NEWS for North Dakotans
Agriculture Communication, North Dakota State University
7 Morrill Hall, Fargo, ND 58105-5665

December 10, 1998

The Market Advisor: It Is Time Again To Analyze Your Beef Cow Profit Center

Harlan Hughes, Extension Livestock Economist
NDSU Extension Service

As we near the end of this calendar year, it's time to perform an annual checkup on your beef cow herd profit center. Part of this annual checkup needs to be an item by item comparison of your herd's business performance with the average business performance of a set of benchmark herds. Comparing your herd's business performance against the average business performance of benchmark herds is the single most powerful ranch management tool available.

Since most of my readers do not have a set of benchmark herds to compare against, I will share my 1997 data summary for North Dakota's Integrated Resource Management (IRM) cooperators' herds to serve as benchmarks for analyzing your 1998 calf production. These benchmarks summarize the 26 North Dakota IRM herds analyzed in the production of 1997 calves. My 1998 data will not be available until this summer 1999.

Most cattlemen focus on costs per cow; however, the problem with costs per cow is that it does not take production into account. Unit cost of production, on the other hand, is a ratio of total production costs for the cow herd divided by the total pounds of calf produced. You can not have low unit costs of production if you do not have good productionregardless of your costs per cow. You also can't have low unit costs of production, even with high calf production, if your costs are out of line. The strength in this ratio is that you have to have both good production and low costs to have low unit costs of production.

In addition to presenting the averages for the 1997 North Dakota benchmark herds, I have elected to break these benchmark herds into three groups based on unit cost of producing a hundred pounds of calfthe low-cost third, the middle-cost third, and the high-cost third.

This data has been summarized in a publication titled "Managing For Today's Cattle Market And Beyond, A Comparative Analysis." Copies are available free by calling (701) 231-7393. I will also put this IRM Summary on my Web page (www.ag.ndsu.nodak.edu/cow) under Harlan's Handouts. If you do not have Internet access, your local county agent can pull off a copy for you. I have elected to highlight these benchmark herds in this Market Advisor as a way of providing my readers with some of the key indicators that standout in this latest summary.

Because an economic analysis is always different from a cash flow analysis, I recommend that cattlemen analyze both the economic profitability and the cash flow associated with their beef cow herds. Let's first review the economic summary for these IRM cooperators and then I will review the cash flow summary for these same producers.

Let's first look at gross income from calf sales, cull animal sales and inventory adjustments on these benchmark herds. Accrual gross income includes cash income plus inventory adjustments. Both the low- and middle-cost herds had the highest gross income. Gross accrual income varied from $420 per cow for the low-cost herds to $350 for the high cost herds, with an overall average of $399 per cow.

Total costs per cow (excluding unpaid family and operator labor, management, and equity capital) averaged $382 per cow and varied from an average of $307 per cow for the low-cost group to $465 per cow for the high-cost group. The average profit, defined as earned returns to unpaid family and operator labor, management and equity capital, was only $17 per cow, up from a $37 per cow loss in 1996. The low-cost group averaged a $114 per cow profit while the high cost herds average a $115 per cow loss, a difference of $229 per cow. Even in these tough times, some beef cow producers earned a reasonably good return from beef cows.

The average cost of producing a hundredweight of calf for these North Dakota benchmark herds was $84. The low-cost herds' costs of production averaged $58 per hundredweight and the high-cost herds' costs of production averaged $117 per hundredweight—for a difference of $59 per hundredweight. This large difference in average costs of production in this one year exceeded the total price differential in the last 10-year cattle cycle. Cattlemen can't do much about the price impacts of cattle cycles, but they certainly can do a lot about their unit costs of production.

Net cash flow is different from economic profits.Cash flow tracks the cash into and out of the beef cow profit center. Cash income includes any breeding stock sold in addition to the calves and cull animals sold. Cash costs include all production expenses, debt service (principal and interest) and any family living draw placed on the beef cow profit center.

These benchmark herds averaged $433 gross cash sales per cow in 1997. The low-cost group averaged $389 gross cash sales per cow while the high-cost herds average $495 gross cash sales per cow. Cash costs include production expenses paid in cash, the purchase of breeding animals, and debt service for cow debt, beef cow equipment debt, and pasture debt. Cash costs for the benchmark herds averaged $391 per cow. The low-cost herds averaged $267 cash costs per cow while the high-cost herds average $559 cash costs per cow $292 more per cow.

Family living draw is provided by producers representing their expectations for family living draw from the beef cow profit center. Some beef cow operators do not expect to take any family living draw from their beef cows as their family living draw comes for off-farm employment. Others take family living draw from farming. Most, however, have a portion or even all of their family living draw coming from their beef cows. Family living draw averaged $64 per cow for all benchmark herds. The low-cost herds averaged $68 per cow family draw while the high-cost herds average $80 per cow.

Net cash flow averaged a minus $23 per cow—implying that, in 1997, the average beef cow herd did not generate enough cash flow to pay production expenses, debt service and the specified family living draw. The low-cost herds, on-the-other-hand, did generate enough cash to pay all cash production expenses, debt service, and the specified family living draw—and also had $68 per cow left over. The high-cost group had a negative $145 net cash flow per cow. Net cash flow varied by more than $200 per cow from the low-cost producers to the high-cost producers.

I encourage producers to compare their 1998 numbers to these benchmark herds item by item. Items where you beat the benchmark herds are your business strengths and items where the benchmark herds beat you are your business weaknesses. Take advantage of your business strengths and try to remove your business weaknesses. It you do this, your profits from running beef cows will go up. In today's tough times, you need to go that extra mile.

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Source: Harlan Hughes (701) 231-7380 hhughes@ndsuext.nodak.edu

Editor: Tom Jirik (701) 231-9629

Click here for a pdf version of this graphic.