NEWS for North Dakotans
Agriculture Communication, North Dakota State University
7 Morrill Hall, Fargo, ND 58105-5665
February 17, 2000
Harlan Hughes, Extension Livestock Economist
NDSU Extension Service
Conducting an economic analysis of your herd during strong calf prices is an excellent time to focus on reducing your costs of production. The financial rewards from being a low-cost producer will never be higher.
I have now completed most of my winter speaking engagements and have turned to my annual analysis of Integrated Resource Management cooperators' beef cow herds. At the time I am writing this, I have analyzed four IRM cooperators' herds costs and returns for producing 1999 calves. Yes, profits are up substantially with the production of 1999 calves.
Now that calf prices are projected to remain strong for a few years, I hope you'll give me a chance to analyze the cost and returns of your 1999 calves. Experience shows that the best way to reduce production costs is to first measure them. An IRM cost and return analysis does just that.
If you are interested in conducting a cost and return analysis of your beef cow herd, please call my secretary, Paulann, at (701) 231-7393 and ask her for the IRM input form and the two associated video tapes. There is a $25 fee for the video tapes. If you already have a copy of the video tapes from previous years, all you need is a copy of the free input form. This year there will be a $75 (US $) per herd processing fee. This processing fee is waived for North Dakota herds.
I promised North Dakota beef cow producers that I would analyze their herds for the decade of the 1990s, and the analysis of 1999 calf production costs and returns fulfills that promise. In fact, this is the last year that I will be conducting IRM herd analyses as an NDSU Extension specialist as I have announced my retirement from NDSU effective March 31. I hope that you will allow me to do one last NDSU analysis of your beef cow herd. I am currently exploring the possibilities of continuing this newsletter and my IRM herd analyses after retirement. Stay tuned.
As I finish a decade of analyzing Integrated Resource Management cooperators' costs and returns, I have some observations to share. There seem to be three economic factors that generally determine the economic profitability of producing calves: calf prices, bred and cull animal prices, and the unit cost of producing a hundredweight of calf (UCOP) in that herd. The first two -- calf prices and bred and cull animal prices -- are determined by consumer demand and beef supply, and neither is under the direct control of the beef cow producer.
The third economic force -- UCOP -- is under the direct control of the beef cow producer. Unit cost of production is the herd's total costs divided by the herd's total pounds of calf produced. Any production factor you want to talk about is either in the numerator, the denominator or both. It is all in there.
A cow calf producer evaluating a production practice needs to look at what that production change will do to total pounds produced (the denominator) and what it will do to the herd's total costs (the numerator). Only then can a producer make an informed decision about the economic impact of that production practice.
A young IRM cooperator came up to me a few years ago and said, "You and your &*#@ unit cost of production. You have me so that everything that I do, I am thinking about what it will do to my UCOP."
I just smiled and said, "Thank you. That is what IRM is all about."
Let me point out a couple of things that my IRM databank illustrates. In 1997, my northern plains IRM cooperators UCOP averaged $77 per hundredweight of calf produced. Steer calf price averaged $85 per hundredweight in North Dakota during October, 1997. Due to a special procedure used to calculate UCOP, this $77 can be directly compared to the average $85 steer market price received that year. You can immediately see that the IRM cooperator average earned net returns from running beef cows was $8 ($85 minus $77) per hundredweight of steer calf produced. The average IRM cooperator produced a level of income equivalent to 5.12 hundredweights of steer income per cow for an earned net return of $41 per cow in 1997. This $41 is the earned net returns to the unpaid family and operator labor, management and equity capital for the average IRM cooperators. These are the only three resources contributed by the ranch family. In today's business climate, it is absolutely critical that a ranch or farm family know what they are being paid for the family's resources consumed.
The importance of UCOP is dramatically illustrated when I group my IRM cooperator herds into low-cost and high-cost groups. While the average UCOP for all herds was $77, the low-cost one-third of my IRM cooperators averaged $62 per hundredweight of calf produced. This group of low-costs generated a profit each and every year in the last five tough years.
This contrasts to the high-cost herds that averaged $108 per hundredweight of calf produced. Even with the favorable 1999 calf prices, this group of producers did not make a profit. Which group of producers do you think will be in the cattle business in 2010 after the next drop in the beef price cycle?
The key management point here is that all of you should have three to five years of favorable calf prices ahead of you to get your herd's costs of production down to your optimum level before calf prices bottom out again in this decade. Calf prices are projected to next bottom out in year 2006.
I frequently get asked what production costs are lower on these low-cost herds. My answer has two parts. First, I find that the low-cost producers tend to have lower costs in all cost categories. Second, the biggest cost category difference is feed costs. These low-cost producers tend to have substantially lower feed costs due primarily to lower feed consumption.
Some of my IRM cooperators know the nutritional requirements of their cows, know that these nutritional needs change with the trimester of pregnancy and lactation, know the nutritional quality of their farm-raised feeds, and feed the cows according to their needs. Another group of IRM cooperators just dump feed. If in doubt, they dump more feed. For example, in 1994 my average hay consumption for all IRM cooperators was 2.25 tons of hay per cow. Yet I had some herds that consumed well over 4 tons of hay per cow. The cow may or may not have consumed all of it, but if it was dumped out to the cows, it was charged against the cow herd.
My next Market Advisor will focus in more detail on the difference between the low-cost and high-cost herds. Stay tuned.
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Source: Harlan Hughes (701) 231-7380
Editor: Tom Jirik (701) 231-9629
Click here for a pdf version of this graphic. (21KB b&w illustrative graphic of UCOP)