This month, I’ll expand on the Northern Plains benchmark data I presented last month. I’ve stratified the data by net income per cow into the average of all the herds, as well as the averages of the low-profit 20% herds, and the high-profit 20% herds. I suggest readers compare their herd’s production and economic facts to these Northern Plains herds in order to identify your herd’s economic strengths and economic weaknesses.
Let’s start with gross income. Gross income is the sum of all income sources in the beef cow profit center. This includes the sale of steer and heifer calves, cull cows, cull bulls and open yearling heifers, as well as the inventory change over that business year. The inventory change can be either negative or positive. Thus, gross income per cow becomes an accrual-adjusted income per cow.
I recommend that asset values, including the market price of animals in the inventory, be locked in at their Jan. 1 values. This way, the inventory change reflects changing cattle numbers rather than changing asset values.
North Dakota Farm Business Management uses gross margin as the income measure, and cash sales are adjusted downward for animals purchased and animals transferred in. I’ve elected to use adjusted total gross income as the income measure, with the animal purchases and animals transferred in included on the cost side as replacement female costs. Both income methods are reported in Figure 1. The bottom line is the same for both accounting methodologies.
In 2012, these Northern Plains herds averaged $1,002/cow in adjusted total gross income (Figure 1). Beef calves sold averaged $214/cow, beef calves transferred out were $543/cow, and all cull sales were $160/cow. The inventory change was a positive $78/cow. Other income came to $7, providing an adjusted total gross income of $1,002/cow in these herds.
In the average benchmark group, 16% of this gross income came from cull sales, and almost 8% came from inventory change. This suggests that, on average, 24% of gross income came from non-calf sales.
How does your herd’s gross income compare to these benchmark numbers? Was your herd above or below these benchmark averages?
Benchmarking to a set of herd averages can offer considerable insight to your herd’s economic performance. Benchmarking against further stratification of the benchmark herds offers even more insight to your herd’s relative economic performance.
Gross income averaged $983/cow for the low-profit 20% herds, which is down 1.8% from the average. Meanwhile, gross income averaged $1,066/cow for the high-profit 20% herds. The high-profit herds generated an additional $64/cow gross income, for an increase of 6.4% over the herds’ average. In addition, the high-profit herds grossed 8.3%/cow more income than the low-profit herds.
Was there a production difference in the herd groups? The line of “Lbs. weaned/female exposed” shows the high-profit herds weaned more pounds of calf per female exposed.
So, based on these benchmarks, is your cowherd a high-income herd or a low-income herd?
Now let’s look at the benchmarks for the three different profit levels of these Northern Plains herds. Your herd’s position within the range of these three benchmark groups will provide insight into your herd’s economic efficiencies.
My recommended bottom line for a beef cow profit center is the earned returns to unpaid family labor, management and equity capital — the three resources that a ranch family contributes to the ranch business. On many ranches, unpaid labor is more than one person.
Let’s go to the bottom line on these benchmark herds labeled “Economic net returns/cow” in Figure 2. The earned average economic net return for these benchmark herds in 2012 was $171/cow. The averages ranged from a negative $35/cow for the low-profit herds to $347/cow for the high-profit herds — a difference of $382/cow!
The high-profit 20% herds earned 103% more for their unpaid labor, management and equity capital than the average of all the herds. Meanwhile, the low-profit 20% herds earned 120% less for their unpaid labor, management and equity capital. How can this be?
The average total economic cost for these benchmark herds was $831/cow. Production costs averaged $1,018/cow for the low-profit herds, and $719/cow for the high-profit herds — a difference of $299/cow.
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When compared to the average for the Northern Plains herds, the low-profit herds’ costs were 23% higher, while the high-profit herds’ costs were 14% lower than the average benchmark herds. Where would your herd fit in this range?
Space constraints prevent a discussion of each cost item, but I’ll summarize the costs into five categories to make my point:
Annual cattle feed costs made up of both summer grazing and winter feeding averaged $323/cow for these Northern Plains benchmark herds. Feed costs averaged $374/cow for the low-profit herds, and $299/cow for the high-profit herds — a difference of $75/cow.
Adding in the rest of the direct costs, the Northern Plains average benchmark for direct costs is $449/cow. This same number for the low-profit herds is $546/cow, and $403/cow for the high-profit herds — a difference of $143/cow.
For overhead costs, the benchmark average is $81/cow, with the low-profit herds averaging $94/cow, and the high-profit herds, $78/cow. That isn’t much of a difference.
The average replacement female costs for the Northern Plains benchmark herds was $301/cow in the January inventory. Low-profit herds averaged $376, and the high profit herds averaged $238. This is a difference of $138/cow.
- On average, it costs these benchmark herds 83¢ to produce $1 of gross income, a profit margin of 17%. However, it cost the low-profit herds $1.04 to produce each $1 of gross income (a negative 4% profit margin), and the high-profit herds 67¢ to produce each $1 of gross income (a profit margin of 33%).
Where does your herd fit with respect to these cost benchmarks? Figures 1 and 2 both have a blank column to benchmark your herd against these three sets of benchmark numbers. Where your herd’s benchmarks exceed the average and/or match the high-profit benchmarks suggests the strengths of your herd. Build a business plan to capitalize on these strengths.
Any category in which your herd is below average and/or approaches the low-profit herd’s benchmarks suggests that more management attention is needed. If you can capitalize on your herd’s strengths, and focus added management on your weaknesses, you should see profits rise in your beef cowherd.
Harlan Hughes is a North Dakota State University professor emeritus of economics. Contact him at 701-238-9607 or email@example.com.
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