NEWS for North Dakotans
Agriculture Communication, North Dakota
State University
7 Morrill Hall, Fargo, ND 58105-5665
January 21, 1999
The Market Advisor: Benchmarking Your Beef Herd's 1998 Unit Cost of Production
Harlan Hughes, Extension Livestock Economist
NDSU Extension Service
As you finish out last year's books and analyze how your business went, now is the time to prepare a cost and returns analysis of your 1998 beef cow herd. There are two critical cost of production questions that every beef cow manager needs to ask a this time. First, what did it cost me to produce a hundredweight of calf? Second, am I a high-cost or low-cost producer?
Your answers will dictate your management choices for raising calves in 1999 and beyond. If you are a low-cost producer, continue doing what you are doing. If you are a high-cost producer, something will have to change if you are going to produce calves profitably in the future.
I often hear, "Ranchers are all operating in the same economic climate so there should not be much difference in their unit costs of production." Not true. There is a huge difference from one ranch to the next in the unit cost of producing a hundredweight of calf. My Integrated Resource Management Financial and Reproductive Management System (IRM-FARMS) database shows a $46 per hundredweight difference between the average of the low-cost one third and the average of the high-cost one third of producers. Individual ranch differences are much greater.
Why such a big difference in unit cost of producing a hundredweight of calf? Remember, unit cost of production is a ratio of total herd costs divided by total pounds of calf produced. Since total production cost is in the numerator and total physical pounds of production is in the denominator, everything related to that herd is taken into account by one of these numbers. I believe that unit cost of production is the single most important ratio that a ranch manager can manage.
Many ranchers calculate costs of production per beef cow, and I also used to express unit costs of production on a per-cow basis. But expressing unit costs of production on a per-cow basis does not take into account production. You might take a management action that reduces costs per cow but reduces production even more, and your unit cost of production goes in the wrong direction. I think this is exactly what has happened in many herds since 1994. Per-cow costs were cut but so were the herds' gross incomes. One well-known top manager told me that he budgeted next year on a per-cow basis and measured his economic performance by looking back at his unit cost of production. I like this management distinction.
Cost identification leads to cost reduction. Just the act of calculating your unit cost of production leads to cost reductions. After working for two years with one young producer, he said to me, "You and your *!@% unit costs of production. You have me so cost conscious now that every time I do something I am constantly thinking about its potential impact on my unit cost of production." My reply was, "Thank you. That is what IRM is all about."
In summary, you can not manage what you do not measure. If you do not measure it, how do you measure progress?
I recommend two ways to do a cost and returns analysis of your herd to measure your unit costs of producing a hundredweight of calf. First, you can participate in North Dakota's IRM-FARMS computerized analysis program. To participate, you must complete an input form describing the reproductive performance of your herd and listing key economic factors needed to perform an economic analysis of the production of your 1998 calves. We focus just on the beef cow profit center from conception through weaning. You send in your completed input form, and we mail back a detailed cost and return analysis for your beef cow profit center. We then enter your name to our IRM cooperators mailing list, and I will mail selected economic materials to you over the next year.
You can start an IRM-FARMS analysis of your herd by calling Paulann, my secretary, at (701) 231-7393 and asking her to send you the two IRM videotapes, the three accompanying publications, a 1998 input form and a bill for $25. If you already have the two videotapes from last year, she will just send you the 1998 input form free of charge.
The second way that you can conduct a cost and returns analysis of your beef cow herd is to get a copy of my publication entitled "Determining Your Unit Cost of Producing a Hundredweight of Calf," available free on my Web page at http://www.ag.ndsu.nodak.edu/cow under the "Harlan's Handouts" button. If you do not have Internet access, call Paulann at (701) 231-7393 for a free copy of that publication.
Let's now turn to the second important question. Am I a high-cost or low-cost producer?
Benchmarking is the act of comparing your beef cow herd's production and economic numbers to the numbers from a set of benchmark herds.
First, find those production and economic measures where your herd beats the benchmark herds and flag those areas as your herd's strengths. Then, find those numbers where the benchmark herds beat your herd numbers, and flag those potential weakness areas. As you put together your business plan for 1999 and beyond, plan to capitalize on your herd's strengths and reduce its weaknesses. Benchmarking gives you very specific areas on which to focus your limited management time. If you do this, you'll be surprised as to what happens to profits.
Each IRM-FARMS cooperator's data are entered into the IRM-FARMS databank, and annual averages are calculated for key production and economic variables. The averages from this databank become the benchmarks that IRM cooperators and other beef cow producers can compare to.
To help you further analyze your herd's performance, these benchmark herds are broken into three groups—the low-cost one third, the middle-cost one third and the high-cost one third based on herds' unit cost of producing a hundredweight of calf. Two publications are available that take you through this benchmarking process. They are "Conducting a Comparative Analysis of Your Herd's Production Facts with Other Herds' Production Facts" and "Conducting a Comparative Analysis of Your Herd's Economic Facts with Other Herds' Economic Facts." Both publications use the IRM-FARMS database as the benchmark herds. Both publications are on my Web site under the "Harlan's Handout's" button and/or are available free from Paulann at (701) 231-7393.
A complete set of the benchmark data is available on my Web site at http://www.ag.ndsu.nodak.edu/cow under the "Harlan's Handouts" button under the title of "Comparative Analysis of ND-Demo 160 Cow Herd" or from Paulann. Ask for the green covered IRM publication.
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Source: Harlan Hughes (701) 231-7380 hhughes@ndsuext.nodak.edu
Editor: Tom Jirik (701) 231-9629
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