What is economic sustainability and why does it matter?
Fact Sheet

Andrew P. Griffith and Christopher N. Boyer, University of Tennessee

If 10 people were asked to define sustainable agriculture, it is likely they would supply 10 different answers. This is likely due to each
person viewing the term sustainability differently. However, many programs, including the Beef Checkoff (Link) have been proactive
in defining sustainable beef production into environmental stewardship, economic opportunity, and social diligence across the beefvalue chain. Everyone within the beef value chain, from producers to processors, have a clear role to play in enhancing sustainable
beef production. This definition helps establish indicators to measure how the industry is performing and illuminate areas where theindustry can improve.
Revisiting the 10 people asked to define sustainable agriculture, most would probably provide answers focused on environmental
stewardship or social diligence. For example, answers might focus on greenhouse gas emissions, soil conservation, water quality,
food waste, food safety, and animal welfare. It is less likely for answers to focus on economics, despite it being a vital component
to sustainability. For example, a producer could adopt and implement several practices to improve environmental stewardship,
but if those practices substantially decrease profits, the producer will either go out of business or stop using those practices. This
is why the Beef Checkoff recognizes that optimal sustainability of beef cattle production requires a balance of the three pillars:
environmental, social, and economic (Link).
What is economic sustainability, and how can a person determine if they are achieving economic sustainability? It is commonly
understood to be a farm’s capability to survive or to be economically viable in the long-term (Latruffe et al. 2016). Studies have shown
economic sustainability is measured by profitability, liquidity, solvency, risk management, access to capital, succession planning, rural
economic development, and consumer demand (Lebacq et al. 2012; Nehring et al. 2014; Key et al. 2018; Key and Lyons 2019).
These measurements are key for farms to remain viable in the long-run and are not mutually exclusive. In fact, strong consumer
demand impacts profitability, and risk management is important to ensure liquidity and profitability. Figure 1 illustrates thesemeasurements of economic sustainability defined by studies, and how they are interrelated.

Figure 1. Relationship of economic sustainability measurements or indicators for beef cattle supply chain.

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Economic Sustainability Across the Beef Cattle Supply Chain
Economic sustainability looks similar across most agricultural production entities from almond production to beef cattle
production. However, beef cattle production is a great example for discussing why economic sustainability is important,because the supply chain from cattle producer to consumer is fairly elaborate and diverse. Additionally, the economic
sustainability of one area of the supply chain influences the economic sustainability of the next area. That is, a steadysupply is necessary for many areas to continue operating at a capacity that is financially sustainable. Below economic
sustainability measures defined in studies are connected to the cattle producers, slaughter and processing facilities, andretail and food service areas of the beef cattle supply chain. This will show how these measures or indicators of economic
sustainability are not mutually exclusive but can vary across the beef cattle supply chain.
Cattle Producers
The beef supply chain begins with cattle producers and more specifically cow-calf operations and stocker/backgrounding
operations. This is the group of producers managing the largest portion of the land resources and the group that
determines total supply of cattle moving through the supply chain in a defined time period. Thus, economic sustainability ofthe beef supply chain starts with the producer.
Figure 2 details estimated annual cow-calf returns and monthly cattle feeding returns from January 2011 through September
2020. The average estimated cow-calf returns over the past ten years is $102 per head. These returns are buoyed by
the high prices experienced in 2014 and 2015. If the extremely large returns to cow-calf operations in 2014 and 2015 areomitted, the average annual return is only $22 per head. Even using $102 per head as a long-run profit, cattle producers
must carry a large number of cows to earn a living wage. According to USDA Economic Research Service (ERS), beef
cattle producers’ have a lower average farm income than all the major commodities (dairy, hogs, poultry, grain, oilseed,
and cotton) (USDA ERS, 2020). For example, a 500-cow breeding herd would only result in an annual profit of $51,000.
Furthermore, it would be difficult for one person to provide all the labor and management that is necessary for a 500-cow
breeding herd. Additionally, a 500-cow breeding herd whose primary feed source is grazing may require 1,000 (SoutheastU.S.) to 10,000 (Western U.S) acres of land, which would require a significant quantity of capital for the cattle and the land.
Additionally, beef cattle producers’ health care expenditures were estimated to be about $4,500 annually, making up an
average of 19 percent of the value of production (USDA ERS, 2020). From the cattle feeders’ perspective, the average profit
per head has been a $3 loss over that same time period.

Figure 2. Net returns for cow-calf producers (annual) and cattle feeders (monthly) from January 2011 through September
2020. (LMIC, 2020)
These returns are absent of any price risk management (i.e. utilization of futures markets) for purchasing cattle and feed or
the sale of cattle. Price risk management can help them achieve a small positive margin when prices decline, and it is likely
many cattle feeders use some form of price risk management for these purposes. This demonstrates how risk management
is a key component of economic sustainability, but the relatively small margins reinforce the previous statement that it takes
running a large volume of animals to generate a significant profit. Additionally, a large profit is necessary for the business towarrant taking the risks associated with feeding cattle, which again means a large volume of cattle.

