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

May 27, 1999

Harlan Hughes, Extension Livestock Economist
NDSU Extension Service

North Dakota's Farm Business Management Summaries indicate that during the past five years, the average earned net income from the beef cow profit center was $3 per cow, but the variation from herd to herd was substantial. North Dakota's Integrated Resource Management (IRM) cooperators averaged $21 per cow earned net income during those same five years. Again, herd to herd variation was substantial.

Why did some beef cow producers weather the down market of the last five years in reasonable shape, while others suffered severely? My IRM analyses suggest that some beef cow operators have more management power than others.

In my last Market Advisor, I defined management power as paying attention to detail. I suggested that low-cost managers monitor so many details that they have to rely on production and financial records to keep track of all the details. I then suggested that the production and financial data, when analyzed and turned into management power, lead to lower costs of production and increased financial rewards. It appears to me that as a result, low-cost producers are surviving the current down market fairly well.

I indicated that North Dakota's weaning weights and pounds weaned per female exposed have steadily decreased since 1993. This suggests that production efficiency in North Dakota's beef cow herds has been dropping. So what does decreasing production efficiency imply about costs of production? About economic efficiency? And about beef cow profits?

A beef cow producer can manage only what he measures. A beef cow producer can use production records to measure and increase his herd's production efficiency. The beef cow producer who ties financial records into his production analysis can measure and increase economic efficiency. The beef cow producer who increases economic efficiency by producing more at a lower cost increases net income by collecting the financial royalties from this increased management power.

The fundamental belief that beef cow profits are highly correlated with weaning weights and/or gross income is generally flawed. Left out of this maximum production efficiency formula is the added cost that typically accompanies increased weaning weight. In summary, high production efficiency is a necessary condition, but not the only necessary condition, for high net income.

Costs of production can be measured on a per-cow basis or on a per hundredweight of calf production basis. Measuring production costs on a per-cow basis is also fundamentally flawed as cost per cow does not take production into account. Reducing costs per cow may also reduce production per cow. I suspect that this is exactly what happened over the last five years enrolled in North Dakota's Cow Head Appraisal Performance System. The focus was on reducing costs, and production efficiency followed costs down. Looking only at production costs is just as serious of a management flaw as is looking only at total production. In summary, having low costs per cow is a necessary condition, but not the only necessary condition, for high net income.

Considerable management power can be gained from knowing the economic efficiency of your beef cow herd. Economic efficiency gets its management power by simultaneously taking both production efficiency and costs of production into account.

One measure of economic efficiency is the unit cost of producing a hundredweight of calf (UCOP). UCOP is the total costs associated with the beef cow herd divided by the total pounds of calf produced by that herd. (To be absolutely correct, the total pounds of calf produced has to be adjusted for the non-calf income—a topic for a future Market Advisor.) Economic efficiency (UCOP) is the single most powerful management factor that can be calculated for a beef cow herd.

Large variation in economic efficiency exists among North Dakota's beef cow herds. In 1997, IRM cooperators' UCOP averaged $84 per hundredweight (calculated as a simple average). The low-cost one-third of the herds averaged $50 per hundredweight of calf produced while the high-cost one-third averaged $117 per hundredweight of calf produced. This is a difference between the low-cost and high-cost groups of $59 per hundredweight of calf produced.

The key point here is that management has direct control over UCOP. In general, the more management power used, the lower the UCOP. Yet even after five tough years in the 1990s, some mid-sized family beef cow operators are still trying to run beef cows without production and/or financial records.

Given the above discussion, let's quantify production efficiency and economic efficiency for North Dakota's IRM cooperators. Gross income (accrual adjusted) in 1997 averaged $399 per cow (or $1.09 per day). The average gross income ranged from $350 per cow (or $0.96 per day) for the high UCOP one-third group to $420 per cow (or $1.15 per day) for the low UCOP one-third of the IRM cooperators. The low UCOP group had the largest average gross income and produced the most hundredweights of calves.

The average 1997 annual total costs of production for North Dakota's IRM herds was $382 per cow (or $1.05 per day). The high UCOP group averaged $465 per cow (or $1.27 per day). The low UCOP group's total costs averaged $307 per cow (or $0.84 per day). Cost difference between the high and low UCOP groups was $158 per cow (or $0.43 per day). The lowest UCOP group had the lowest cost per cow.

Earned net returns (profits) is the difference between total costs and gross income. The 1997 earned net returns (profit) to unpaid family and operator, management and equity capital averaged $17 per cow (or $0.046 per day) which reflects 1997's relatively low market prices. Not all herds, however, fared the same. Earned net returns averaged $114 per cow or ($0.31 per day) for the low UCOP group, while the high UCOP group averaged a loss of $115 per cow (or a negative $0.31 per day). This was a difference between the low- and high-cost groups of $229 per cow or ($0.63 per day). Clearly, some beef cow producers did quite well in 1997 while others did not.

My observations are that high profit herds experience both high production efficiencies and high economic efficiencies. Thirty-five percent of the $229 difference ($80) in earned returns in North Dakota's IRM herds was due to production efficiency. In turn, 65 percent of the difference ($149) in earned returns was due to economic efficiency (i.e., UCOP). Clearly, cost of production was the bigger determinant of profitability; however, both production efficiency and economic efficiency impact net returns. High profit herds seem to excel in both production efficiency and economic efficiency. The easiest way to excel in both production and economic efficiencies is to have production and financial records and then use these records in managing your beef cow herd.

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

Editor: Tom Jirik (701) 231-9629