Cattle Economics

Cost Management Really Pays In Tough Times

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Top-tier producers had an average annual cow cost that was $249.75/head less than bottom-tier producers, and $344.90/head more in net return.

Cost management is much like heterosis. Used wisely, it always pays; but it pays most when conditions are at their worst.

“If one is better managing feed expenses per cow in normal times, I’d assert the comparative advantage in management only increases in stressed times such as those presented by a drought,” says Glynn Tonsor, Kansas State University (KSU) agricultural economist.

Tonsor shares a study from Kevin Dhuyvetter, fellow KSU agricultural economist, which utilizes data from the Kansas Farm Management Association (KFMA) for 2006 to 2010. Revenue accounted for 28% of the vast difference between the one-third of producers who were least profitable (bottom tier) and the one-third who were most profitable (top tier). There was less than $2/cwt. difference in calf sale price. The top tier sold 2% more calves/cow than the bottom tier; and those calves weighed 14 lbs. more on average.

Another Look: Reduce Cow Costs, Increase Revenue

The lion’s share of difference (72%) was due to cost (Table 1). Top-tier producers had an average annual cow cost that was $249.75/head less than bottom-tier producers, and $344.90/head more in net return.

Differences in cost by category ranged from 12-41% less for the top tier. Part of that is a function of average herd size – 85-cow average for the bottom tier and 187 cows for the top tier. For instance, a higher percentage of operation labor was assigned in top-tier operations (47.3%, compared to 31.5% for the bottom tier), but the increased volume meant significantly less labor cost per head.

“Operations with the most sound managerial practices are better positioned to thrive in an environment that increasingly rewards active and effective management,” Tonsor says. Thinking of the ongoing drought, he adds, “Many cattle operations are feeding different feedstuffs, using alternative grazing patterns, etc. The underlying decisions of these adjustments will drive differentials in realized profitability.” 

In other words, during currently challenging times like today – with drought and historically high input costs – the folks who are the best at managing costs have increased their comparative advantage. This allows more flexibility to exploit opportunities.

“The industry’s best managers will better recognize where it makes sense to spend more money in an environment of elevated feed prices, such as investments that improve feed efficiency and earn an increasing return on investment,” Tonsor says. “These managers also recognize where it makes sense to maintain current expenditures, such as animal health protocols; as well as where it may be possible to reduce expenditures, such as spreading certain fixed costs across more animals.”

At least anecdotally, you can argue this reality is at least partially behind the stout bull prices paid this fall, despite a drought many thought would delay purchases or at least dilute demand. The folks pushing bull prices higher may not be in expansion mode just yet, but they sure don’t appear to be scared.

Consolidation and concentration in all industry sectors have been driven by the need to reduce costs overall and increase cost competitiveness, and it’s no different for cow-calf producers. What does seem to be occurring, though, and not unexpectedly, is that management acumen is cleaving a wider gap between the most profitable and least profitable producers.

Read the KSU cost study at http://www.agmanager.info/livestock/budgets/production/beef/Cow-calf_EnterpriseAnalysis(Nov2012).pdf.

Discuss this Blog Entry 2

Jim McGrann (not verified)
on Jan 3, 2013

Wes,
Bull investment with the high salvage value turns out to be a low cost input. Seed stock producers seldom communicate this. It's depreciation over useful life divided by calves sired.

The KSU results are interesting. We have always found this wide range in costs doing SPA. Top managers measure costs.

Jim Sturrock (not verified)
on Jan 4, 2013

Measuring cost of today as a cow/calf operation against yesterday is like comparing apples to oranges. Yet if % or ratios are compared it isn't the case (cost divided by sales or revenue = %) as the restaurant industry in their cost control protocol. If beef is effecting food cost % comparison with using chicken entree cost % factoring in lower menu price and its impact on labor % gives flexibility for management conclusion on bring food cost % in line with the budget and the bottom line of the P/L statement. All in all the study was informative and well presented. I like % comparisons. Happy days to all!

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Wes Ishmael provides tightly focused analysis and commentary on specific beef quality and marketing issues of practical importance to beef producers.

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Wes Ishmael

Among the industry’s most insightful thinkers, Wes Ishmael concentrates on industry price and market perspectives for BEEF magazine. Along with his monthly “Cattle Economics” column...

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