If these price projections come true, there is a real possibility that well-managed beef cowherds will generate record profits the next few years. In any case, beef cow producers are moving into the driver’s seat with respect to profits in the total beef industry.
My Northern Plains Integrated Resource Management (IRM) database suggests record profits will only go to low-cost producers. High-cost producers, meanwhile, may well experience low profits at a time of record calf prices.
My primary goal in this monthly column for BEEF magazine is to stimulate beef cow readers to think about production, economic and financial management practices that will enhance their beef cowherd’s profits in these times of high calf prices. I start this BEEF magazine series by looking at the critical control points for operating a high-profit herd.
The Basic Profit Equation
First, a beef cow producer needs to focus his management attention on every component in the total profit equation. Historically, beef cow producers have focused primarily on production, believing that economic profit and financial performances will follow. My IRM database suggests, however, that economic profits do not automatically follow production.
Let’s look at the basic profit equation for a beef cowherd:
Profit = (Price - UCOP) x Cwt.
In this equation, Profit equals a total beef cowherd’s profits, Price equals the market price of calves, UCOP equals "Unit Cost Of Producing" a cwt. of calf, and Cwt. equals 100 lbs. of calf produced.
This profits equation suggests that a beef cowherd’s profit is determined by three manageable components. They include:
1) The market price for feeder calves.
2) The unit cost of producing a cwt. of calf.
3) The cwts. of calf produced by the beef cowherd.
Traditionally, beef cow producers have focused most of their management energies on the cwts. of calf produced. While this is necessary for operating a high-profit beef cowherd, it can’t serve as the only condition for operating a high-profit herd.
It was in this light that the National Cattlemen’s Beef Association (NCBA) initiated its IRM program 10 years ago targeted at motivating beef cow producers to get a handle on the economic components of their herds’ profit equations. Astute ranchers are starting to recognize that the two economic components of the profit equation – market price of calves and unit cost of producing a cwt. of calves – are now also critical determinants of beef cow profits.
Let’s take an in-depth look at these three components of the profit equation by starting with the cwts. of calf produced.
According to North Dakota’s Cow Herd Analysis and Performance System (CHAPS) herd data base, average weaning weights in North Dakota went from 460 lbs. in 1979 to 560 lbs. in 1989. This was a weaning weight gain of 100 lbs. in the 1980s decade, an increase of 10 lbs./calf/year. I think these North Dakota data are indicative of U.S. beef cow weaning weights in general.
The weaning weight trend for the 1990s turned out to be different from the 1980s (Figure 1). North Dakota’s CHAPS data indicates the average weaning weight continued to trend upward during the high-priced 1991-1993 time period and peaked in 1993. However, average weaning weights broke trend mid-decade and followed calf prices down in the 1994-1996 period.
Farm business management records indicate that average beef cow profits hit record lows in 1995 and 1996. Apparently, economic survival during the tough years of the 1990s forced beef cow producers to focus on cutting costs rather than increasing calf weaning weights.
Market price is one of the two economic components in the profit equation. Two overall factors influence market prices:
- There is a long-term beef price cycle driven by the cattle cycle.
- There are short-term seasonal price patterns driven by bunched marketings during the year.
In order to make optimal production decisions under today’s beef price cycle and seasonal price patterns, astute beef cow producers need a price projection system that has two components:
- First, their projection system must look at planning prices for one to 18 months ahead in order to determine the optimum marketing strategies for their current calf crop.
- Second, beef cow producers need to focus on long-term planning prices (like five to 10 years) in order to determine optimum long-run business strategies over the expansion, contraction and turn-around phases of a complete 10-year cattle cycle (Figure 2). The management key here is to include the cattle cycle and annual seasonal price patterns into these planning prices.
These planning prices are updated and posted weekly at www.ag.ndsu. nodak.edu/cow (Click the "weekly prices" hot button.) Jim Mintert, Kansas State University, routinely posts slaughter cattle planning prices at www.agecon.ksu.edu/livestock/. Both these price projection systems are Futures based and are updated regularly.
I guarantee that if you develop your own set of planning prices and write them down, your management decisions will be positively impacted by your focus on planning prices.
The UCOP Of Calf Production
The unit cost of producing (UCOP) a cwt. of calf is the second economic component of the profit equation. Figure 5 presents the average UCOP for my Northern Plains IRM cooperators from 1993-1999. As we can see, average UCOP changed as we went through the cattle cycle.
My IRM Databank suggests that variation from herd to herd is large and that producers can not generalize with respect to their own unit costs of production. The only real answer is to institute a year-end analysis system that generates your own unique UCOP.
Evaluating Market Alternatives For 2000 Calves
These planning price projections (Figure 3) are based on both the futures market price and Western North Dakota sale barn prices for the second week of November 2000. The price projections in Figure 3 were used to evaluate five marketing alternatives for year 2000 calves shown in Figure 4.
The "buy/sell margin" in Figure 4 is the buying price of animals going into a lot subtracted from the selling price of animals coming out of the lot. Since selling price is normally less than purchase price, the buy/sell margin is normally negative. The negative buy/sell margin represents the marketing loss/cwt. on the purchase weight of the animals. The cost of gain (COG) represents the cost of the added weight while in the lot. Profit/head represents the combined marketing losses and profits from gain.
Let’s look at marketing example 2 in Figure 4 to see how one might use Figures 3 and 4 to evaluate marketing alternatives for year 2000 calves. Let’s assume that I produced 565-lb. calves at my late October weaning. What if I were to background these calves at a high average daily gain and sell them as 800-lb. feeders in January 2001?
According to my prices for the Northern Plains, I could have sold my 565-lb. calves for $99.85/cwt. in late October. Figure 3 projects that 700-lb. backgrounded calves will sell for $95 and 800-lb. backgrounded calves will sell for $84/cwt. giving an average price of $89.60.
The above prices give a buy/sell margin of -$10.45 rounded off the -$10 in Figure 4. The marketing loss on the original 565-lbs. is $59 (565 lbs. x $10.45).
The cost of producing the 235 lbs. of gain is $108 (235 lbs. x the $0.46 COG in Figure 4), and this gain is projected to be sold for $210. The profit from this 235 lbs. of gain is projected to be $103 ($210 - $108).
Combining the marketing loss with the profits from the pounds gained generates a projected profit of $44/head reported in Figure 4. Figure 4 presents the three key numbers from evaluating the alternative marketing alternatives – the buy/sell margin, the COG and profit/head.
Next month: "Making economic sense of today’s market prices." How the planning price system can help you generate your own set of planning prices.
Harlan Hughes is a Professor Emeritus at North Dakota State University. Retired last spring, he is currently based in Mankato, MN. He can be reached at 701/238-9607 or firstname.lastname@example.org.