Lost opportunities
- Public health
- Community impacts
- Animal welfare
- Career Pathway content standards
- Students will learn how sustainable practices can affect farm profitabilit.
- Students will consider the effects of government agriculture programs on the profitability of sustainable farms.
- Students will learn about alternative marketing strategies.
- Students will learn to think about costs and benefits of different livestock production systems at the community and regional level.
This section begins by looking at how sustainable agriculture affects profitability at the farm level. It then goes on to introduce some of the other forces that affect the economics of agriculture, including government payments and the handling of external costs.
The profitability of animal production is the product of
- The costs of production
- The amount of product, and
How does sustainable agriculture affect the costs of animal production?
Sustainable farmers generally seek to replace purchased inputs with resources produced and recycled on-farm. This approach can significantly reduce some costs of production, but not others. Let’s look at some typical livestock production costs.
Feed is a major production expenditure for livestock operations. In some cases, sustainable practices result in higher feed costs, in other cases they can reduce feed expenditures. For example, organic feed is almost always more costly than conventional feed. Iowa State University research indicates that feed costs for hoophouse swine production may run very slightly higher than for confinement pork production. On the other hand, feed costs for animals on pasture are generally lower than for animals in confinement. Note that total feed costs for farms that raise their own feed (whether in the form of pasture, hay, or grain) should include the costs of raising that feed as well as the actual price paid for purchased feed.
Manure management costs vary depending on the specific practice chosen. In general, sustainable livestock systems require lower capital expenditures for manure management than conventional manure storage structures, but they may demand more labor and/or management. Well-managed grazing systems do not require separate manure management when the animals are on pasture. Composting systems range from passive composting, requiring relatively little labor and equipment to high-tech systems requiring specialized equipment and careful management. In general, a new compost turner costs around $15,000 to $20,000, though a large mechanized indoor composting setup can cost well over $100,000. A Michigan study found that on-farm composting was comparable in cost to daily spreading, while a review of a Minnesota farm found that composting reduced manure handling costs compared to daily spreading.
See the following Web Sites for additional information:
Facility costs tend to be lower on sustainable farms, which try to make use of existing structures or choose facilities such as hoops or fencing that are relatively flexible and inexpensive. However, sustainable farms that include processing can have higher facility costs. http://www.extension.iastate.edu/agdm/articles/duffy/DuffyJune97.htm
Labor needs for sustainable livestock production can be higher or lower than for conventional or industrialized meat and dairy production. Many farmers report that labor conditions on sustainable farms are considerably more pleasant than on farms using conventional animal confinement. Animals raised in sustainable systems such as rotational grazing or deep-bedded hoops also tend to be easier to handle than animals that do not have access to the outdoors and do not have regular contact with humans. Labor needs on sustainable livestock farms can vary substantially, depending on the type of animal and the particulars of the system chosen. Another confounding factor is that on family farms labor is not always tracked accurately.
How does sustainable animal agriculture affect production levels?
Comparing production levels of different animal systems raises the question of production per what? For example, if you look at annual milk production per cow, rotational grazing systems have a lower average than confinement dairies. However, if you look at milk production per unit of feed costs, the reverse is true. Many sustainable livestock farmers prefer to maximize farm income rather than total production, and find that pushing production can disproportionately raise costs.
How does sustainable animal agriculture affect prices?
The impact of sustainable agriculture on price depends on the specific production and marketing practices of the farm.
Certified organic livestock products typically get a significant price premium, particularly when conventional prices are low. For example, in 2002 the organic marketing cooperative Organic Valley paid farmers more than $20 per hundredweight of milk, while the conventional price was around $12 per hundredweight.
Most sustainably produced livestock products that are not certified organic do not receive a price premium, unless they are marketed directly to consumers. However, some national marketing programs such as Niman Ranch and local marketing coops such as Northeast Iowa Specialty Meats provide price premiums for livestock produced using certain sustainable practices.
See the below Web Sites for additional information:
Direct marketing can give farmers considerably higher prices than traditional livestock sales to meat packers. However, direct marketing requires significant amounts of labor, as well as special skills and access to processing plants (such as dairies, cheese factories, or slaughterhouses) that are willing to handle small quantities and licensed to allow retail sale of products processed there. (See section 5 Regulation and Handling of Animal Products.)
Activity 1: What’s it worth to you?
