Managing a profit into beef cows without detailed management data is becoming increasingly difficult. Inflating production costs tend to negate much of the profit potential for many of today's ranchers, despite current record cattle prices.
My studies suggest that since 1997, costs have risen $14/cow/year, or $112/cow over the last eight years. If you've suffered a drought sometime since 2000, your costs inflated even more.
Increasing your management intensity is effective in combating cost inflation. Let's look at the value of intensified management provided by my 1999 Northern Plains IRM Benchmark Herds.
In this economic analysis, “worst” and “best” are defined by profit/cow, with “profit” being the value added by the beef cow herd to a producer's family resources. So, what did these cow herds contribute to family resources?
The answer is defined as “earned-net-return to the unpaid family and operator labor, management and equity capital.” Rather than use this long term, I will use the word “profit.” When you see “profit,” think “earned-net-returns.”
Average weaning weight (AWW) for these benchmark herds ranged from 476-715 lbs. Figure 1 presents these herds' AWW sorted from smallest to largest. The AWW for the worst three herds was 496 lbs., while the best three herds' AWW was 667 lbs. — a 34% difference.
Figure 2 sorts these benchmark herds by profit/cow, with averages ranging from $46-$281/cow. Profit for the worst three herds averaged $62/cow while the best three averaged $250/cow, a profit range of 403%.
Three key factors
Three key variables sorted the best 10% from the worst 10%. These are accrual-adjusted-gross-income/cow, winter feed costs/cow, and unit cost of producing a cwt. of calf (UCOP). Let's examine these three variables in order of statistical significance, starting with the most significant.
UCOP is calculated by dividing a herd's total production costs by total cwts. of calf produced. The equation is:
UCOP = Herd's total production costs/Cwts. of calf produced
In every analysis I've performed, UCOP has surfaced as the single most important variable determining profit/cow. UCOP gets its management power from the fact it's a ratio of economic costs to calf production pounds. Any factor impacting economic costs or pounds is included in this ratio.
Figure 3 presents a worst/best graph for UCOP by three profit groups. UCOP is highest for the three lowest profit herds, and lowest for the three highest profit herds. This suggests a significant trend relationship between UCOP and profit.
Statistically, UCOP explains 87% of herd-to-herd variation in per cow profits. Clearly, UCOP is the single most important variable sorting the worst 10% of herds from the best 10%.
Sadly, however, few ranchers calculate their herd's UCOP. This suggests ranchers are trying to run profitable beef cow herds without even measuring the single most important variable determining profitability.
Accrual adjusted gross income (AAGI). Figure 4 presents the AAGI relationship with profits per cow in a worst/best graphical format. The visible trend is confirmed by statistical analysis. Statistically, the AAGI variable alone explains 57% of herd-to-herd profit variation in the study herds.
Most beef producers' perception is gross income (thus, profits) is heavily determined by weaning weight (WW). This relationship, however, doesn't exist in any of my data sets, which suggests WW explains only 6% of herd-to-herd variation in profits.
Part of the answer to why ranchers perceive WW as the primary determinant of profit comes from studying the components of gross income. The gross income number for a beef cow herd comes from six sources — sale of steer calves, sale of heifers not held for replacement, as well as sale of cull cows, bulls, and open two-year-old heifers, plus inventory change.
WW, however, has no direct effect on heifers held for replacements, cull cows, cull bulls, cull heifers, or inventory adjustment. In fact, WW only affects two of the six sources of AAGI leading to tremendous slippage from WW to AAGI, and even more slippage from WW to profits. Statistically, WW explained only 7% of herd-to-herd variation in gross income for the study herds.
Ranchers must move beyond WW in their management programs. A good alternative would be to track AAGI.
Winter feed cost is the single biggest cost variable for these Northern Plains IRM Benchmark Herds, accounting for 40% of total production costs. Thus, just by their sheer magnitude, winter feed costs also are a key determinant of herd profits.
Figure 5 presents the worst/best graph for winter feed costs. Winter feed costs' relationship to profit isn't very visible from this graph. Statistically, winter feed cost alone only explained 9% of herd-to-herd variation in profits. Of the three variables identified in this study, winter feed costs is the least statistically significant. Still, its 40% share of all production costs warrants continual management attention.
I encourage ranchers to intensify their management systems as quickly as possible by including these three business measures in their beef management systems. If they aren't measured, they can't be managed.
Harlan Hughes is a North Dakota State University professor emeritus. He lives in Laramie, WY. Reach him at 701/238-9607 or [email protected].