Market Advisor

Costs & returns: Part II

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Particularly in today's tough economic times, there are three red flag/green flag business measures on which astute ranchers should focus, and all are monitored via three different business analyses. (For more detail on these three flags, see my August 2008 column.)

As economic pressure on the beef-cow sector grows, the first red flag to pop up in a ranch business is associated with an economic analysis of a beef cowherd. As we move into today's tougher times, this measure can serve as an early-warning signal.

To help ranchers evaluate their early-warning red flag/green flag measures for their ranch businesses, this series of columns will focus on the Integrated Resource Management (IRMez) analysis I use with my clients.

The purpose of an IRMez analysis is to provide ranchers with a simplified way to calculate the economic cost and return of their beef cowherd. The bottom line tells a rancher if the flag is red or green; a red flag means management action is needed.

Last month, I focused on the key production parameters a rancher needs to accurately measure within a beef cowherd's production profile. This month, I'll focus on measuring the “gross income generated” by a study herd's production and economic parameters.

It's important to remember that gross income in an economic analysis consists of both cash income and non-cash income. The two non-cash incomes are the market value of the heifer calves held back for replacements, and the inventory change from the Jan. 1 beginning herd inventory compared to the Dec. 31 ending herd inventory of the study year. Many ranchers tend to forget about these non-cash income components when measuring gross income generated.

While ranchers typically concentrate their management attention on the calves produced, calf income is typically only 70-85% of the gross economic income generated from a beef cowherd. Cull-animal income typically accounts for 10-30%.

When heifer calves are held back for replacements and not sold for cash, calf cash income can be reduced to as low as 70% of the gross economic income of a beef cowherd. In Table 1, gross cash income is indeed 70% of the gross economic income generated by this example herd.

The production parameters of this study herd are presented in Table 1's left-hand side. This rancher had 562 preg-checked females in his Jan. 1, 2007 inventory. Steer calves were weaned in fall 2007, averaging 558 lbs.; heifers averaged 26 lbs. less. Eleven cows died (2%) during the year, and 68 were culled, so 79 cows left the herd in 2007.

Because this ranch typically culls 14% of the breeding herd annually, it needed 79 preg-checked replacement heifers to enter the herd in fall 2007. To meet this goal, the rancher held back 99 replacement 2006 virgin heifers to be exposed in the 2007 breeding season. With an 80% breeding percentage on virgin heifers, this should generate the needed 79 replacement females.

Of open heifers, 20% (20 head) were sold after the fall 2007 preg check. On Dec. 31, 2007, this ranch again had 562 preg-checked females scheduled to calve in spring 2008. This is a “steady state” herd — no expansion, no contraction.

In his 2006 breeding program, 659 females were exposed to bulls, producing 560 live calves at 2007 weaning, an 85% calf crop (560/659 x 100). The average weight weaned per female exposed was 453 lbs.

Percent calf crop based on females exposed and pounds weaned per female exposed are the two most critical herd-production numbers. The herd culling rate, heifer-conception rate, cow death loss and inventory change are also needed for a gross income analysis of the beef cowherd.

Now, let's calculate a composite “IRMez Gross Income Generated” statement. This study ranch generated a total cash income from six sources:

  • steer calves sold
  • heifer calves sold
  • cull cows sold
  • cull bulls sold
  • cull open heifers sold
  • bred females sold

Gross cash income totaled $368,511 for the herd, or $656/cow.

The “value of total annual production” adds non-cash income covering the “dollar value of the heifer calves retained” (but not sold) for replacements and “inventory change” to the “total cash income generated.” In this example, it totaled to $429,606 for the herd, or $764/cow.

The dollar value of replacement heifers held back can be handled two ways — include them in the income calculations and thus in the cost calculations, or exclude them from both the income and cost calculations. The bottom-line result is the same. Right or wrong, the IRMez model excludes them from both calculations.

The “IRMez Gross Income Generated” statement removes the dollar value of replacement heifers and totals $368,511 for the herd, or $656/cow. This IRMez composite $656 income/cow can be expressed as equal to the income generated by 5.20 cwts. of steer calves, and is calculated by dividing the IRMez gross income per cow by the price of steer calves ($656/$126 = 5.20). These 5.20 cwts. of steer equivalents are a composite measure of all sources of income listed in (except the value of heifers held back for replacements).

I encourage each reader to now generate the IRMez Gross Income for their 2008 calves. We'll use this number in future columns.

By the way, we all know heavier weaning weights mean increased economic costs. Of the added costs associated with heavier weaning weights, 100% have to be paid by 70% of the gross income from calf sales. A slippage occurs when the cost of increasing weaning weights goes up on each cow in the herd — 562 cows in this example herd — as weaning weight goes up. But, this rancher only sold 448 calves — a 17% slippage (448/562).

Most ranchers tend to forget about this 15-20% slippage when looking at the economic benefits of added weaning weight.

See Associated Figure 1

See Associated Figure 2

Harlan Hughes is a North Dakota State University professor emeritus. He lives in Laramie, WY. Reach him at 701-238-9607 or harlan.hughes@gte.net.

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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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