Market Advisor

High Vs. Low Profit Ranching Operations

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Why are some ranchers more profitable than others? Let’s begin in answering this question by looking at how gross income figures for a beef cowherd is constructed. To do this, I’ll rely on North Dakota State

University’s 2008 Farm Business Management (FBM) summary of 119 North Dakota herds.

Figure 1 presents the adjusted gross income (AGI) average of these 119 beef cowherds in 2008. The FBM system calculates a gross margin per cow, which is basically a sum of the value of calves sold plus the value of weaned calves transferred to other profit centers, as well as cull animals sold.

Click here to view a PDF of Figure 1 and 2

Then the dollar value of cattle transferred into the cowherd (this includes bred heifers transferred in and the value of purchased females and bulls) is subtracted. This total is then adjusted for any change in the animal numbers reflected in the dollar value of the annual ending inventory vs. annual beginning inventory. Finally, any miscellaneous income is taken into account.

However, I prefer to calculate an AGI number that considers replacement animals transferred in, and/or purchased animals as production expenses. Thus, I remove those two numbers from the gross margin in calculating the AGI number presented at the bottom of Figure 1, Section 1. The very bottom section of
Figure 1 is designed to help readers calculate the total cull cattle sales.

Figure 2 presents the 2008 economic summary for these 119 beef cowherds. The data for these herds have been sorted by net income per cow into three groups – the low-profit 20%, the average of all herds, and the high-profit 20%. A column (your herd) is also provided for readers to compare their herd’s numbers against these benchmarks.

These 119 herds averaged a $606/cow AGI (middle column). The low-profit 20% (left column) averaged a $519/cow AGI – 14% below the overall group’s average. The high-profit 20% (right column) had a gross income of $675 – 11% above the group average. This is a $156 difference between the low- and high-profit groups.

Total direct costs (farm-raised feeds are at market value) add to this story. While the average direct cost of these herds was $390/cow, low-profit herds averaged 13% higher direct costs at $441/cow. The high-profit group averaged 11% lower direct costs at $348/cow, or $93/cow less than the low-profit herds.

Overhead costs present the same story. While average overhead costs were $63/cow, low-profit herds averaged $82/cow, and high-profit herds $54. Replacement-female costs, while averaging $142/cow, didn’t vary much between low- and high-profit herds.

Total production costs averaged $595/cow, but $673 for the low-profit group, and $547/cow for the high-profit group – $126/cow lower than the low-profit herds.

Let’s go a step further and combine these gross income and total cost figures into one profit-indicating composite number – unit cost of producing a hundredweight of calf (UCOP), shown in the middle row of
Figure 2. (See last month’s column on how UCOP is calculated.)

These North Dakota herds averaged a UCOP of $103/cwt. of calf weaned, with the low-profit herds averaging $129 and the high-profit herds $91.
Since UCOP considers both production and costs simultaneously, the only way a rancher can have a low UCOP is to have a high gross income. Conversely, the only way a rancher can have a high gross income is to have high reproduction efficiency such are live calves weaned per
female exposed.

My favorite measure of production – pounds weaned per female exposed – is presented in the bottom line of Figure 2. These herds averaged 498 lbs. weaned per female exposed. Low-profit herds averaged 449 lbs., and high-profit herds 543 lbs. Clearly, the high-profit herds had the highest production efficiency.

Somehow, the high-profit group produced a larger gross income per cow with fewer dollars per cow. That is greater economic efficiency.

So what did it cost each group to produce $1 of income? On average, it cost these ranchers 98¢ to generate $1 of gross income in 2008. (Calculate this by dividing costs per cow by the gross income per cow: ($595/$606). But it cost the low-profit group $1.30 (remember, this group lost $154/cow in 2008), while the high-profit group paid only 81¢ to generate $1 of gross income.

Clearly, a key factor separating ranchers in terms of profitability is their economic efficiency. A rancher can only achieve high economic efficiency via high production efficiency. But high production efficiency doesn’t ensure high economic efficiency. That’s a hard concept for some ranchers to grasp.

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.

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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