Many ranchers feel the end product of an Integrated Resource Management (IRM) analysis is building a set of financial, economic and cash-flow numbers for their beef cow herd. In reality, compiling a complete set of financial, economic and cash-flow numbers for you your herd just leaves you ready to start.
It’s what you do with the numbers that matters, not the fact that you have them. The key is for an IRM cooperator to use those numbers to make management decisions. Benchmarking is where the management signals are generated.
I encourage all my clients to compare their herd’s analysis numbers with a set of benchmark herds, always looking for their herd’s business strengths and weaknesses. Where their herd beats the benchmark herds are that herd’s strengths. Where the benchmark herds beat the study herd are the potential weaknesses. I recommend benchmarking not just the herd’s production factors, but the financial, economic and cash-flow factors, as well.
Figure 1 covers the production benchmarks used for a beef cow herd. The two production strengths that stand out are the percent calf crop (item 4) and the pounds weaned per female exposed (item 7). No real weaknesses show up in this benchmarking.
Perhaps, this rancher could work on his pregnancy rate and get it above average. Weaning weights might also be increased if it can be accomplished without increasing production costs per hundredweight of calf weaned.
That’s not a given, however, at his relative high production levels. Added weaning weight often comes with an added cost.
Figure 2 is this demonstration herd’s economic benchmarking process looks at some key economic factors analyzed for this herd. Ranchers are encouraged to use this same process for the financial and cash-flow analyses completed for their herds.
Most ranchers are so busy running the herd that they haven’t time to manage everything. A ranch’s economic success, however, depends on where the rancher focuses that limited management time. The key is to use benchmarking to direct your management energies to the areas of the ranch business that need extra management attention.
Figure 2 presents an example benchmarked herd summary of 14 different measures (out of the 100 or so benchmark factors presented in the final written report) used to identify this herd’s strengths and weaknesses. One herd’s actual values are compared to the benchmark herds’ averages.
The benchmark herds, in this case, are the 2000, 2001 and 2002 Central Plains U.S. herds that have been analyzed through the IRM-Financial and Reproductive Management System. The demonstration herd’s numbers are for the production of 2003 calves. (I have the herd manager’s permission to share these numbers with readers.)
The right-hand “Percent of Benchmark” column is used to rank this ranch in comparison to the benchmark herds. First, look for the herd’s strengths. Managers must do everything possible to capitalize on their herd’s business strengths.
Capital investment per cow (item 2) in the breeding herd, pasture land and breeding herd equipment is right at benchmark average. That is good.
Accrual adjusted income certainly stands out. However, this is due primarily to the fact that the ranch data is for 2003, a time of record-high fall calf prices. Meanwhile, the benchmark herds’ average was for 2000, 2001 and 2002. This must be considered when analyzing this herd’s income.
Livestock costs (item 10) and overhead costs (item 11) are certainly business strengths for this study herd.
Next, let’s look for the business weaknesses. Ranch managers must do everything they can to remove their herd’s business weaknesses.
I immediately go to the unit cost of producing a cwt. of calf (UCOP) as shown in item 14, and conclude this rancher was a high-cost producer in 2003. This rancher’s UCOP was 22% higher than the average of the benchmark herds.
High-cost producers clearly will have a tougher time implementing BSE damage control strategies. Business weaknesses are starting to surface in this benchmarking study.
Let’s use this benchmark study to zero in on just what costs of production are high. First of all, winter-feed costs (item 7) were 183% of the benchmark herds. This rancher was impacted by drought in 2003 so he had a longer than normal feeding season.
I wonder if this rancher balanced any rations, tested any homegrown feeds or looked at alternative feeding programs? If not, he needs to. With cheap feed grains, feeding all hay may not be the most economical way to feed cows in a drought.
Summer grazing costs were right at the benchmark level. I wonder if he could somehow extend his summer grazing with rotational grazing or planted annuals?
His total feed costs for this herd were 152% of the benchmark averages. Why can the benchmark herds feed cows for less than this rancher?
Debt per cow (item 3) is high but this debt is structured toward long-term debt so that the debt service per cow (item 4) is right on par. How debt is structured is all-critical and this rancher seems to have debt properly structured. Still, debt needs to be managed in these tough times.
In summary, this rancher’s business strengths are his capital investments in the beef-cow herd, his livestock costs for the herd and his overhead costs for the herd and his debt structure. Gross income per cow appears to be good with the high calf prices and cull cow prices of fall 2003. Additional budgeting should be done, however, with Fall 2004, 2005, and 2006 planning prices to ensure future gross income is adequate to make a profit with his relative high cost structure.
Specific areas of weakness are the total costs of producing a cwt. of calf and his winter feed costs per cow. Applying additional management time to his overall winter-feeding program looks to have the biggest payoff for this rancher. Costs, in general, need to be lowered in this herd.
In general, producers need to lower their UCOP over the next few years. This is especially true now with the U.S. BSE announcement. Many will do this through increased production per cow rather than cutting costs per cow.
This rancher should also explore the option of increasing production to lower his UCOP. He needs to ensure, however, that increasing production doesn’t also increase UCOP.
This businessman now has his management areas identified for the next two or three years. A year from now, he should start the process all over again by recalculating his analysis numbers, measuring his progress, and benchmarking his herd one more.