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Along these same lines, many cattle producers rely on lending institutions for working capital (liquidity) and to make landand equipment purchases. Borrowing money has many advantages when the return on the money exceeds the cost of
the money. Thus, lending institutions can contribute to the economic sustainability of the entire supply chain for beef
by providing a service that has a greater return than the cost of the service. Lending institutions must be economicallysustainable, which means making loans based on calculated risks and the potential for customers to repay in full andon time. If this is achieved, then the lending institution and its customers will grow. This will also result in long-run rural
economic development by creating skill-labored careers as lenders in rural communities.
Slaughter and Processing
The slaughter and processing side of the beef business depends on an adequate supply of cattle and beef demand.
Thus, they are margin operators who depend on previous sectors in the supply chain to be profitable so those sectors willcontinue to produce cattle to be slaughtered and processed. Similarly, the slaughter and processing sector depends on
consumers to demand beef such that it can be supplied via restaurants, grocery stores, and food service.
Similar to Figure 2, Figure 3 contains the monthly live cattle to beef cutout spread for the same time period. Spread values
are not estimates of profitability but rather the margin available between the purchase and sale of the product. The live
cattle to beef cutout spread is calculated by subtracting the cost of the live animal from the revenue of selling the meatproducts. Assuming a 1,000-pound steer ready for harvest and the price of that steer is $1.10 per pound, then the steer
is worth $1,100 (1,000 lb x $1.10/lb = $1,100). Similarly, assuming the steer dresses at 63 percent, then 630 pounds of beef
product will be cut. If the beef cutout value is $2.10 per pound, then the beef from the 1,000-pound steer is worth $1,323(630 lb x $2.10/lb = $1,323). This would result in live cattle to beef cutout spread of $223 ($1,323 - $1,100 = $223). It is
important to note that the beef cutout value is a value for the carcass based on the value of individual cuts that can beproduced from that carcass. Thus, this value is not based on how a packer fabricates cuts of beef. Packer margins haveaveraged $220 per 1,000 pounds of finished animal over the past decade. This means packers had $220 per 1,000-pound
animal on average to harvest, cut, package, and market each animal. Much of this $220 spread would go toward labor,
packaging, maintenance, and fixed costs associated with the slaughter facility. After the stated costs are accounted for,the packer is also working off a small profit margin for the business, which could explain why the packing industry has
consolidated relative to 50 years ago. Packing plants have significant operating costs due to the high cost of product,
specialized equipment required, and food safety protocols. Therefore, it takes a significant volume to produce any kindof profit. As a result, the packing industry is taking advantage of economies of size to help boost profits, which works intandem with a larger volume.

Figure 3. Monthly live cattle to beef cutout spreads from January 2011 through September 2020 per 1,000 pounds offinished animal. (LMIC,2020)
Economic sustainability for slaughter and processing is highly dependent on profitability, but it is also dependent on astable and trained workforce. Slaughter, processing, and fabricating facilities in the beef industry are generally locatedin larger communities or cities. Many of these operations are a major employer in their community, which means they
contribute to the economic engine in that community. Thus, they depend on a steady supply of cattle to keep people fully
employed while also paying those employees a fair wage that ultimately contributes to the long-run economic growth of
those communities.
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Retail, Restaurants, and Food Service
The beef cutout to retail spread can be analyzed much the same way (Figure 4). The beef cutout to retail spread is calculated bysubtracting the beef cutout value from the retail value of the beef. Going back to the previous example of 1,000-pound steer with abeef cutout value of $1,323, this animal may produce approximately 430 pounds of retail cuts after fabrication. If the average retailprice for beef is $6.00 per pound, then the total retail value of the animal is $2,580 (430 lb x $6/lb = $2,580). This leaves a beef
cutout to retail spread of $1,257 per head ($2,580 - $1,323 = $1,257) or $1.26 per pound of live animal. The 200-pound difference(630 lb – 430 lb = 200 lb) between the carcass and the retail cuts produced is made up of trimmings, bone, and fat that are removed
during the fabrication process. (These products do have value to the packer). Over the past decade, the average beef cutout toretail spread has been $1,114 per 1,000-pound animal or $1.11 per pound of live animal, which equates to a margin of $2.61 per poundof retail beef. Thus, the retail sector has a margin of $2.61 per pound of retail meat to get beef transported, further processed if
necessary, on the meat counter, and marketed. This relatively small margin once again supports the idea of a need to market large
volumes of product to produce a significant profit at the retail level.

