During the past several weeks, Kansas Farm Management Data (KFMA) has been highlighted as it relates to cowherd trends and average costs versus returns. The KFMA data is especially useful being it’s one of the largest programs in the country and simultaneously comprised of mostly mid-size operations. And lastly, it’s a long-running program with excellent consistency over time, thereby providing a good handle on the real trends occurring within participant operations.
For all types of enterprises, KFMA provides a breakdown of operational performance based on profitability; that is, the operations are categorized into thirds according to their comparative position of profitability. This week’s graph highlights the difference between operations based on those rankings with respect to return to management.
Overwhelmingly, annual cow costs are the single largest contributor to the differences between profit tiers – that’s because there’s generally very little difference in terms of sales price and overall revenue among the respective groups. Between 2004 and 2018 (15 years of data), the average cow cost was $758, $870, and $1,056 for the top, middle and low profit groups, respectively. That represents nearly a $300 per cow difference between the high and low categories.
As noted previously, the total revenue variation is comparatively small—an average of only about $50 per cow over time. The outcome being that costs are the overwhelming driver when it comes to explaining profitability.
With that in mind, the differences in return to management are significant. The high-profit group has averaged an annual return of about $70 per cow during the past 15 years. Meanwhile, the middle-third and lower-third groups have experienced negative returns to management: -$159 and -$451 per cow, respectively.
Looking at it from a longer-run perspective is even more dramatic. The low-profit producers average herd size during the past 15 years is 95 cows; that size herd with an average loss of $451 per cow per year totals to a negative return to management of nearly $640,000. That’s a significant loss of equity over time. Meanwhile, the top tier generated positive returns to management totaling nearly $170,000—a difference in excess of $800,000!
What are doing to monitor your operation’s profitability? Are you carefully tracking your costs and benchmarking your financial performance in order to make some meaningful comparisons?
Speer serves as an industry consultant and is based in Bowling Green, Ky. Contact him at [email protected]