Market Advisor

Size Up Your Herd Performance With These Benchmarks

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The national beef cow inventory is at a 50-year low, and long-run corn prices are projected to trend lower. These are two positive indicators for today’s beef industry.

This month, I’ll expand on the Northern Plains benchmark data I presented last month. I’ve stratified the data by net income per cow into the average of all the herds, as well as the averages of the low-profit 20% herds, and the high-profit 20% herds. I suggest readers compare their herd’s production and economic facts to these Northern Plains herds in order to identify your herd’s economic strengths and economic weaknesses.

Let’s start with gross income. Gross income is the sum of all income sources in the beef cow profit center. This includes the sale of steer and heifer calves, cull cows, cull bulls and open yearling heifers, as well as the inventory change over that business year. The inventory change can be either negative or positive. Thus, gross income per cow becomes an accrual-adjusted income per cow.

I recommend that asset values, including the market price of animals in the inventory, be locked in at their Jan. 1 values. This way, the inventory change reflects changing cattle numbers rather than changing asset values. 

North Dakota Farm Business Management uses gross margin as the income measure, and cash sales are adjusted downward for animals purchased and animals transferred in. I’ve elected to use adjusted total gross income as the income measure, with the animal purchases and animals transferred in included on the cost side as replacement female costs. Both income methods are reported in Figure 1. The bottom line is the same for both accounting methodologies.

average gross cow income

In 2012, these Northern Plains herds averaged $1,002/cow in adjusted total gross income (Figure 1). Beef calves sold averaged $214/cow, beef calves transferred out were $543/cow, and all cull sales were $160/cow. The inventory change was a positive $78/cow. Other income came to $7, providing an adjusted total gross income of $1,002/cow in these herds.

In the average benchmark group, 16% of this gross income came from cull sales, and almost 8% came from inventory change. This suggests that, on average, 24% of gross income came from non-calf sales.

How does your herd’s gross income compare to these benchmark numbers? Was your herd above or below these benchmark averages?

Benchmarking to a set of herd averages can offer considerable insight to your herd’s economic performance. Benchmarking against further stratification of the benchmark herds offers even more insight to your herd’s relative economic performance.

Gross income averaged $983/cow for the low-profit 20% herds, which is down 1.8% from the average. Meanwhile, gross income averaged $1,066/cow for the high-profit 20% herds. The high-profit herds generated an additional $64/cow gross income, for an increase of 6.4% over the herds’ average. In addition, the high-profit herds grossed 8.3%/cow more income than the low-profit herds.

Was there a production difference in the herd groups? The line of “Lbs. weaned/female exposed” shows the high-profit herds weaned more pounds of calf per female exposed.

So, based on these benchmarks, is your cowherd a high-income herd or a low-income herd?

Profit-level benchmarks

Now let’s look at the benchmarks for the three different profit levels of these Northern Plains herds. Your herd’s position within the range of these three benchmark groups will provide insight into your herd’s economic efficiencies.

My recommended bottom line for a beef cow profit center is the earned returns to unpaid family labor, management and equity capital — the three resources that a ranch family contributes to the ranch business. On many ranches, unpaid labor is more than one person.

Let’s go to the bottom line on these benchmark herds labeled “Economic net returns/cow” in Figure 2. The earned average economic net return for these benchmark herds in 2012 was $171/cow. The averages ranged from a negative $35/cow for the low-profit herds to $347/cow for the high-profit herds — a difference of $382/cow!

beef industry profit benchmarks

The high-profit 20% herds earned 103% more for their unpaid labor, management and equity capital than the average of all the herds. Meanwhile, the low-profit 20% herds earned 120% less for their unpaid labor, management and equity capital. How can this be?

The average total economic cost for these benchmark herds was $831/cow. Production costs averaged $1,018/cow for the low-profit herds, and $719/cow for the high-profit herds — a difference of $299/cow.

 

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When compared to the average for the Northern Plains herds, the low-profit herds’ costs were 23% higher, while the high-profit herds’ costs were 14% lower than the average benchmark herds. Where would your herd fit in this range?

Space constraints prevent a discussion of each cost item, but I’ll summarize the costs into five categories to make my point:

  • Annual cattle feed costs made up of both summer grazing and winter feeding averaged $323/cow for these Northern Plains benchmark herds. Feed costs averaged $374/cow for the low-profit herds, and $299/cow for the high-profit herds — a difference of $75/cow.
     
  • Adding in the rest of the direct costs, the Northern Plains average benchmark for direct costs is $449/cow. This same number for the low-profit herds is $546/cow, and $403/cow for the high-profit herds — a difference of $143/cow.
     
  • For overhead costs, the benchmark average is $81/cow, with the low-profit herds averaging $94/cow, and the high-profit herds, $78/cow. That isn’t much of a difference.
     
