“I've got records, now what?” cattle producers in South Dakota kept asking. They got their answers in 2002 by joining a Standardized Performance Analysis (SPA) Integrated Resource Management (IRM) group, says Heather Gessner, South Dakota McCook County Extension educator.
As members of a SPA-IRM group, cattlemen began to understand which data they needed to keep in order to analyze their ranching business efficiency from a variety of angles. SPA is nothing new; it's still an extremely useful tool in gauging efficiency in a herd. The balance sheet and income statements are used to look at business efficiency and profitability, which, in turn, are used to develop standards to measure financial performance.
“This type of management is definitely a learned thought process,” says Eric Mousel, a South Dakota State University range livestock production specialist who administers the SPA-IRM groups. “Doing this type of analysis helps give producers that kind of thought process. You just can't make blind decisions.”
Decision-making is one of the chief reasons for conducting year-end analyses, in Harlan Hughes' opinion. A farm business consultant and BEEF “Market Advisor” columnist, Hughes wants producers to make management decisions based on the facts of the operation — not county averages or published numbers.
“Collecting data doesn't do you any good; you have to convert it to information. A year-end analysis does that,” Hughes says. “It takes data from the ranch and converts it to information.”
The process of conducting a year-end analysis can be overwhelming, which is why working with SPA-IRM groups and specialists is a good option.
Gessner says that's one of the most rewarding parts of her job — helping producers feel empowered to make decisions by understanding their unit cost of production (UCOP), also known as breakevens.
Crunching the numbers
Experts rely heavily on SPA guidelines developed by the National Cattlemen's Beef Association (available at: www.beefusa.org/prodstandardperformanceanalysis_spa_.aspx). SPA guidelines are available for financial, production, cow-calf and stocker segments.
Gessner and Mousel begin by calculating production efficiency using SPA measurements, such as adjusted number of breeding females exposed — the basis for reproductive efficiency measurements — and gauging how long the breeding season is.
After that, it's on to weaning data, where Gessner is looking for the percentage of calves born alive and saleable at weaning. “These are primary determinants to adjust cost per cow based on efficiency performance,” she explains, “which, in turn, heavily influences profitability.”
Gessner stresses that it's not about having the highest weaning weights. “We're looking at efficiency — not bragging rights. Maybe we're better off weaning 450-lb. calves than 800-lb. calves if we can't do it efficiently.”
From there, Mousel and Gessner analyze the operation's financial data, which brings up the low-cost producer misnomer. When Hughes says “low-cost,” many cattlemen think that means cutting costs per cow.
“When I say low-cost, I'm thinking low cost per hundred pounds of calf produced,” Hughes says. This is also known as UCOP, which Mousel also advocates.
“It's what every other industry does, but where agriculture has lagged,” Mousel says.
There are major differences between low cost and UCOP.
For example, to have a low cost per cow, the cow doesn't have to have a calf because production isn't factored in. “I may be a low-cost-per-cow producer, but I have no calves to sell,” Hughes says.
Producers think that by cutting costs $10-$50/cow, they've done the right thing. Not so if it reduces production, Hughes says.
On the flip side, a rancher can have high costs and still have a low UCOP, if he has high production. The UCOP is a ratio of total costs per cow for your cowherd, divided by total pounds of calf produced, Hughes explains.
Barry Dunn, executive director of the King Ranch Institute for Ranch Management, gives this example: Rancher A has a $600/cow cost while rancher B has a $400/cow cost. Rancher A can have a lower UCOP by having higher production (e.g., higher percentage of calves weaned).
“If you can spend one more dollar and make two dollars, you should do that,” Dunn says.
Hughes' data, along with Texas SPA data and other data points, all lead to this conclusion: “He who has the lowest unit cost has the highest profit.”
Dunn adds that understanding break-evens can assist cattlemen in marketing. For example, if you know it costs you 75¢ to wean 1 lb. of calf and the calf market is $1/lb., you know your margin is 25¢/lb. Knowing those margins will become increasingly important as margins narrow. To note, 2004-2006 had some of the largest cow-calf margins in history. Dunn believes 2007 margins will narrow.
Hughes' data shows a huge range in UCOP among ranches — as much as $60 difference between the lowest one-third cost producers and the highest one-third. For reference, Hughes' 2005 IRM producers' average UCOP was $105/cwt.
Costs of production are obviously increasing — land, fuel, feed costs, etc. In fact, Cattle-Fax cites a 20% increase in production costs over the past two years for running cows; North Dakota Farm Business Management Association data reflect a 10% increase last year. Hughes reminds cattlemen that each new piece of equipment purchased elevates the cost of production.
Once an analysis of an operation is completed, the rancher's first question is “How am I doing?” That can only be answered by comparing an operation's performance to other aggregated data, or “benchmark” data, which helps identify operational strengths and weaknesses.
“If he doesn't have something for comparison, how does a rancher know if it's a strength or a weakness?” Hughes asks.
The knowledge allows operators to focus their management efforts. Hughes dubs the weak areas of an operation as the “bottlenecks” to profit. From there, he asks ranchers if management can be applied to remove the bottleneck. He suggests focusing on one bottleneck/year.
“If you can influence it and correct it with management, profits are going to go up,” Hughes says.
Dunn agrees — benchmarking can be a powerful tool — but cautions that producers can sometimes misuse the information, or choose to settle and not make improvements.
