Benchmarking is among the most powerful ranch-management tools available to ranch managers, and one of the least used.
A key reason for its lack of use is a general lack of published ranch benchmark data. In my next several columns, I'll focus on my Integrated Resource Management (IRM) and North Dakota rancher databases to illustrate how ranchers can lower their herd's breakeven price.
An item-by-item benchmarking exercise clearly points out a beef cowherd's production and business strengths and weaknesses. This allows managers to capitalize on their strengths and minimize their weaknesses, thus improving the herd's profit margin.
Profit margins in a beef cowherd are basically the difference between calf prices and a herd's breakeven cost. Today's increasing input costs are driving up the average cowherd's breakeven costs. Meanwhile, with feeder-calf prices declining, beef-cow profit margins are taking a hit. In fact, they've been decreasing since 2005.
So how does a rancher know if his breakeven costs are rising faster or slower than the average herd's? And in today's fast-changing world, how does a rancher know which cost factors require extra management attention? Both answers are generated by benckmarking one producer's production and financial factors against a set of benchmark herds.
I emphasize unit cost of producing a cwt. of calf (UCOP) because no other production or financial variable has a higher correlation with herd profits.
Note that I emphasize UCOP of calf, and not costs per cow. That's because you may have a cost of $350/cow but if she doesn't bring in a calf, or she brings in a light calf, in the fall, you've gained nothing.
On the other hand, the only way to have a low UCOP is to have high production. In fact, UCOP is the ratio of the total costs to run that cowherd divided by the herd's total pounds of calf produced, adjusted by non-calf income. When production goes up, UCOP tends to go down and profit margins increase. It's almost that simple.
To lower UCOP, you can either lower the total costs of running that cowherd, increase the pounds of calf produced, or both. Most ranchers tend to lower UCOP by increasing pounds of calf produced.
The production factors I look at first when trying to increase a herd's profit margin are:
percent calf crop based on females exposed,
pounds weaned per female exposed (WFE),
percent calf death loss,
average calf weight per day of age as a measure of your bull power.
In my expanded 2005 data set, the benchmark herds averaged an 86% calf crop, 406 lbs. WFE, 7% calf death loss, and 2.87 lbs. of gain/day of age. Interestingly enough, crossbreeding tends to impact all four measures and as an industry we're moving away from cross breeding. What does this tell us?
Truth is, all four of these average production measures are below my expectations for a beef cowherd. I recommend a 90% calf crop, 500 lbs. or more WFE, less than 5% calf death loss, and 3 lbs. of gain or more/day of age for my IRM Cooperators.
Figure 1 presents the last nine IRM herds I analyzed in 2005. Look at the huge differences in UCOP between ranches. Which herds are faring the best in this era of higher costs?
The average economic UCOP for my expanded set of herds analyzed in 2005 was $105. In economic costs, ranch-raised feeds are valued at local market prices — not cost of production. Given the cost inflation of the last two years, where do you think the average economic costs of these herds are now with their 2008 calves?
Cattle-Fax suggests beef-cow costs have risen $150/cow in the last three years. Kansas State University suggests it's at least that high or even higher. My preliminary data indicates my average IRM Cooperator in 2006 had a UCOP of $122, up $17/cwt. from the year before.
Meanwhile, North Dakota's Farm Business Management Beef Cow Herds had an average UCOP of $100 in 2007. Why lower than my IRM Cooperators? These are intensively managed herds with profit-center accounting and many have herd-performance records.
Going one step further, let's calculate what it cost the nine herds in Figure 1 to produce $1 of gross income (Figure 2). The average cost to produce $1 of gross income was 81¢, leaving an average profit margin of 19¢/cwt. of calf produced.
What this 19¢/cwt. profit margin means is that if a rancher wants to generate an additional $10,000 family living from his beef cowherd, it would require a gross income increase of $52,632 ($10,000/19¢). And that's in 2005, a year of record calf prices.
What if a rancher wants to bring his son or daughter into the operation and pay them a $30,000 annual salary? With a 19¢ profit margin, a gross income increase of $157,950 ($30,000/19¢) is required to generate that extra $30,000 net income. That's an additional 263 cows even in 2005, a year of record calf prices.
By suggesting where to focus your management attention, benchmarking is the best management tool to lower a herd's breakeven price.
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.