Organic, Natural and Grass-Fed Beef: Profitability and Constraints to Production in The

Organic, Natural and Grass-Fed Beef: Profitability and constraints to Production in the Midwestern U.S.

Nicolas Acevedo[1]

John D. Lawrence

Margaret Smith

August, 2006

1. Introduction

Iowa State Value-Added Agriculture Extension staff has had an increase in requests from organic beef marketers across the US. These individuals and groups indicate they are unable to source adequate supplies of organically raised cattle to supply their markets. Apparently, there are constraints to entering this market that need to be addressed if these specialty beef markets are to be filled by Midwestern farmers.

One would think that organic beef production is much more complex and expensive than the production of conventional beef and, therefore, the cost of converting to organic production would affect the producers’ decision. In addition, producers would face problems with the availability of inputs (i.e. organic corn, organic hay and organic soybean meal) for the organic production. Finally, some producers would fail to produce organic beef because they are not prepared to meet USDA requirements for certification. It is possible, though, that some producers find it more attractive to sell natural beef instead of organic beef because production standards are less regulated.

This document is organized as follows. The next section reviews the definitions for natural, organic and grass-fed beef. The third section explores the consumer’s willingness to pay for non conventional beef, organic corn and organic hay. The fourth part is an internet exploration of some representative organic, natural and grass-fed producers in the US. The fifth section discusses the costs and challenges that a producer has to face when he or she decides to convert from conventional beef production to organic production. The last section is a cash flow analysis for the different methods of producing organic beef.

1. Production of beef

Beef producers in the US have increasingly marketed a wide variety of beef products, giving consumers the opportunity of selecting from several kinds of beef products. However, there are essentially four types of beef marketed by US beef producers: conventional, natural, certified organic and grass-fed beef.[2]

Conventional beef

Conventional beef comes from cattle raised in pastures for the majority of their lives, typically 12 to 18 months, and then fed a grain-based diet for 120 to 200 days prior to harvest. The grain-based “finishing period” is meant to increase the marbling, tenderness and consistency of the final beef product. Producers are allowed to use a wide variety of technologies including fertilizing pastures and grains with commercial fertilizers and use man-made herbicides and parasite control. Also animals may be treated or fed growth promotants and subtherapeutic antibiotics.

Natural beef

The official USDA definition of natural refers to beef that has been minimally processed and contains no additives, which means no artificial flavors, colors or preservatives. This definition applies to all meat that does not have an ingredient label (a label is added if the product includes a marinade or solution). Then, if there is no ingredient label it can be assumed as natural.

The USDA definition doesn’t mention the growing techniques for the natural beef production and this can be misleading for consumers. Some producers are aware of this and try to explain to consumers the problem that comes from the lack of an official definition on the growing side for the natural beef. For example, the Dakota Beef Company stresses the idea of “no restrictions [for natural beef production] on feed, veterinary care, or growth stimulants. If a natural producer decides to promote the fact that his or her cattle were raised without antibiotics or growth hormones, an additional label is added to the package.[3] For the Maverik Ranch, “the natural beef definition allows almost any pure protein to be labeled as ‘natural.’ While it precludes the addition of chemicals or additives after the animal has been harvested, it does not make reference to raising practices during the life of the animal, such as what the animal was fed or whether antibiotics or pesticides were ever administered.”[4]

In general, and through the efforts of ranchers and natural beef marketers, natural beef has come to be defined as raised without antibiotics or growth hormones[5]and ionophores and implants[6] are not used in the production process.

Certified organic beef

Certified organic beef must meet USDA National Organic Program standards. With the Organic Foods Production Act, effective October 2002, USDA standards were set for all food labeled organic. For beef, this means:

• Organic meat comes from animals that are given no antibiotics or growth hormones. However, if an animal is sick, the animal cannot be denied treatment to ensure its health; any animal that is treated with antibiotics is taken out of the National Organic Program.
• Organic food is produced without using most conventional pesticides; fertilizers made with synthetic ingredients or sewage sludge; bioengineering; or ionizing radiation.
• Cattle must be fed 100 percent organic feed, but may be provided certain vitamin and mineral supplements.
• Organic food is produced by farmers who emphasize the use of renewable resources and the conservation of soil and water to enhance environmental quality for future generations.
• Cattle that meet the national organic standard require ruminants to have access to pasture.
• Before a product can be labeled "organic," a Government-approved certifier inspects the farm where the food is grown to make sure the farmer is following all the rules necessary to meet USDA organic standards. Companies that handle or process organic food before it gets to your local supermarket or restaurant must be certified, too. Organic beef must be certified through USDA’s Agricultural Marketing Service (AMS).