In the twelve years from 1995 through 2006, the US government spent more than 177 billion dollars in direct agricultural payments to farmers. The amount paid each year can vary significantly, from around five billion dollars in 2007 (a year of record commodity prices) to more than thirteen billion dollars in 2006 (see Environmental Working Group website http://www.ewg.org/farm/regionsummary.php?fips=00000). This amount of money has a significant impact on the economics of agriculture in the US and around the world.
In most years the largest subsidies in the Midwest are for corn and soybean production. In animal agriculture these subsidies favor systems that feed grain rather than relying on grazing. If the farm buys its grain, the subsidies contribute to artificially low prices in most years. If the farm grows its own grain or silage corn, it gets direct payments from the government in years when grain prices are low.
Another type of government payment is cost-sharing for pollution control structures. The 2002 farm bill substantially increased the funding available for manure management and other structures needed for large confined animal feeding operations (also known as CAFOs or more critically as factory farms). These payments tend to favor industrial animal agriculture over more integrated ecologically based systems.
Other types of government payments, such as the milk price support program, do not favor one farming type or size over another.
There are a variety of USDA programs to promote environmental protection, including the Conservation Reserve Program (CRP), the Wildlife Habitat Improvement Program (WHIP), and Wetlands Reserve Program (WRP). Some of these programs work by paying land owners to take land out of agricultural production. Thus while they protect the environment, they do not support sustainable agriculture. More recently, however, programs have been developed that reward farmers for environmentally sustainable production practices. Examples include the Grassland Reserve Program and Conservation Security Program. Unfortunately, the total amount of funding for this type of program is far lower than the resources for commodity subsidies. As of 2005, the Conservation Security Program was only funded to apply to 202 small watersheds in the entire country (3 in Iowa and 2 in Wisconsin), excluding the majority of agricultural land in the US. The 2008 Farm Bill renamed the program the Conservation Stewardship Program and requires the program to be available on a nationwide basis. For more information on conservation payments available in Wisconsin and Iowa see the following web sites:
NRCS Wisconsin Report 2008
Grassroots Guide to the 2008 Farm Bill
Government regulation can also affect the economics of animal agriculture. Most regulation is intended to protect consumers, workers, and/or the environment. For some regulations, though, it is hard to see any public benefits. For example, the US Department of Agriculture prohibited an exporter of high-value beef to Japan from testing all the cattle it processes for Bovine Spongiform Encephalitis (Mad Cow Disease).
See the following Web Sites for additional information:
The bottom line
Because there are so many variations of both “sustainable” and “conventional” animal production systems, and because the profitability of an operation depends in part on the strengths and skills of the producer and on changeable government policies, as well as the practices used and their interaction with the soils and weather of a specific farm, it is hard to make an overall judgment on what animal production system is most profitable. What is clear is that even with policies slanted towards conventional systems, production practices such as rotational grazing, organic production, and deep-bedded hog production can be profitable.
Data comparing grass-based dairies with medium and large confinement dairies over several years show that the grass-based dairies have the highest profit and lowest cost per unit of milk produced, while the large confinement operations have the highest cost per unit of milk produced, but they also have the highest total incomes because they are so large. See http://cdp.wisc.edu/Great%20Lakes.htm, factsheet YR3-5.
Economic impacts beyond the farm: Cheap food and its hidden costs
The combination of government subsidies, industrialized farming, an abundance of good farmland, and a wealthy population have resulted in cheap food for the average American. Overall, Americans only pay around 10% of their income for food. This is the lowest percentage in the world. In general, having affordable food is a good thing. But the way our society is providing it turns out to have some steep hidden costs. Hidden costs like these that are not reflected in the prices consumers pay are called external costs or externalities by economists.
Cost 1: Struggling farmers and exploited workers
Farm gate prices can be highly volatile, but much of the time commodity prices barely cover the costs of production. When prices are low, many farmers get forced out of business. The farmers who remain take on more land and more animals in an effort to make a living off an extremely narrow profit margin. In order to expand, they typically have to take on more debt. This makes it harder for new farmers to get started, and makes even established farmers quite vulnerable to downturns in the market. Many sustainable farmers have found reducing input costs and/or improving the price they receive (by direct marketing or selling to specialty markets) to be better economic strategies than increasing the volume of production.