  • The average replacement female costs for the Northern Plains benchmark herds was $301/cow in the January inventory. Low-profit herds averaged $376, and the high profit herds averaged $238. This is a difference of $138/cow.
     
  • On average, it costs these benchmark herds 83¢ to produce $1 of gross income, a profit margin of 17%. However, it cost the low-profit herds $1.04 to produce each $1 of gross income (a negative 4% profit margin), and the high-profit herds 67¢ to produce each $1 of gross income (a profit margin of 33%).

Where does your herd fit with respect to these cost benchmarks? Figures 1 and 2 both have a blank column to benchmark your herd against these three sets of benchmark numbers. Where your herd’s benchmarks exceed the average and/or match the high-profit benchmarks suggests the strengths of your herd. Build a business plan to capitalize on these strengths.

Any category in which your herd is below average and/or approaches the low-profit herd’s benchmarks suggests that more management attention is needed. If you can capitalize on your herd’s strengths, and focus added management on your weaknesses, you should see profits rise in your beef cowherd. 

Harlan Hughes is a North Dakota State University professor emeritus of economics. Contact him at 701-238-9607 or harlan.hughes@gte.net.

 

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Discuss this Blog Entry 6

on Jul 30, 2013

Excellent information as usual from Dr. Hughes. Progressive beef producers are looking closely at costs, especially feed costs and finding ways to do even better yet. I am a huge proponent of building a team of advisors, nutritionist, grazing specialist, herd health veterinarian and extension beef specialist to help the beef producer become a high profit producer.

on Aug 1, 2013

Production, cost, and profit per cow make no allowance for the fact that fewer larger cows than smaller cows can be operated on the same resource. Total results are what's important, not per cow.

on Aug 7, 2013

I might be missing something about the stated annual feed cost per cow that includes grazing and seasonal supplement ranging from $299 -$374. If pasture rent averages $30 per AUM, as it does here in our area and also applies to this stronger cattle market, wouldn't the minimum amount possible be grazing for 12 months and thus total $360 annually? That essentially becomes the opportunity cost as well, and therefore establishes the very minimal cost per annum. The only way to beat that would be to feed hay or other supplements that would beat $30/AUM (which is the same as $1/day). Because $1/day is the equivalent of $66/ton hay when a 1200# cow eats 2.5% of her body weight on average, thus 30#/day , a producer would have to provide hay costing less than $66/ton. That seems like a remote possibility, too.

on Aug 8, 2013

Harlan Hughes responds:
Pasture costs vary considerably from region to region. The Farm Management Associations in North Dakota used a pasture cost of $17. 43 per AUM for 2012 grass verses the rancher with the question from a region where pasture cost is $30. The northern plains has a lot of land that cannot or should not be farmed so its only use is to graze cattle.

While I do not know where that rancher is from, that kind of a pasture price can be found in parts of Nebraska. I suspect the $30 pasture cost can be found in other regions also.

Winter hay price used in the North Dakota Farm Management Associations is also lower that in most regions of the U.S. The data that I reported was for the 2012 calf crop where most of the hay fed was produced in 2011 and fed before the 2012 drought. Again, hay prices were considerably lower then compare to after the 2012 drought. I am predicting considerably higher feed costs for the production of 2013 calves. I expect record feed costs for 2013 and maybe even 2014 calves.

I fully concur with the person asking the question that today’s feed prices could well be much higher. While I am aware of there being $30/AUM rates out there, I question if $30/aum pasture rate can be sustained in the beef cow industry. This suggests to me that beef cow production would continue to go down and shift to the non-farming states and mountain states. I think this is already happening. I am less clear about what will happen in the Southeast. They seem to have a lot of grazing capability – even year around grazing.

Carl Stafford (not verified)
on Aug 20, 2013

Southeastern cow calf producers certainly have a cost advantage due to our ability to stockpile fescue and ration it out across the months when grass stops growing (Dec - Mar). However, I read from other economists about low cost cattle production using stockpiling as far north as Canada. Eventually you will have to plow snow to gain access to the stockpile. Even then its worth the effort here in Virginia given the 50% reduction in feed cost from an added day of grazing. Plan to "Graze 300" and once accomplished, move on to year round.

Wayne Parrish (not verified)
on Aug 20, 2013

We have to deal with the $30/AUM in this area. the only way a cow will work here is by utilizing a lot of afterfeeds(corn stalks). Then you probly have to figure labor is free.

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What's Market Advisor?

Harlan Hughes has spent a professional lifetime helping U.S. beef producers better manage the business end of their beef cow operations.

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Harlan Hughes

Harlan Hughes is a North Dakota State University professor emeritus and author of the monthly "Market Advisor" column that appears in BEEF magazine. He also consults and lectures widely,...

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