Figure 4. Monthly beef cutout to retail spreads from January 2011 through September 2020 per 1,000 pounds of finished animal.
(LMIC,2020)
Meat retailers, restaurants, and food service participants rely heavily on beef demand to drive profitability. Participants in this
sector are also margin operators, which means profitability is the driver of economic sustainability. However, these businesses
also contribute to the local economy by providing jobs to the community, which contributes to economic growth in the community.
Further, the employees of this sector will require goods and services from other sectors, such as medical or real estate, which
will further contribute to economic growth in the community. If economic growth occurs then that generally results in a growing
community, which further increases the demand for beef products. This essentially helps contribute to economic sustainability in this
sector. In the short run, this segment in the supply chain could rely on risk management tools to manage price risk. However, in thelong-run, having strong and consistent consumer demand across the globe is key for long-run economic sustainability.
Economic Sustainability in the Short- and Long-Run
As was stated previously, economic sustainability is considered the ability of an operation to survive in the long-run. However, mostoperations are forced to make both short- and long-run decisions that influence profitability and thus economic sustainability. Shortrun and long-run decisions tend to influence each other. For instance, many of the day-to-day decisions made in farming operations
are short-run decisions. However, many of those short-run decisions influence the long-run survivability of the operation, because
they influence profitability. One such decision may be associated with a grazing management plan. Grazing pasture or rangeland
for too-long because of limited hay resources to feed may result in partial forage stand loss and potential erosion issues, which
could be expensive to correct. Similarly, long-run decisions tend to influence the short-run. A grazing management plan is a longrun decision for soil and plant health to reduce long-term forage costs. However, sticking to the plan may result in an increase in
short-term expenses if forage production is negatively impacted in some manner and additional feed resources must be purchased.
Conversely, profitable short-term economic conditions will allow managers to focus on making decisions for the long-term if theyknow their business is viable today.

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ECONOMIC SUSTAINABILITYAs operations make decisions, it is integral to keep a focus on long-run survivability. To ensure long-run economic sustainability, an
operation may be forced to make decisions that negatively influence short-term profitability. Such a situation may occur when an
environmental or social sustainability issue will be economically expensive in the short-run, but results in reduced costs or greater
gains in the future. Similarly, short-run decisions may not be optimal for an operation in the long-run, but they must be made toprotect the environmental or social integrity of an operation until a longer-run solution can be established.

Economic Sustainability and Mental Health
The net return estimates and spreads discussed here clearly indicate that profit margins are thin throughout the entire cattle andbeef supply chain. The relatively small margin in each of these sectors points to the need for high volumes of animals to achieve
economic sustainability in the long run. This is no doubt stressful, which might be reflected in reported suicide and self-harm
reported in the agricultural sector.
In 2017, occupations made up of agriculture, forestry, fishing and hunting had the fourth highest suicide rate in the United States(Peterson et al., 2020). Suicide and self-harm can be driven by many underlying factors, but factors such as increasing debt, lowcommodity prices, and poor productive output, which negatively influence economic sustainability, can also contribute to mental
health struggles. These mental health struggles are part of social sustainability for the individual, employees, and the community
at large, as such a tragedy can wreak havoc on a community. Occurrences of self-harm in rural communities indicates a need foradequate health services in these communities whether it be a physical facility or via online health resources, which require accessto high speed broadband internet. Regardless, economic sustainability is tied to social sustainability. It is important to note that
economic and social sustainability are interrelated. The three pillars of sustainability are interconnected, and each pillar must be
evaluated with the other two pillars in mind in order to holistically achieve sustainability.
Bottom Line: Economic sustainability is largely tied to profitability and the financial success of the operation. However, economic
sustainability in the beef cattle business is influenced by environmental and social sustainability as farmers and ranchers’ operations
work to be stewards of the land and to contribute to their local economies. The tight margins across the supply chain demonstrates
the need for strong profitability, liquidity, solvency, risk management tools, and consumer demand to ensure short- and long-run
economic sustainability. Building economic sustainability in the beef cattle supply chain could lead to improved rural economic
growth, environmental outcomes and cattlemen’s and cattlewomen’s well-being.

References
Key, N., C. Litkowski, and J. Williamson. 2018. “Current Indicators of Farm Sector Financial Health.” USDA ERS Amber Waves, July 2, 2018.
Key, N. and G. Lyons. 2019. “An Overview of Beginning Farms and Farmers.” USDA ERS Economic Brief Number 29.
Latruffe, L., A. Diazabakana, C. Bockstaller, Y. Desjeux, J. Finn., E. Kelly, M. Ryan, S. Uthes. 2016. Measurement of Sustainability in Agriculture: A Review of Indicators.”
Studies in Agricultural Economics 118:123-130
Lebacq, T., P.V. Baret, and D. Stilmant. 2012. “Sustainability indicators for Livestock Farming: A Review.” Agronomy for Sustainable Development 33:311-327.
Livestock Marketing Information Center (LMIC). 2020. Various calculations.
Nehring, R., J. Gillespie, C. Hallahan, J.M. Harris, and K. Erickson. 2014. “What is Driving Economic and Financial Success of US Cow-Calf Operations?” Agricultural
Finance Review 74(3):311-325.
Peterson, C., A. Sussell, J. Li, P.K. Schumacher, K. Yeoman, and D.M. Stone. 2020. “Suicide Rates by Industry and Occupation – National Violent Death Reporting
System, 32 States, 2016.” Morb Mortal Weekly Report 69:57-62. DOI: http://dx.doi.org/10.15585/mm6903a1/.
USDA ERS. 2020. Farm Household and Income Characteristics. Available at: https://www.ers.usda.gov/data-products/farm-household-income-and-characteristics/.

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