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More Than Just Price Determines Cow-Calf Profitability

Pounds may drive revenue in the cattle business, but how those pounds appear in the marketplace, and when, determine the direction and degree.

“Although cattle producers can't affect the forces that drive the cattle market, they can control the factors that affect the premium and discounts that their calves can potentially obtain,” say authors of Kansas State University's (KSU) recently published “Factors Affecting Feeder Cattle Prices in Kansas and Missouri.”

The study by Kevin Dhuyvetter, Karl Harborth, Lee Schulz and Justin Waggoner encompassed 84,319 head of cattle sold as 8,200 feeder cattle lots at auction in Carthage, MO, and Dodge City, KS, during November and December of 2008 and March and April of 2009.

As in similar studies, KSU researchers found wide, additive differences for management and marketing attributes:

  • Breed was worth +$3.10/cwt. (Angus) to -10.86/cwt. (Longhorn), compared to the base value paid for Herefords.

  • Compared to red cattle, blacks brought $2.49/cwt. more.

  • Heavy-muscled cattle were worth $6.62/cwt. more than average-muscled peers.

  • Small-framed cattle brought $5.98/cwt. less than medium-muscled.

  • Horns brought a discount of $2.18/cwt.

  • Compared to cattle in moderate condition, those classified as very thin were worth $10.83/cwt. less; very fat cattle were worth $4.87 less.

  • Those classified as very full brought $4.02/cwt. less than cattle with average fill; very gaunt cattle were $3.60/cwt. less.

Now consider that domestic consumer beef demand will likely end 2009 at a level reminiscent of 1999-2000 when it started to trend upward after two decades of consecutive year-to-year declines. In fact, during the second week of December fed cattle in some parts of the nation sold for $78/cwt. That was only the second week since 2006 that they traded below $80, according to the Agricultural Marketing Service.

Though some economists claim the recession is over, others say the nation is in the beginning stages of an economic depression. Either way, it seems obvious that high unemployment will continue to make for lackluster beef prices.

Feedlots continue to wade through a flood of red ink, even though feed prices are lower than last year. Cattle supplies are historically tight, but continued feeding losses and anemic beef demand suggest feeders must lower prices further on the cattle they buy.

Of course, more than price determines cow-calf profitability.

In a separate KSU study, “Differences Between High, Medium and Low Profit Cow-Calf Producers: An Analysis of 2004-2008 Kansas Farm Management Association (KFMA) Cow-Calf Enterprise,” researchers Dhuyvetter and Michael Langemeier analyzed the profitability of KFMA-enrolled cow-calf producers.

“The variability across producers at a point in time is much larger than the variability over time,” the researchers explain. “This research suggests that while both production (weight) and price do impact profit, they are much less important in explaining differences between producers than costs.”

For 2004-2008, the average net return to management over total costs was -$152.20/cow. For the top third of producers it was +$15.05/cow; it was -$356.42 for the bottom third. The top third of the producers did have a 17% advantage in gross cattle income, but it was the costs that allowed them to show an average profit.

Compared to the bottom third of producers, the top third had 34% less total cost; 56% less depreciation cost; 46% less machinery cost; 44% less labor cost; 33% less interest cost; 21% less feed cost; 63% less “other” cost. Interestingly, the most profitable producers spent 2% more on cattle health than the least profitable.

“There is tremendous variability across producers, which means there is room for people to improve their relative situations,” conclude authors of the KSU study. “However, before one can improve their situation, they need to know where they stand relative to other producers. Thus, benchmarking and identifying one's strengths and weaknesses is the first step to deciding where to focus management efforts.”