Grass-fed beef

Even though there is no USDA definition for Grass-fed cattle, the USDA Meat Marketing Claims[7] outlined for Grass Fed Claims that “Grass Fed - Grass, green or range pasture, or forage shall be 80% or more of the primary energy source throughout the animal’s life cycle.”

This statement suggests that a producer of grass-fed cattle is allowed to use 20% from other sources of energy in any stage of production of meat. Therefore, a producer could feed animals on a daily basis with no more that 20% from other sources of energy or can wait until the finishing period and give the animal a high concentration of grains that will not exceed 20% of the total of energy source of the animal through the animal’s life cycle. So, the decision of how to start feeding the animals will have an impact in the cost and weight gain of the livestock.

In contrast the American Grass-fed Association, has a different definition for the grass-fed cattle: a) Animals having been, from birth to harvest, fed on grass, legumes and forages and, b) Animals having not been: creep fed as calves, fed for extended periods in confinement, or finished on grains (as grain feeding is what destroys the nutritional benefits of grass-fed products).[8] Similarly, the National Cattlemen’s Beef Association has defined Grass-finished beef as that produced from cattle that grazed in pastures their entire lives.

As a result of the forage-based diet grass-finished animals receive throughout their lives, grass-finished beef tends to grade “Select”, which means it has minimal intramuscular fat or marbling, so it is typically a leaner product. However, conventional beef graded “Select” has the same level of leanness as grass-finished beef. Some producers claim that

“Grass-fed animal products have been shown to be higher in beta carotene (Vitamin A), conjugated linoleic acid (CLA), and Omega-3 fatty acids, which some producers claim are important in reducing cholesterol, diabetes, cancer, high blood pressure and other life threatening diseases. These products are lower in fat, cholesterol and calories. In addition, the risk of infection by E. coli in these products is virtually eliminated”[9].

A disadvantage for grass-fed meat producers is that animals raised entirely on grass mature more slowly, lengthening the production time of grass-fed products, and the carcass weight is often less at slaughter.

Grass-fed cattle can be raised organically or naturally. Consumers can recognize organic products by looking for the “USDA Certified Organic” label. They may also find organic beef imported from other countries. Grateful Harvest Organic is marketing their product as

“beef is 91% lean and comes from Uruguay. Getting lots of rain and lots of undeveloped land, grass grows year-round. Cost is lower because it's easier to maintain grass-fed cattle and land is less expensive. Uruguay has some of the most advanced techniques for beef production. They export into 60 countries including Europe and Japan. They have had no case of mad cow disease and the cattle are treated properly.”[10]

Table 1. Difference between conventional, natural, organic, and grass-fed beef.

Organic Beef / Natural Beef / Conventional Beef
Antibiotics (therapeutic)[11] / No a/ / No / Yes
Antibiotics (sub therapeutics)[12] / No / No / Optional
Hormones / No / No / Yes
Ionophores[13] / No / No / Yes
Pesticides / No / Optional / Yes
Vaccinations / Yes / Yes / Yes
Feedlots (grain) / Optional b/ / Yes / Yes
Certified Organic[14] / Yes / No / No

a/ It is possible that an organic beef producer use antibiotics in a therapeutic way. If so, that animal will be marketed as conventional.

b/Some organic producers don’t confine animals in feedlots, they, instead, provide organic grain to their cattle on the field. In contrast, Organic grass-fed beef must be fed with pastures and hay and no grains.

1. Consumer’s willingness to pay

Consumers of organic beef are willing to pay a premium for non-conventional meat.[15] At the same time, organic producers will have to pay more for some production inputs used in the cattle business (i.e. organic corn and hay) and the production process takes more time and more total feed inputs per pound of carcass beef. This section explores these topics.

Final consumers

Because of the wide variety of products and definitions, finding the consumer’s willingness to pay for organic and natural beef had become an important goal for researchers in recent years. Its importance lies in the fact that the premium that consumers are willing to pay for organic or natural beef has a significant impact on the profit of organic and/or natural beef production operation. However, one can find it difficult to examine the price premium that consumers arewilling to pay when there is uncertainty among consumers regarding the differences between organic and natural beef.

It is likely that consumer confusion about natural and organic beef has been influenced by the way that producers market their beef. Boland (2002) and Lautaro (2003) have found that “the way in which companies align their marketing program to the ‘natural definition’ varies in the United States” and therefore consumers could be confused when buying natural and/or organic beef.

Some surveys have been conducted in recent years to find the premium for natural beef. Grannis and Thilmay (2000) found that of the 1,400 survey respondents, 521 consumers (38%) were willing to pay $5.49 (10% price premium) for natural steak and 197 consumers (14%) were willing to pay $5.99 (20% price premium) for the former type of meat. At $1.89 (12% price premium), 912 consumers (67%) would buy natural ground round, and at $2.09 (23% price premium), 403 consumers (29%) were still willing to buy the natural ground round.

