Beef cow producers are in the midst of exciting economic times. It's an excitement, however, that the industry experiences at this point in every cattle cycle. One rancher summarized it best when he told me that I refer in my talks to 10- to 12-year cattle cycles, but rancher memories go back only seven years.
Today's record feeder cattle prices suggest the economic rewards for operating optimal production and marketing strategies in beef cow herds are very high. However, potential opportunity losses (missed profits) generated from operating a beef cow herd in a sub-optimal production/marketing mode are also very high.
Whether a ranch business experiences increased production costs or missed opportunity profits, the net result is the same — lower overall ranch profits. My concern is that current industry turmoil may cause ranchers to leave a considerable amount of money on the table in these good times.
Now is the time in the cattle cycle when ranchers need to stockpile money to ease the stress of the downturn that surely will follow. It's similar to stockpiling hay in wet years for use in years of low moisture.
For many ranchers, it should not be management as usual. The opportunity cost of potential lost profits is just too high. The key to ensuring maximum profits in these good times is to intensify your management system now. The best way to do that is implement a third-generation management information system (TG-MIS).
A TG-MIS integrates herd performance measures and economic/financial measures into a single management information system that sends a single set of management signals. The nation's Integrated Resource Management (IRM) system, developed and tested during the 1990s, is such a TG-MIS.
My July issue “Market Advisor” column (“The money is in the details,” page 8) focused on four management systems identified from a decade of Northern Plains individual IRM herd analyses. The experience gained from a decade of kitchen-table IRM Cost & Return Analyses taught me that, as management intensifies on an individual ranch, the unit cost of producing a cwt. of calf (UCOP) drops.
This concept is represented in Figure 1. As the stair steps illustrate, the more intensive the management system, the lower the UCOP.
My IRM database statistically confirms that as UCOP goes down, herd profits go up. Participating IRM cooperators have proven the best time to intensify management is during times of high prices — like right now.
The more intensively managed herds collect more herd data, thoroughly analyze that data, and utilize the analyses to make management decisions. These data-driven analyses are integral to the management system, and are where the power of intensive management is generated.
Here are some key economic concepts that should be integrated into your TG-MIS:
Management intensity must be driven by both herd production and herd economic data. Intensive management requires going beyond your pocket calving book to detailed herd performance records that summarize your beef cow performance by 21-day calving intervals and by age of dam. Heifer performance data needs to be summarized separately from mature cows, as well as included in the total herd summaries.
A bred heifer's market value is the net dollar value she will bring at the sale barn. Her economic value in your herd is the sum of the future net incomes from her annual calves produced while she is in your herd, expressed in today's dollars.
Economic profits are generated when the economic value of this bred heifer in your herd exceeds the market value of selling her. If her market value exceeds her projected economic value in your herd, sell her.
Ranchers need to project the economic value of any proposed replacement heifers. There's a time in the cattle cycle to add replacements, and a time to not add them. The key is knowing which phase of the cattle cycle you're in.
The value of added weight on a feeder calf is always less than the market price of that feeder. How much less? It depends on the market price slide.
I'm projecting a $10.28 price slide this fall for calves 550-650 lbs. This price slide suggests the value of the added weight will be $82.08/added cwt. This is in contrast to a projected average price of $134/cwt.
Given the current projected record corn crop, I expect a market premium for light feeders. This will, in turn, translate into very high price slides for light 2004 calves. This is a year to focus on price slides, as they could really eat into post-weaning profits.
Figure 2 demonstrates the wide disparity in management levels in the U.S. beef cow sector. The red bars depict the average beef cow net returns for Cattle-Fax members from 1980 through 2007 projections. First, note the cyclical impact of cattle cycles on herd profits. Then, note the projections for years 2004 through 2007.
The top yellow line represents average net returns for the high 20% of Cattle-Fax beef cow members over the last three cycles. In all but two years, this group's profits were above zero.
The blue line represents the low 20% of Cattle-Fax beef cow producers. This group's only years of profits are 2003 to 2007.
It's obvious these two groups aren't employing the same levels of management.
The top 20% may already be practicing intensive management. Their management systems may or may not be a TG-MIS but their management intensity is already high.
At the same time, it's obvious the other 80% could benefit from the more intensified management system offered by a TG-MIS.
Harlan Hughes is a North Dakota State University professor emeritus. He lives in Laramie, WY. Reach him at 701/238-9607 or [email protected].