“If I have an 88% pregnancy rate and the benchmark is 90%, is mine good or bad?” Dunn asks. “A higher level may not be appropriate, or even achievable,” he says, noting that UCOP can increase trying to hit benchmarks.
In South Dakota SPA-IRM groups, Gessner and Mousel don't necessarily want producers comparing their operation to others in the group. Instead, Gessner advocates that producers look for change within their operation.
While producers are often anxious about an outsider viewing their production and financial data, Mousel says it's actually helpful to have a second opinion because it takes the emotion out of it.
“We have no interest in judging, no capacity to judge from just a computer screen. All we're doing is interpreting the analysis for them, helping them generate ideas,” Mousel says.
Benchmark data can be found in a variety of databases. FINBIN (www.finbin.umn.edu/) is one of the best in the nation, Hughes says. Users can determine variables and generate reports for free.
Regional data is more specific, but harder to come by. For good state and regional databases, Hughes recommends Texas SPA data and Farm Management Associations (Kansas for cattle operations and Illinois and Indiana for corn farmers). Cattle-Fax numbers have also been cited as benchmark data.
How do computers fit in?
Hughes says computers aid the process of year-end analyses by allowing ranchers to ask more “what if” questions. After compiling data for a rancher, Hughes says he's often asked such questions as: “If I change my calving date, what will that do to costs, returns and UCOP?”
“It's pretty easy to make some changes in your data input, turn the computer loose and let it grind out the next set of analyses,” Hughes says. But if you had to do it by hand, the time required would be prohibitive.
Montana State University has farm management cost analysis Excel spreadsheets available at: www.montana.edu/wwwextec/softwaredownloads.html. South Dakota's SPA-IRM groups also use Excel to run analyses. Some software packages (see “Computer Savvy: Recordkeeping,” p. 52, October 2007 BEEF) can also run analyses. FINPACK is another tool (www.cffm.umn.edu/Software/FINPACK/index.aspx), but ranchers should have training on how to use it, Hughes says.
In existence since the '70s, FINPACK is computer software designed for year-end analysis and year-end ranch and farm business planning by combining accounting records and production records. Farm business management specialists across the Northern Plains rely on FINPACK, which takes into account SPA guidelines. The only disadvantage Hughes sees is that FINPACK necessitates a large amount of data to grind out numbers.
Regardless of how cattlemen conduct a year-end analysis, experts agree it's vitally important. “We set ourselves up for success by being responsive,” Mousel says. “Either sustain or improve.”
Roadblocks in analysis
Keeping records and conducting an analysis isn't intuitive to cattlemen, says Barry Dunn, King Ranch Institute for Ranch Management executive director.
Reflecting on 20+ years of IRM and SPA work in the '80s and '90s, Dunn points out three roadblocks to producers not running year-end analyses.
There isn't much help out there. “The average county agent doesn't have the skills.”
Most people don't have accrual-adjusted financial records needed to complete an analysis. “It takes an accrual-adjusted accounting system, or tremendous amounts of adjustments to a cash system, to make it work.”
There's no incentive to run analyses when profit margins are high. “The market has been just exceptional of late. It's not a big thing for people when they're making $200/head.”
But, he adds, if “you have millions of dollars invested in land, cattle and equipment, it's responsible stewardship of the management of your assets to take a more sophisticated look at your operation.”
Experts have differing viewpoints on enterprise analysis and cost- and profit-center analysis.
“The accounting world and a lot of farm management has moved beyond enterprise analysis and does managerial accounting,” Barry Dunn, King Ranch Institute of Ranch Management executive director, says. “It's getting away from breaking an operation into its parts and arbitrary allocations.”
For example, say you're a cow-calf rancher who also produces hay. In an enterprise analysis, these would be separate enterprises. Hay is “sold” at market value to the cow-calf operation — even though there's no exchange of cash.
“If there isn't an entry in your chart of accounts, you can't make it up,” Dunn says. “Everything that goes into the calculation of unit cost of production (income statement, total costs and/or profit) has to be traced to a journal entry in your accounting system.”
In a cost- and profit-center approach, the haying portion is a cost center within the business and the cow-calf portion is a profit center. Hay is transferred at its cost of production, as opposed to the market value of the hay.
These differing philosophies are what Harlan Hughes, farm business management consultant and BEEF magazine “Market Advisor” columnist, describes as a “financial analysis” (cost- and profit-center approach) and an “economic analysis” (enterprise approach).
Financial analysis asks the question: “How well did I perform last year?” Dunn favors this approach, and says Ford and Wal-Mart approach their business this way.
Economic analysis asks: “Is this the best use of my resources?” Hughes uses this method and argues that if your beef cows can't pay market value for hay, why are you running cows when you can just sell the hay? “If it isn't the best use of resources, then it isn't the most profitable business plan,” Hughes says.
Dunn points to another philosophical difference. The fiscal year and production year in standardized performance analysis (SPA) guidelines don't align. Because bulls are turned out for breeding in June, the calf crop isn't realized until October the next year.
General Accepted Accounting Practices would characterize this as a crop year. “You accumulate the cost over the entire life of the production system,” Dunn explains. Unlike crop systems, such as corn planted in the spring and harvested in the fall, the production cycle for beef cattle isn't complete in the same calendar year. Timber companies and orchards use a crop year approach because they may plant a tree and not realize revenue from that tree for 30 years.