Increasing economic efficiency is the key to increasing long-term beef cow profits. And, Integrated Resource Management (IRM) tools and techniques are the avenue to that improved economic efficiency.
Economic efficiency leads to increased beef cow profits in the good years and reduced financial stress in tough years. Right now — during the high-price years of this cattle cycle — is when ranchers should work to increase their cowherd's economic efficiency in order to build the financial reserve to carry them through the next set of tough years.
My Northern Plains IRM database illustrates the profit potential that comes from improved economic efficiency. In 1999, the last year in a decade of analyses, all the IRM herds analyzed were former IRM cooperators of one to seven years of participation. Half had been working on their economic efficiencies for five years or more.
These cooperators were highly economically efficient and had the lowest average unit cost of calf production ($62/cwt. of calf produced) of any year in the Northern Plains IRM Databank. They clearly demonstrated what can be accomplished through intensive beef cow business management.
The low-cost, one-third of these cooperators averaged $145 profit/cow on their 1999 calves. This is $84 more profit/cow than earned by the high-cost, one-third of the IRM cooperators, who averaged $61 profit/cow.
Profit here is defined as earned net returns to unpaid family and operator labor, management and equity capital. This 1999 data demonstrates that economic efficiency clearly does make a difference.
Our decade of working with IRM cooperators suggests that increasing the economic efficiency of a beef cowherd takes multiple years of focused, intensified management. My Northern Plains IRM Database shows that those beef farmers and ranchers who built a financial reserve during the last good times best survived the last downturn in beef prices.
Measuring Economic Efficiency
The primary measure of economic efficiency in a beef cowherd is the herd's unit cost of producing a hundredweight (UCOP) of calf. UCOP is a ratio of the herd's total production costs in the numerator to the 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 either the numerator or denominator in this ratio. It's all there.
Beef cow producers have long used production ratios as proxies to profits. The problem with these production ratios is that they aren't highly correlated with profit. UCOP is also a ratio but, as a key component of the profit equation, it's highly correlated with profits.
The first management step to increasing economic efficiency is to assess the herd's current economic efficiency. Several regional IRM management assessment systems are available. Contact your state Extension Service for the specific assessment system promoted in your state.
My experience suggests that one assessment system doesn't fit all. I personally offer an IRM assessment system in three different levels of management analyses — gold, silver and platinum. Gold is an introduction to the concept of measuring economic efficiency. Silver is the workhorse system for enhancing economic efficiency. Platinum is my advanced system used with beef cow managers already utilizing financial statements to manage their total farm or ranch businesses.
Professionals Can Be Vital
Agricultural professionals — bankers, veterinarians, agribusiness representatives, county Extension agents and others — can play a vital role in their clients' business survival. They need to talk to producers about the past decade's profit pattern. I project a similar profit pattern for the current decade.
North Dakota's Annual Farm Business Management Summaries illustrate the impact that the 1990s cattle cycle, and its related beef price cycle, had on beef cow profits (Figure 1). The 1990-93 years completed a seven-year series of record-high, beef cow earned net incomes (1987-1993) driven by the same seven-year, record-high, beef price series.
After this seven-year period, earned net income/cow decreased three consecutive years (1994-1996). After a 74% drop in 1994, average earned net returns went negative in 1995 and even more so in 1996.
Average earned net returns/beef cow turned up in 1997, fell in 1998 and increased in 1999 and 2000. In 2001, profits fell 30% due to Sept. 11 and Japan's problems with bovine spongiform encephalopathy (BSE).
Our data also suggest that profit margins shrink in each successive cattle cycle. With average profits projected to move upward again in 2002 and through 2003-04, producers should use this time to prepare themselves for the next downturn.
Harlan Hughes is a North Dakota State University professor emeritus. He lives in Laramie, WY, and can be reached at 701/238-9607 or [email protected].
Evaluating Market Alternatives For 2001 Calves
These planning price projections (Table 1) are based on both the futures market price and Western North Dakota sale barn prices for the current week. The price projections in Table 1 were used to evaluate six marketing alternatives for year 2001 calves shown in Table 2.
The “buy/sell margin” in Table 2 is the buying price of animals going into a lot subtracted from the selling price of animals coming out of the lot. Since selling price is normally less than purchase price, the buy/sell margin is normally negative. The negative buy/sell margin represents the marketing loss/cwt. on the purchase weight of the animals. The cost of gain (COG) represents the cost of the added weight while in the lot. Profit/head represents the combined marketing losses and profits from gain.
|Lbs.||Spring '01||Fall '01||Jan. '02||March '02||Spring '02*||Fall '02*|
|*Projected week of March 29, 2002|
|1. Sell at weaning||N/A||$0.70||$113|
|2. Bckg high ADG||-$14||$0.45||$7|
|3. Fin bckg steer||-$11||$0.48||-$27|
|4. Grow and finish||-$26||$0.40||$31|
|5. Steers on grass||-$10||$0.45||-$3|
|6. Fin grass steer||-$8||$0.46||$44|
|The six marketing alternatives evaluated here are: 1) selling 565-lb. calves at weaning, 2) backgrounding 565-800 lbs. sold after first of the year, 3) finishing backgrounded steers 800-1,200 lbs., 4) growing and finishing 565-1,175 lbs., 5) steers on grass 625-800 lbs., and 6) finishing grass steers 800-1,250 lbs. |
*Projected week of March 29, 2002