Market Advisor

How Is The Beef Cow Sector Doing Six Years After Ethanol?

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This is the final article in my four-part series on the beef cow sector’s economic transition to the “new normal.” The question I’ve specifically addressed in this exercise is: “How is the beef cow sector performing economically now that we are six years into the biofuels era?”

This month, I will compare the long-run total production costs per cow with the long-run earned net returns in the beef cow sector. We’ll also look at the beef cow sector’s current and future prospects for profit.

• Total direct costs. My July column discussed the long-run average total direct costs (TDC) for Northern Plains beef cowherds from 1993 through 2009 with projections for 2011 through 2015. The calculated statistical trend line suggested TDC was increasing at an average of $8.72/year, or roughly $87 in any consecutive 10-year period during the 17-year period studied. What’s more, TDC appears to be accelerating in the biofuels era.

My more conservative straight-line projections were for TDC to grow to $390/cow in 2011 and to $425/cow in 2015, with a five-year 2011-2015 average of $407/cow. Historical TDC numbers for 1993 through 2009, with projections for 2011 through 2015, are depicted by the red section of the cost-of-production bars in Figure 1. The long-term upward trend is clearly evident.

• Overhead costs. My August column focused on average long-run overhead costs (OC) from 1993-2009. OC was much smaller and the trend increase was only $1.25/year, or $12.50/10 years. Projections are for OC costs to grow to $74/cow in 2011 and to $79/cow in 2015, with a five-year (2011-2015) average of $76/cow. OC is depicted by the green portion of Figure 1’s cost-of-production bars.

• Replacement costs. My September column focused on beef cow replacement cost (BCRC), which is comprised of both the dollar value of all replacement breeding stock purchased (replacement females and bulls) and the market value of raised replacements transferred into the breeding herd. BCRC is represented by the blue section of the cost-of-production bars in Figure 1.

BCRC’s year-to-year variation is quite volatile. For example, in 2010, the study herds purchased an average of $119/cow worth of replacement animals and transferred in an average of $113/cow of raised replacements, which produced a record-high BCRC of $232/cow. In 2009, BCRC was $156/cow. I can’t totally explain the big jump in BCRC from 2009 to 2010, but I assume the 2010 number is the abnormal number.

My straight-line projections, based on 17 years of data, project BCRC at $159/cow for year 2011, growing to $172/cow for year 2015, with a five-year 2011-2015 average of $166/cow.

• Total production costs. Each complete bar in Figure 1 represents the average total cost of production per cow for that year. It’s comprised of that year’s average TDC and OC, as well as BCRC. Average total production costs with replacement costs (TCWRC) trended up at $13.12/year or $131 in 10 years. The projected TCWRC for 2011 is $622/cow and increases to $675/cow in 2015, with the five-year 2011-2015 average projected at $650/cow.

Gross income in this study is defined as the sum of beef calves sold, beef calves transferred out, cull sales (females and bulls), inventory change and other income. For example, the 2010 gross income for the study herds averaged $810/cow, a record-high gross income/cow.

Figure 2 presents the average annual gross incomes for 1993-2009. While there was considerable year-to-year variation in the average gross income, the statistical trend was a positive $16.15/year, or $161/10 years.

The year-to-year irregular pattern reduced the statistical fit for the straight-line trend (R2 = 0.47). Further study suggests an upward trend for years 1996-2005, and then a negative trend for years 2005-2009; statistical trend lines were calculated for these two differentiated time periods.

The trend line for the 1996-2005 period was a positive $24.15/year (R2 = 0.82) and a negative $55.56 for the 2005-2009 period (R2 = 0.92). I conclude that we had a $241/cow increase in average gross income in the 10 years from 1996-2005, followed by a $222/cow reduction in gross income the next five years (2005-2009). Interestingly enough, these were the beginning years of the biofuels era.

During this five-year period (2005 through 2009), my data shows gross income fell $222/cow, but total production costs increased $78/cow. Unfavorable economics and the 2006 drought killed any plans for a herd expansion, which led to continued herd liquidation. Profits recovered slightly in 2010 ($113/cow) but today’s drought in the Southern Plains is the overriding driver for the continued liquidation of the nation’s beef cowherd.

Projecting gross income per cow for 2011-2015 suggests a $730/cow gross income for 2011 and $795/cow gross income for 2015. The five-year (2011-2015) average gross income is projected at $763/cow. Given the actual 2010 average gross income of $810/cow, one could easily argue that these straight-line projections for 2011 through 2015 are low.

Earned net incomes (ENI) for these study herds are calculated by subtracting total production costs from gross income, and are summarized in Figure 4. ENI varies so much from year to year that no statistical trend line should be calculated. In fact, the best statistical line that can be generated is the simple average over the 17 years, which is $74/cow.

The lowest ENI was 1996 with a negative $50/cow and the highest was in 2005 at $218/cow. The last recorded ENI average was $113/cow for year 2010.

Total production costs and gross income were both projected for years 2011 through 2015. The difference between these two projections gives a projected 2011 ENI of $108/cow and a projected 2015 ENI of $120/cow with a five-year average of $114/cow (Figure 4).

Are these 2011-2015 profit projections high enough to trigger national herd expansion? It took profits in the range of $200/cow to motivate expansion in 2004 and 2005. It might take a $200/cow profit level to again stimulate expansion today. Drought recovery, whenever that might be, is probably going to play a huge role in the next herd expansion.

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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