No matter how high cattle prices are, chances are you know someone who got more. Or, they would have gotten more if they'd: held them a week longer or less, put more or fewer pounds on them, had more or less of a particular breed in them, or rubbed their rabbit's foot the opposite way during the last full moon, etc.
Point is, more folks banter about price across the pickup hood than discuss breakevens and percentage return on investment. That's despite the fact no one's ever been able to do much about price, other than choose when to accept what's offered.
There's nothing wrong with price wonderments, or the pride, chagrin and speculation spawned by them. Bought right is still at least half-sold, after all. And, risk exposure certainly grows as prices and requisite equity requirements climb.
But focusing too intently on price can blind you to management sins and risks in other parts of the business. That's especially true now, when high prices can fog your risk-vision, just when the financial wherewithal exists to address business sins rather than just their symptoms.
Shore financial foundations
Unfortunately, when financial times are the best, producers demand financial planning and management the least, says Damona Doye, Oklahoma State University (OSU) Extension economist.
With both historically low interest rates and high prices, she's urging producers to get their financial houses in order and pay down debt, so they can ensure surviving a dramatic downturn in prices. And the first step in addressing risk overall starts with developing and maintaining a firm grasp on the costs and returns of each enterprise in order to understand financial position.
Although most producers Doye works with have a handle on cash and cash flow, she explains, “Many of them miss the opportunity of using record-keeping for tax purposes, packaged differently, for management purposes.”
Although moving business records from a shoe box to a full-fledged business accounting system can be overwhelming, Doye explains. “What I hear most often though is, ‘I'm not sure we want to know,’” she adds.
She says a number of inexpensive accounting and/or cow-calf management software programs provide turnkey opportunity. In fact, OSU has developed a report listing the features of several common ones. To access the list, visit http://pods.dasnr.okstate.edu and type in CR-3279 into the search field.
“Once you get past the initial learning curve for using these tools, there are many things you can do to sort and summarize information, which can highlight strengths, weaknesses and vulnerabilities in enterprises and in the total operation,” she says.
Pick your risk
In December, Doye and fellow OSU Extension economist Clem Ward analyzed cow herd economic performance using Standardized Performance Analysis data collected in Oklahoma, Texas and New Mexico the previous decade. They analyzed it with models for cost of production (cost), pounds of production (production) and rate of return on assets (profitability). What the numbers say about how different variables affect cost, production and profit corroborates what you might guess:
Calving percentage was the only significant variable in all three models. Increasing calving percentage decreases per-unit costs, and increases pounds weaned and profits.
Pounds weaned/cow exposed was significantly affected by investment in livestock and higher calving percentage (both positive), along with death loss and longer breeding seasons (both negative).
However, detailed financial analysis also underscored realities that run counter to what many would expect:
Increased feed per cow increased costs, but not production or profit.
Machinery and equipment investment increased cost, but not production or profitability.
Increased investment in breeding stock increased cost and production, but didn't impact profitability. Researchers say this suggests, at least in this data set, that increased production may have been insufficient to offset high investment values.
Cost per unit of production declined at a decreasing rate, meaning that while herd size significantly affected cost and profitability, it had little impact on actual production; cost of production can go down, yet physical production can remain unchanged as cow numbers increase.
If it makes you feel any better, Doye reminds us some bankers suggest that more farms and ranches are lost to poor planning associated with such life transitions as death and divorce than to catastrophic business management blunders or horrendous luck with markets or weather.