In light of the discovery of the first case of bovine spongiform encephalopathy (BSE) in the U.S., damage control has to be foremost on ranchers' minds. And, the key damage control action is to focus management energies on the things producers actually can do something about.
Producers have little impact on the market price for their calves, but they can impact their herds' calf production levels and the associated production costs of their calves in 2004 and beyond. This new post-BSE era will reward those ranchers who have high economic efficiency in their beef cow herds, and penalize those with low economic efficiency.
Clearly, it is not “management as usual” for U.S. and Canadian ranchers. Year 2004 is now projected to be one of those tough years for North American beef-cow producers as the two countries work their way out from under border closures imposed as a result of a single case each of BSE in the U.S. and Canada.
But there is much an individual rancher can do to help pull his ranch business through this crisis. Now, more than ever, it is critical to invest time and effort in the management tools and techniques that will improve the economic efficiency of a beef cow herd. A decade of experience with Integrated Resource Management (IRM) suggests that improved economic efficiency leads to increased beef-cow profits in the good years and to reduced financial stress during the tough years.
It's critical that ranchers integrate as many local professionals as possible into their management teams targeting this beef crisis. County and state Extension personnel, local bankers, veterinarians and feed dealers, as well as private consultants, can all help you design a favorable response to this crisis. Make sure you tap the expertise of every agricultural professional you can.
A key component of any rancher's BSE damage control strategy is to start a management action program focused on economic efficiency. While a key ingredient for economic efficiency is high production, that alone won't guarantee profit or economic efficiency.
During this upcoming period, it's imperative that agricultural professionals work with their beef cow clients to develop management action plans focused on increasing herd economic efficiency. Go beyond your current production service offerings to provide your farmer and rancher clients the management services specifically designed to increase economic efficiency of their beef cow herds.
Measuring Economic Efficiency
The primary measure of economic efficiency in a beef cow herd is that herd's unit cost of producing (UCOP) a hundredweight (cwt.) of calf. UCOP is a ratio of the herd's total production costs in the numerator to that herd's total pounds of calf produced in the denominator.
UCOP's management power comes from the fact that any production, economic and financial factor you want to talk about impacts the numerator and/or the denominator. Everything is in this ratio!
Assessing a client herd's current economic efficiency is the very first management action that agricultural professionals need to encourage beef farmers and ranchers to take. There are several regional IRM Standardized Performance Analysis (IRM-SPA) programs available to help in assessing economic efficiency of beef cow herds.
Producers should contact their local county Extension agents for information about the specific IRM-SPA being used in their state. If your state doesn't have an IRM-SPA program, I have a fee-based IRM program available.
The Efficiency Payoff
To illustrate the potential for improved economic efficiency in a beef cow herd, let's take a look at North Dakota's IRM database. In 1999, all the participating Northern Plains IRM cooperators were operating finely tuned beef cow businesses. All IRM herds analyzed that year were former IRM cooperators with one to seven years of IRM experience. In fact, half had been working on their herd's economic efficiency for more than five years.
In 1999, these experienced IRM cooperators generated the lowest, average, annual, calf-production costs ($62/cwt.) of any year in the Northern Plains IRM cooperator databank. These low unit costs were the direct result of high economic efficiencies.
Figure 1 presents the earned net returns per cow for the high-cost one-third, the low-cost one-third, and the middle-cost one-third of these 1999 IRM cooperators. The low-cost one-third averaged $145 earned net returns/cow with their 1999 calves. This is $84 more/cow than the high-cost one-third of these IRM cooperators. Clearly, economic efficiency makes a difference.
In addition, my Northern Plains IRM database indicates those operators who built a financial reserve during the last good times best survived the last downturn in beef prices. The key was having a financial reserve generated through high economic efficiency.
The Last Cycle's Lessons
It's important that ranchers study the past decade's beef cow profit pattern in detail, as I project a similar profit pattern for the next 10 years (2004 to 2013). During this beef price cycle, there will be a phase of increasing calf prices, followed by a phase of decreasing calf prices. The best way to survive the ups and downs of a long-run beef price cycle is through increased economic efficiency.
Figure 2 shows the impact on beef-cow profits that the 1990s' cattle cycle and its related beef-price cycle had on profits in North Dakota's beef cow herds. The 1990 and 1993 years completed a record-high, seven-year, beef-cow net income (1987-1993) driven by the same seven-year, record-high price period. After the seven-year high, profits decreased for three consecutive years.
The 74% decline in profits that occurred in 1994 got North Dakota beef cow producers' attention. Losses also occurred in 1995, with even larger losses in 1996.
Average beef-cow profits improved in 1997, but could not be sustained in 1998. They increased again in 1999 and 2000.
The beef market was on a roll in 2001 when the terrorists struck on Sept. 11. The discovery of BSE in Japan that same month further dropped U.S. beef demand, which was compounded by drought-induced liquidations and the larger carcass weights that produced record 2002 beef production.
A rapid drop in beef supply in 2003, coupled with strong beef demand, led to a record-breaking fall 2003 market. Now, following the Dec. 23 discovery of BSE in the U.S., I project we'll be working on the second top of this decade's beef price cycle.
I project 2004 prices will be under considerable pressure — perhaps as much as 20% under 2003 prices. The desired strategy will be to delay as many marketings in 2004 as cash-flow requirements will allow.
I expect some borders to open in late 2004 or early 2005, which will move cattle prices back toward a second price top this beef price cycle sometime in 2006 to 2007.
It's clear the 2000-2003 drought in the western U.S. has delayed this next, cattle-cycle expansion phase until at least 2006. I expect, however, that low heifer calf prices in early 2004 will stimulate added heifer retention even with 2003 heifers.
Once we get through 2004, the expansion phase of the post-drought recovery will eventually increase bred animal numbers to the point of driving beef prices back down. Economically efficient beef cow herds are again projected to experience several years of high profit in this revised beef price cycle.l
Harlan Hughes is a North Dakota State University professor emeritus. He lives in Laramie, WY. Reach him at 701/238-9607 or [email protected].
The Immediate Challenge
I project a tough 2004 with respect to beef prices followed by a gradual return to normalcy in the 2005-2006 time period. The current beef price cycle should peak again in the 2006-2007 time period.
U.S. beef cow numbers are at a seven-year low and still trending down. Beef prices will surely once again cycle upward as foreign borders reopen to U.S. beef exports.
My goal is to get each reader to peak economic efficiency during the 2004-2007 period to take advantage of these projected higher prices. My challenge to producers is to lower your production costs 5%/year the next three years. Thus, ranchers with $100/cwt. costs of producing 2003 calves will produce their 2006 calves for $85/cwt. On a national basis, the cattle industry has the management tools to do this. It just has to utilize them.
It takes more than one year to increase economic efficiency in most cow herds. Generally, it takes multiple years of focused, tough, measured and documented progress. The start of the post-BSE era we are currently in is an excellent time for a beef farmer or rancher to launch his or her own economic efficiency improvement program.
The herds that made the most money in the last good times and best survived the last downturn were those with high economic efficiencies. During the start of the cattle cycle's expansion phase, which is where we are, is an excellent time for a beef producer to improve his or her herd's economic efficiency.