It appears the “good times” have returned for beef cow producers. In fact, we're already two calf crops into this beef price cycle's good times.
Two years of record prices appears to have set optimism flowing throughout the ranching sector. As a result, drought-induced ranchers are starting to show interest in repopulation, while others contemplate expansion.
My optimism stems from my suggested long-run beef calf planning prices (Figure 1 ). I predict 2004 will be the current cycle's record-high calf price year. I expect calf prices to remain above $100/cwt. for the 2008-2013 period, suggesting a new price plateau for the beef cow sector.
Last month's column included a chart of my current profit projections for the rest of this price cycle based on my suggested planning prices and constant production costs. When compared to the five-year history of Northern Plains Farm Business Management Herds presented on the left of Figure 2, these projections are clearly record high. This suggests the positive profit impact my projected new price plateau could have on prolonged ranch profits.
As I continue to conduct IRM Cost & Return Analyses with the current record-high calf prices, economic performance on ranches today is quite good — but not as favorable as projected (Figure 3). Gross income on the 2004 herds analyzed is averaging $566/cow while total production cost averaged $458/cow — $100/cow higher than the Northern Plains average for 427 herds in 1999. Earned net income for these 2004 herds is averaging $108/cow, which is also below my projections.
Unit cost of producing a hundredweight of calf (UCOP) is averaging $112 for my 2004 herds — $20 higher than expected. As UCOP is a ratio of pounds of calf produced to total production costs, it may surprise you to learn it's “the missing pounds of calves weaned” that's driving up average UCOP.
All six of these ranchers have no herd performance management system, which results in sub-optimal levels of production. I'm convinced a good herd performance records system would do wonders for each of these herd managers.
Missed profit opportunities
Most ranchers continue to leave money on the table by missed profit opportunities. Two of the six ranches analyzed have high numbers of cows open. In times of high prices, open cows are a huge missed profit opportunity.
Missed profit opportunities are just as devastating to profits as high production costs, as both result is lower overall ranch profits. As cattle-price volatility has grown in recent years, management as usual is generating more and more costly missed profit opportunities.
It cost these ranchers 82¢ on average to produce $1 of gross income in 2004. That left a profit margin of 18¢ for each $1 of gross income produced. From this profit margin must come family living, debt principal payments, and capital purchases (that new pickup).
The herds' profit margins range from -3¢ to +57¢/lb. of calf weaned. Profit margin is a reasonable proxy for economic efficiency of a beef cow herd. Producing pounds of calf weaned is one thing, producing those pounds with economic efficiency is another thing.
For a benchmarking perspective, Figure 4 presents the cost of producing $1 of gross income for 300+ Northern Plains ranchers spread over the first eight years of the current beef price cycle (1996-2003). The right-most column is the average data from my last six herds analyzed in 2004 for their production of 2004 calves.
The first three columns on the left in Figure 4 illustrate the tough 1996-1998 period. These were the current cycle's low calf-price years, so low it cost these ranchers $1 to generate each $1 of gross income.
Things have changed. High calf prices the last two years have helped generate lower costs of producing $1 worth of gross income for 2003 and 2004.
The average cost of production/cow for my 2004 herds was $40/cow above the average of the 310 herds summarized for 2003. I expect cost of production to again rise during these good times. If so, these times may not be as good as earlier implied.
Are costs increasing?
My Integrated Resource Management Databank clearly documents that when cattle prices trend down, ranchers cut production costs. This would suggest then that when prices go up, ranchers tend to increase production costs by making those delayed capital purchases.
As ranchers continually remind me how their costs go up each year, it motivated me to review the University of Minnesota's large Northern Plains data set for 1996-2003, which represents 3,064 ranch years. That data suggests costs aren't necessarily going up each year, but there are distinct multi-year trends.
Figure 5 shows costs per cow actually trended down 1997-2000. But, since 2000, costs per cow have trended up. My analysis suggests costs per cow from 2000-2003 trended up by $12/cow/year.
Figure 6 integrates this calculated $12 upward trend line into a set of projected costs per cow through the rest of the current beef price cycle. This suggests production costs per cow is entering a new and higher plateau, and production costs could approach $500/cow by the end of this price cycle.
Perhaps the good times I referred to earlier won't be as good as implied, with the rest of this price cycle proving more typical of the last two cycles.
Revised profit projections
By combining Figure 6’s new cost plateau with the new price plateau discussed in Figure 1, I've revised my long-run profit projections (Figure 7). The profit projections are lower but still exceed profits seen in the first half of this beef price cycle.
Yes, I still think there are good times ahead for well-managed herds. Now, if we could just get every beef cow producer to manage for these good times.
Harlan Hughes is a North Dakota State University professor emeritus. He lives in Laramie, WY. Reach him at 701/238-9607 or [email protected].