Market Advisor

How To Maximize Cattle Profits By Cutting Production Costs

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The markets are finally moving in the right direction for cow-calf producers. But don't let today's more favorable calf prices deter your focus on production costs.

Figure 1 presents my latest profit projections for Western Nebraska/Eastern Wyoming ranchers producing 2010 calves. My projected $110/cow profit from selling 2010 calves at weaning is up from my calculated $24/cow for 2009 calves and North Dakota's $10/cow reported for 2008.

My concern with more favorable calf prices is that ranchers will relax their attention on costs. Costs of production are even more important when prices are high and there is a real opportunity to make big money from cost reductions. Such opportunities don't come along often, and high-cost producers tend to leave money on the table.

When I say “high-cost,” ranchers tend to think “cost per cow,” but I'm referring to the unit cost of producing a hundredweight of calf (UCOP). Cost per cow and UCOP are completely different concepts. One ignores production while the other considers production.

The only way to have a low UCOP is to have high production per cow. Once a rancher has quantified his individual cost components, he can identify and focus his management attention on the high-cost components.

A rancher can identify his high-cost components by benchmarking his herd's cost components against those of a set of benchmark herds. The components where he beats the benchmark herds' average are his business strengths, and a ranch manager should strive to capitalize on those strengths. Meanwhile, the values where the benchmark herds beat his component costs are his potential high-cost components and he needs to analyze why that's the case.

Once you select a high-cost component for study, you should analyze the production and financial factors driving that cost component. Is it something that management can influence? If so, then what production and/or financial factors impact that cost component? Then, measure your progress with next year's documented component costs.

I recommend ranchers focus on one high-cost component per year to analyze and change. It's not a difficult process once a rancher sets his mind to it.

In fact, several university Extension programs and community colleges publish annual benchmark data sets. One is the North Dakota Farm Business Management Summary published annually by North Dakota State University in cooperation with the University of Minnesota (www.finbin.umn.edu/default.aspx?PG=About).

Figure 2 summarizes benchmark data for 119 North Dakota herds producing 2008 calves (data for 2009 calves are not yet available). All resources consumed by the beef cowherd are priced at the going market rate rather than cost of production. For example, the $94 average pasture cost is based on the going local pasture rental rate, and the $194 winter feed costs price home-raised feeds at market price. Daily feed costs are summarized at the bottom of Figure 2.

Your region may have a different ratio of summer pasture days to wintering days than these North Dakota benchmark herds, but your total annual feed costs should be comparable.

Average total cost for the benchmark herds is broken into feed costs, direct costs and overhead costs. These 119 benchmark herds had a total feed cost of $288/cow, direct costs of $390, overhead costs of $63, and replacement female costs of $142, for an average total economic cost of production of $595/cow. These major cost categories are further broken into several component costs. Ranchers can use these component average costs as benchmarks for their herds' component costs.

Breeding fees and interest paid need further explanation. Unfortunately, bull costs aren't broken out from the beef cowherd. The low breeding cost benchmark is the average for the 119 herds of the limited number of herds that use artificial insemination. Interest is broken down into borrowed money for operating loans and for the capital investments associated with the beef cowherd. There is no opportunity interest cost included in these benchmark numbers.

Meanwhile, proper enterprise accounting suggests that developing replacement heifers is a separate enterprise from the beef cowherd. All heifer-development costs, including the market cost of the initial weaned heifer calf, are assigned to the heifer-development enterprise. Then the market value of preg-checked replacement heifers is transferred into the beef-cow enterprise.

Some benchmark herd owners raise their replacements while others purchase them. The $142 benchmark average cost of replacement females includes the market value of developed replacement heifers plus those purchased and added to the cowherds. (The costs of replacement bulls are also included in this $142 number, while the sale of cull bulls is included in the gross income number.)

I challenge readers to use the Figure 2 benchmarks to compare their herd's key cost components against these benchmark numbers. Identify and analyze your high costs and apply management actions to reduce those areas. As costs go down, cowherd profit goes up. Take maximum advantage of the higher current prices and try not to leave one single dollar on the table.

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.

Figure 1. Traditional marketing alternatives for 2010 calves*
Marketing strategy Buy/sell margin Cost of gain (COG) Profit/head
Spring calving 2009 ND-FBM-07
Sell at weaning xxxxxx $105 $110
Background high ADG -$24 $0.68 -$56
Finish background steers -$6 $0.75 $30
Grow & finish -$29 $0.68 $0

*Projected March 26, 2010

Figure 2. North Dakota average herd costs
Item ND-FBM Ave* Your herd
Gross income $606
Days wintered xxxxxxx xxxxxxx
Pasture cost $94.38
Winter feed costs $193.96
Total feed costs $288
Vet & medicine costs $17.58
Livestock costs xxxxxxx
Breeding fees $2.36
Supplies $11.48
Fuel & oil $26.01
Repairs $26.34
Custom hire $4.44
Livestock leases $0
Marketing $3.60
Operating interest $10.08
Total livestock costs $84
Total direct costs $390
Overhead costs xxxxx
Hired labor $7.63
Farm insurance $7.27
Utilities $8.15
Interest $10.40
Mach & bid depreciation $18.90
Miscellaneous $10.85
Total overhead costs $63
Replacement female costs $142
Total costs per cow $595
Earned net income $11
183 past cost/day = $0.52
182 winter feed cost/day = $1.07
Annual feed cost/day = $0.79

*Gross income and total costs were adjusted by replacement heifer costs

Source: North Dakota Farm Business Management

Accounting made easy

Enterprise accounting as part of the business accounting system is the ultimate cost-measuring tool, and Quicken and Quickbooks software make enterprise accounting very feasible on your ranch computer. Several state Extension services offer Quicken and Quickbooks educational programs, while community colleges in other states also offer educational programs for ranchers on enterprise accounting.

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.

Contributors

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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