NEWS for North Dakotans
Agriculture Communication, North Dakota State
University
7 Morrill Hall, Fargo, ND 58105-5665
July 9, 1998
Harlan Hughes, Extension Livestock Economist
NDSU Extension Service
My last Market Advisor focused on the critical control points for operating a high-production herd. This week we'll will focus on the critical control points for operating a high-profit herd, using the same McKenzie County, N.D., benchmark herds.
Economic analyses, according to the National Standardized Performance Analysis Guidelines, are to be based on the business year which typically goes from Jan. 1 through Dec. 31. The number of cows in the herd Jan. 1 is the number of cows that are in the inventory as of Jan. 1 and that will be kept to calf during the next spring. Cull cows tagged last year to be marketed after the first of this year are not included. The demo herd had 166 cows in the Jan. 1 inventory, compared to the benchmark herds' average of 177 cows.
Pay weight dollars for steer calves is the market price of steer calves used in the analysis. If the rancher actually sold his calves at weaning, this is his reported sale price. If the ranchers retains his calves, it is the average North Dakota price received for steer calves during the week that the calves were weaned, adjusted for the weaning weight of his steer calves. The demonstration herd presented in this Market Advisor sold steer calves at weaning for $85 per hundredweight with a $10 heifer price differential. The benchmark herds, on the other hand, averaged $87 for steer calves with a $6.85 heifer price differential. Marketing appears to be a weakness for the demo herd.
Capital invested in breeding herd, beef cow facilities, beef cow equipment, and pastureland represents the total capital investment in the beef cow profit center. The crop profit center sells forages to the beef cow profit center at market price; thus, capital investments in farm land and farming machinery used in raising crops fed to the beef cows are not included as part of the beef cow profit center. The demo herd had a market value capital investment of $2,086 per cow in the beef cow profit center, while the benchmark herds had $2,177 invested per cow.
Debts are only those debts associated with the beef cow profit center (cows, bulls, replacement heifers, beef cow facilities, beef cow equipment, cows' share of equipment debts pro-rated by percentage use by cows, and pasture land debt). Debts on farmland and farming machinery are not included. Debts per cow averaged $508 on the demo herd compared to $360 for the benchmark herdsa weakness for the demo herd.
Accrual income is the sum of the cash income plus capital gains income adjusted for inventory changes. Inventory changes can be either positive or negative, depending on management strategies. Accrual income per cow was $426 on the demo herd compared to $434 average for the benchmark herdsno significant difference.
The market value of farm-raised feeds, plus any purchased feeds fed, was $189 per cow for the demo herd, 19 percent above the benchmark herds' average.
Pasture costs, on the other hand, were 11 percent below the benchmark herds'$78 versus $88 per cow. Total feed cost was 8 percent higher for the demo herd than for the average of the benchmark herds. Non-feed costs, however, were 29 percent lower on the demo herdan important strength for the demo herd.
Total production cost represents all production costs except unpaid family and operator labor, management and equity capital. The demo herd's total production cost was $365 for per cow compared to $386 benchmark herds' average—a 5 percent strength for the demo herd.
Financing interest is the total interest paid on money borrowed for the beef cow profit center debts. For the demo herd it was $41, for the average benchmark herd $21 per cow. Interest payment on the demo herd was almost double that for the average benchmark herd, and this is a weakness.
Net pre-tax income is the earned return to the ranch family's three contributed resourcesunpaid family and operator labor, management, and equity capital. This demo herd has a net pre-tax income of $61 per cow compared to the benchmark herds' average of $40 per cow. The demo herd's average was 153 percent of the benchmark average—a major strength of this beef cow herd. This strength was accomplished through the cost side, rather than the income side.
Percent return on market valued assets is the economic return to the capital invested in the beef cow profit center. It is calculated by adding interest paid to net pre-tax income, subtracting out a labor and management wage, dividing by the capital invested per cow and multiplying by 100. The demo herd earned .5 percent return on all investment capital while the benchmark herds earned an average 2 percent. Borrowing money at 9 percent and earning a .5 percent return on all capital (borrowed and equity) is a major weakness of this business.
The National SPA Guidelines suggest that the ranch family's labor and management wage should be charged in at a value equal to the family living draw. The demo herd manager placed a family living draw of $90 per cow on his herd. The benchmark herds, on the other hand, placed an average family living draw of $42 per cow with a range from $0 to $233.
The final economic critical control point is the unit cost of producing (UCOP) a hundredweight of calf. The economic UCOP for the demo herd was $73 per hundredweight of calf produced, compared to $77 for the benchmark herds. The range in UCOP for the benchmark herds was $49 to $108 per hundredweight. This demo herd had a below-average UCOP a strength for that business.
Let's now summarize this herd's economic critical control points for profitability. The potential economic strengths identified for this demonstration herd through this benchmark analysis are grazing costs, non-feed costs, total production costs, net pre-tax income and economic UCOP. The potential weaknesses that need more management attention are marketing, debts per cow, market value of farm-raised feeds fed, total feed costs per cow, financing interest paid and percent return on capital invested.
When a manager's energies are focused on the calculated critical control point rather than on perceptions, profits generally increase.
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Source: Harlan Hughes (701) 231-7380 hhughes@ndsuext.nodak.edu
Editor: Barry Brissman (701) 231-7866
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