On the other hand, the department of Agricultural Economics of the KansasStateUniversity conducted a survey in 2002 with the objective to “learn more about how managers view Nature’s Premium All Natural beef products”. The results indicated that consumers are somewhat informed about how meat is raised and processed. The results of the survey were encouraging, because consumer’s overall impression of All Natural Beef franks was positive (taste and texture). Unfortunately, no prices for the All Natural Beef were provided in that research[16].

Organic corn and soybean meal

The organic beef production requires feed raised according to organic standards. In general, organic markets demand that organically grown corn and soybeans be seeded, grown, harvested, and handled without synthetic fertilizers or synthetic pesticides. Then weed control will rely on a mixture of tillage prior to plant, crop rotation and hand weeding, which might increase the machinery and labor costs for the organic production.

Organic corn and soybean markets are not well developed in the US. For this reason, organic markets are volatile, with periods of high demand and short supply for some crops and periods of high supply and slow demand for others. This implies that the price of this input exhibits a high standard deviation throughout time. This becomes a disadvantage for cost budgeting and it can be seen as a source of risk in organic beef operation.

Corn

Based on information from organic corn producers in Iowa, we found that buyers were paying 1.6 times more for organic corn than conventional corn in late 2005. This means that organic corn price would be around $5.46/bushel.

Soybean meal

The organic soybean meal market has similar behaviors to the organic corn market. Price fluctuates considerably and its availability can vary from year to year. For our calculations we have assumed a price of $604.5/ton for soybean meal (48% protein), which implies a premium of 2.1 times the regular soybean meal price.[17]

Organic grass and hay

Forage grasses provide pasture and hay for livestock during most of the year. Pasture costs can vary greatly across regions and farms within regions due to land costs, productivity, and management practices. In this research we estimate thecost of organic production of orchardgrass – legume pastures. As it can be seen in table 2, annual cost per acre of organic grass-legume pasture is $113.69 and assuming a productivity of 3 tons of dry matter, 19 cents/lb of harvested forage. As budgeted the organic cost per acre and ton is less than conventional pasture which assumes that the organic producer must be able to maintain productivity without commercial chemicals or fertilizers. We do not model the entire farming system to determine if that is feasible. It is important to note that organic feed is grown and processed without the use of synthetic chemicals, fertilizers or pesticides for at least three years prior to the harvest of the crop. Also, the land must be certificated organic.

Producers can replace chemicals, fertilizers, and pesticides with some organic fertilizers and organic pesticides. When a producer stops using fertilizers and does not rotate crops, he/she observes a decrease in the amount of grass and corn produced and an increase in the cost of controlling weeds. Theproducer can select from applying a mechanical weed control, mulching, or propane flame burning, all of which will increase the manual labor costs.[18]

Adapting a variety of grazing strategies can reduce the cost of meat production and allow producers to have enough pastures to produce hay for winter seasons. At the same time, when animals harvest their own feed in a well-managed rotational grazing system of management intensive grazing (MIG) feed costs decline and animal health improves. For the purpose of our budget scenarios (Table 2) we have assumed well-managed pastures for fall, spring, and summer.[19] We also assumed that the grass yields for the organic and conventional method arethe same, after including legume in the organic pastures.[20]

The use of cool season grasses requires cattle producers to have winter feed options for a pasture-based organic system (i.e. organic hay and corn silage). Organic hay can be produced on the farm but requires good drying conditions to produce high quality hay. Alternatively, high quality organic hay can be bought at market with prices fluctuating from $80 to $100 per ton, which means that some organic hay growers are getting 10-30% premium over the conventional hay price. The supply of organic hay varies from season to season and it can be another source of risk for the organic beef producer. Some organic hay suppliers can be found in Table 3.

Table 2. Cost per acre of maintaining improved grass pastures - Annual cost per acre.

Table 3. Web pages for organic hay buyers and sellers.

Internet Address / Description
/ The Hay Barn is a classified ad site for hay, hay equipment, and haying services. Using the links to your left, you can locate buyers and sellers in your area or across the globe.
/ FarmClassifieds.com is a division of MOVIA Media of Alberta, Canada and is part of a large Farm related web community. They strive to provide the most farm related information presented in a highly professional and accessible way.
/ This webpage contains a list of hay sellers and buyers by state.
/ The Institute works with people worldwide to achieve a regenerative food system that renews and improves environmental and human health, working with the philosophy that "Healthy Soil = Healthy Food = Healthy People ®.”

1. Webpage exploration

To analyze how beef producers sell their products, we have taken information from the web pages of several organic and natural beef producers in the US. These producers are listed in Table 4, with a description of their meat production and their web page address.