In the Midwest, anti-corporate farming laws have affected the progress of confined animal feeding operations owned by large corporations. In the South and Mid-Atlantic regions, however, corporate controlled poultry and hog production has grown relatively unchecked and has depressed farm incomes. Restoring Economic Health to Contract Poultry Production
Despite anti-corporate farming laws in many Midwestern states, large agribusinesses are influencing animal production throughout the country by using restrictive long-term production contracts and affecting access to markets.
Working conditions in CAFOs throughout the country tend to be unhealthy and unpleasant, and wages tend to be low. Most US citizens are not willing to work as farm laborers at these facilities. The legal and illegal immigrants who make up most of the workers generally are not able to stand up for better pay or working conditions. Because of language and other barriers, they are often also ignorant of environmental, labor, and safety laws and regulations.
Much of the price consumers pay for food goes to processing and distribution costs. The meat processing industry has seen union-busting, corporate consolidation, decreasing wages and benefits, and increasing injuries and turnover during the past ten to twenty years. These trends help keep prices in the supermarket low, at the expense of the people who slaughter, butcher, and package the meat. As a result, jobs in this industry are now also primarily held by foreign workers, who are desperate enough to take these dangerous jobs, at least for a little while. Like the workers in the CAFOs, they are not in a position to urge that worker or consumer safety regulations be followed in the plants where they work. (See Eric Schlosser’s Fast Food Nation for a description of labor conditions in meatpacking plants or excerpts from an interview with Schlosser.) See also
The Transformation of US Livestock Agriculture
CAFOs Uncovered, Union of Concerned Scientists
Cost 2: Environmental costs
The pollution that results from agricultural activities has real costs, but they don’t show up in the dollars and cents people pay for food. Some of them show up as extra water treatment costs that communities and their residents have to pay for safe drinking water. Others are harder to translate to monetary terms, such as the decline in healthy fish populations in rivers and lakes and even the Gulf of Mexico. Other costs can include declining property values near large animal confinement facilities (also known as CAFOs or Confined Animal Feeding Operations) and chronic health problems attributed by some people to air pollution, odors, and pathogens generated by CAFOs.
Economists have a special name for costs that result from the production of an item but that are not reflected in the price of the item: external costs or externalities. Externalities are a social justice problem, because someone sometime does pay their costs, just not necessarily the person or people responsible for them.
Cost 3: Lost opportunities
Agricultural land can serve a single purpose, commodity production, or it can serve several purposes, including water management, tourism, recreation, and aesthetics. These other purposes also have economic value, though only some of it will accrue directly to the farmer. In general, sustainably managed farms do much more to support these purposes than non-sustainable farms. In particular, well-managed grass-based farms are excellent for both water quality and aesthetics. Where would you rather vacation: in a landscape with cows or sheep grazing and a variety of crops, or in a countryside completely covered with large corn and soybean fields, interspersed with the occasional set of metal animal confinement buildings and manure lagoons? In Europe, working farmland is also used for recreation, through centuries-old rights of way across private lands. European agricultural policy explicitly recognizes agricultural land as an important recreational asset as well as a source for food production.
Cost 4: Public health
There are a number of questions about the health impacts of intensive animal production systems. All these issues are the subject of debate both in the scientific and policy arena.
- What are healthful levels of animal products in human diets?
Nutritionists and medical professionals don’t know the answer. On one hand, dairy products and meat are high in critical nutrients such as calcium, protein, and certain vitamins and micro-nutrients. On the other hand, they are high in saturated fats, and some studies indicate that consuming large amounts of protein can reduce the body’s ability to take up calcium. What we do know is that the food industry spends a lot of advertising money to get people to eat their products and also that trade groups such as the National Dairy Council and National Cattlemen’s Beef Association have considerable influence on the development of USDA nutritional recommendations:
“Since 1922, the National Cattlemen’s Beef Association and its predecessor organizations have been committed to nutrition research and nutrition education. America’s beef producers, through the voluntary beef checkoff program, have funded numerous human nutrition research projects and extended research results through public information programs.” Quote taken from the National Cattlemen’s Beef Association web page.
See the following Web Sites for additional information:
http://www.beefitswhatsfordinner.com/beefhealth.aspx (note the serving size described)
We also know that despite widespread familiarity with these nutritional guidelines, more and more people in the US and worldwide are suffering from diet-related health problems including obesity, high blood pressure, high cholesterol, and certain cancers.
- Do current animal production practices contribute to antibiotic resistance?
