My current price projections and associated economic analysis suggests that profits are finally returning to the ranch sector. I project decade-high ranch profits in the production of 2011 calves through weaning.
Decreasing beef cow numbers and increasing exports are the primary drivers. Lower beef cow numbers imply lower beef supplies down the road. Meanwhile, lower beef supplies and a strong export market should lead to continued strong beef export prices. And, strong export prices should lead to continued strong feeder-calf prices, despite record-high corn prices.
Should these projected high profits motivate ranchers to start expanding the nation’s beef cowherd, beef supply will drop even more as heifer retention increases. In summary, I believe we are in for another exciting time in the ranching sector.
Based on my study of past “booms” in the ranching sector, I suggest we could also see cost inflation recurring in the ranching sector. Two things generally trigger cost inflation in good times:
- In times of high calf prices, ranchers typically back off on cost control.
- As ranchers increase heifer retention and sell a lower percentage of calves born, the cost per calf sold, or more importantly the cost per hundredweight of calf sold, goes up. If a rancher doesn’t have a good handle on his production costs, this unit cost of production (UCOP) increase can easily go unnoticed.
The opportunity cost of not selling a weaned heifer during high-priced times is high. This high opportunity cost becomes part of the economic cost of that replacement heifer; therefore, heifers retained during high-priced times typically end up generating higher-cost replacement females. Heifers produced when prices are low, cost less to produce.
The beef cow sector is better equipped to manage this boom than ever before. We now have two decades of Integrated Resource Management (IRM) experience behind us. The goal of IRM was to integrate ranch-level production records and financial records into one management information system (Figure 1).
Herd performance is the economic foundation of any beef cowherd. Prior to the advent of IRM, we measured the growthiness of calves by “weight/day of age” and the “replacement rate” of the breeding herd. Overall management performance was measured by the average weaning weight of the calves produced (Figure 2); the bigger the weaning weight, the better.
In the 1980s, we added 100 lbs. to the average weaning weight of calves weaned. Clearly, we were able to produce bigger calves. The problem was that profits did not parallel weaning weights.The financial crisis of the early 1980s led cattlemen to seek help in managing for profit. In the late 1980s, industry leaders (private and public) came together and developed IRM. Thus, beef cow production, range management, animal health and financial management were integrated into one management system.
Financial records were combined with production records to monitor the economic progress of a ranching operation (Figure 3). The management goal was shifted from weaning weight to profit per cow (labeled “net/cow” in Figure 3).
With further research, we found profit was highly correlated with UCOP. The lower the UCOP, the higher the herd profit. Remember, UCOP and costs per cow are two different concepts. Cost per cow measures the cost of the factory, while UCOP measures the cost of the production from the factory. The profit margin was calf price minus UCOP.
This IRM approach led to the Standardized Performance Analysis (SPA) program now utilized across the nation. Regional databases are now being generated on a regular basis, with averages from these databases useable as standards for analyzing the production and economic performance of individual beef cowherds.
A rancher can routinely benchmark his herd against these database averages, thus identifying his operation’s bottlenecks to profit. As those production bottlenecks are removed, herd profit tends to go up – especially in good times.
So what are the lessons for today? During the 1990s, IRM specialists went from one rancher to the next analyzing individual beef cowherds. We were looking for the common denominator of high-profit herds. Was it the number of cows, calving date, size of cows, the breed of cow, or capital invested?
We found was that no one size of herd, calving date, size of cow or breed of cow was always the most profitable. Rather, we found “management intensity” was the common factor impacting cowherd profitability. Herd managers who utilized herd performance records and enterprise accounting tended to be more profitable.
The fundamental lesson was that as management intensity increased, UCOP tended to go down and individual herd profits go up. The key ingredient was management intensity.
Here are the five key IRM points learned in the 1990s that you can apply to the production of your 2011 calves:
- The common denominator of high-profit herds is intensive management.
- Herds with the biggest weaned calves were not the high-profit herds.
- Reproductive management must be based on the number of females exposed.
- Cattlemen must measure a factor in order to manage it.
- UCOP was the single, most important factor related to beef cow profits.