NEWS for North Dakotans
Agriculture Communication, North Dakota State University
7 Morrill Hall, Fargo, ND 58105-5665
January 6, 2000
Harlan Hughes, Extension Livestock Economist
NDSU Extension Service
A Montana State University animal science graduate student sent me an e-mail over the holidays raising some excellent questions about the management data needs of commercial cattlemen. One of his questions was, "What would be your top three or four recommendations to improve profitability of a beef cow herd?" I will share my four top recommendations in this Market Advisor.
Recommendation one. After 10 years of going from kitchen table to kitchen table conducting cost and return analysis for beef cow herds, my top recommendation for enhancing profits is for a beef cow producer to answer a fundamental economic question, "What does it cost me to produce a hundredweight of calf?" In other words, "What is my beef cow herd's unit cost of producing a hundredweight of calf (UCOP)?"
Recommendation two. Profits also can be enhanced if a beef cow producer answers a second fundamental economic question, "Am I a high-cost or low-cost producer?" Answer this question by comparing your herd's UCOP, item by item, against the low-cost, average-cost, and high-cost profiles from a set of benchmark herds for your county, state, region or the national Integrated Resource Management-Standardized Performance Analysis (IRM-SPA) benchmark herds. Various states are now publishing state IRM benchmark summaries like the Northern Plains Benchmark Summary that I have published at www.ag.ndsu.nodak.edu/cow as the second item under the IRM hot button.
If you are a low-cost producer relative to your benchmark herds, continue doing what you are currently doing. Focus on fine tuning your herd's economic performance, but I certainly would not recommend making any major changes.
If you are a high-cost producer, it is a different story. Why can others produce calves cheaper than you can? If you continue to be a high-cost producer, there are two milestones that you need to determine. Are your costs so high that your cow herd is consuming financial equity? Or are your costs just high enough that you are earning lower economic returns from your family's resources than the benchmark herds are earning from their family resources?
Use your IRM-SPA Financial Analysis to answer the financial equity question. How long you can continue running a high-cost, equity consuming beef cow herd depends on the amount of financial equity that you are willing to give up. Some high-cost producers have consumed equity for the last five years (1994-1998). I suspect that the higher calf prices projected for the next few years will not bail some of these high-costs producers out of financial trouble. I can almost assure you that they will not make it through the next cattle cycle if they remain high-cost producers.
If you are looking at reduced returns to your family's resources, remember that those resources are unpaid family and operator labor, management, and equity capital. Use your IRM-SPA Economic Analysis to answer this low economic returns question.
Recommendation three. My third recommendation is that beef cow managers should not use "production proxies" for profit. By production proxies I mean using such things as weaning weights, calf weight as a percentage of mature cow size, frame size, etc. as proxie indicators of profit. Drovers Journal reported in November "that there are 72 genetic traits that can be measured and ranked for expected progeny difference (EPDs)." But that same article goes on to say, "that Bruce Golden, Colorado State University, suggests that there are only 10 to 12 genetic traits that actually influence profitability."
Current IRM databases are confirming that many of the production proxies used in the past are not highly correlated with profits. For example, my IRM database suggests that gross income and profitability are not highly correlated. Yet, I am hearing some current discussions about developing an EPD for profit based on gross income. Increased gross income certainly does not ensure increased profitability.
In today's business world of computers, Farm Financial Standards, IRM, IRM-SPA Guidelines, and Quicken Accounting Software, you have the management tools to measure profits directly and do not need to measure profits through production proxies. Adopt these management tools and measure profit directly.
Before you conclude that I don't think herd performance records are important, let me assure you that I think herd performance records that identify and treat each cow as a single production unit with its own production records are absolutely critical for managing economic efficiency in your herd. Managing a beef cow herd by herd averages is no more economically efficient than marketing a pen of cattle based on pen averages. Yet we continue to do both because that is how we have always done it.
First, use your IRM-SPA Year-End Analysis to decide the economic parameter that you want to change through management. Then, select the appropriate herd production management tool or tools that you believe will help you make the desired economic change. Do not, however, assume that profits are related to one specific production trait. For example, weaning heavier calves does not assure you that you are generating more profits. Use your IRM analysis to confirm if producing heavier weaning weights did, or did not, lower your UCOP and increase profits. The beef industry has spent the last 20 years proving that weaning weight, used as a single production proxy, does not work. On the other hand, production parameters used to accomplished desired economic changes in that herd are powerful, powerful management tools. Its how you use the production traits that makes the difference. Just remember that production traits are poor proxies for profit.
Recommendation four. My fourth recommendation is that beef cow producers need to fully understand and take advantage of the management power in unit cost of production (UCOP). The management power in UCOP comes from it being a ratio of the herd's total production costs to total pounds of calf produced. Anything that you want to talk about is either in the numerator or the denominator.
I find that many, many producers are trying to run beef cows without knowing their unit costs of production. Because profit margins are getting smaller with each cattle cycle, knowing your costs of production is critical. It is getting harder and harder for today's managers to make a profit, but knowing your unit cost of production enhances your odds of doing so.
Unit cost of production is a very powerful management tool. I just wish more beef cow producers would use it!
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Source: Harlan Hughes (701) 231-7380
Editor: Tom Jirik (701) 231-9629