Antibiotics play a critical role in the treatment of illness. However, an increasing number of pathogens are developing resistance to antibiotics. An estimated 70% of antibiotics used in the US are fed to farm animals to speed their growth and/or to prevent illness among animals weaned very early, fed diets for which their digestive systems are not adapted, or kept in crowded conditions. Many researchers suspect that the virtually uncontrolled use of antibiotics in agriculture may be an important factor in the development of antibiotic resistance.
See the following Web Sites for additional information:
Union of Concerned Scientists
The Potential Role of Concentrated Animal Feeding Operations in Infectious Disease Epidemics and Antibiotic Resistance
Antibiotics in Animal Feed, CDC article
- Do current animal production practices contribute to foodborne illness or reduce the nutritional benefits of animal products?
Foodborne diseases such as tuberculosis carried in milk, trichinosis in pork, and salmonella in seafood have long been associated with the consumption of animal products. Public health actions such as pasteurization of milk have greatly diminished certain foodborne diseases. Other illnesses, however, remain a problem, and there is reason to believe that some of these diseases may be linked to practices of intensive, industrialized livestock production and processing. For example, the feeding of animal by-products to cows is recognized as an important vector for the spread of mad cow disease. Some research indicates that grain-finished cattle are more likely to contain dangerous E. coli 0157:H7 bacteria than grass-finished cattle. And as discussed above, antibiotic-resistant strains of pathogens have been associated with the widespread use of antibiotics in intensive animal production.
In addition, the nutritional profile of meat and milk from pasture-raised animals is slightly different from that of grain-fed animals raised in confinement. Overall, the meat of grass-finished animals is leaner and higher in conjugated linoleic acid (CLA) and Omega 3 fatty acids. Some animal feeding studies indicate that these substances may reduce the risk of cancer, heart disease, and obesity. However, so far there is little or no research on the long-term human health effects of CLA.
See the following Web Sites for for popular discussions of possible health benefits:
Cost 5: Community impacts
The impacts of cheap industrialized meat production on labor and the environment in turn have impacts on local communities. As the name of Wisconsin’s professional football team shows, communities once took pride in the meat processing industries that gave stable, high-paying jobs to local families. Today, communities with large meatpacking operations often struggle to serve and police transient, poor, and often ill workers and their families. Residents of rural communities with large confined animal feeding operations suffer odor problems and declining property values. Poorly managed livestock operations large or small can contaminate surface and ground water supplies, raising the cost of safe drinking water and reducing recreational opportunities. And decreasing numbers of farm families hurt rural schools and businesses.
Cost 6: Animal welfare
Some people claim that animals do not experience pain and suffering the way humans do. However, most people are inclined to believe that at least vertebrate animals do feel pain, discomfort, and even non-physical suffering. It seems intuitively obvious that animals feel discomfort and psychological stress when they are crowded, kept in artificial conditions such as on slatted metal floors, fed diets to which they are not adapted, and treated with drugs to enhance their production. Such animals also tend to exhibit more aggressive and self-destructive behaviors and die younger than animals raised in less intensive systems. The cost of animal suffering does not translate to dollars and cents, but it is an important concern for many people. http://www.awionline.org/farm/fai.htm, http://www.ciwf.org.uk/livefastdieyoung/, http://www.certifiedhumane.com/USAtoday81203.html.
For a quick summary of external costs of industrialized livestock production for specific products see:
http://www.cias.wisc.edu/wp-content/uploads/sites/279/2008/07/natdairy.pdf (dairy products)
Activity 2: You’re planning what?
Career Pathway content standards
|Projected Outcome||National Agricultural Education Standards
Performance Element or
(in this section)
|1. Explain how government agricultural programs effects the profitability of sustainable animal production farms.||NRS.02.05 Interpret laws related to natural resource management and protection.
ESS.02 Assess the impact of policies and regulations on environmental service systems.
|2. Compare and contrast the costs and benefits of different livestock production systems for consumers at the local and regional level.||CS.03.02 Decision Making – analyze situations and execute an appropriate course of action.||D-1|
|3. Map out the steps involved in developing a sustainable animal production business plan.||ABS.02.01 Compose and analyze a business plan for an enterprise.
ABS.06 Use industry-accepted marketing principles to accomplish AFNR business objetives.
CS.03.01 Communication: demonstrate oral, written and verbal skills.