What determines profitability in a cow-calf operation? More than price paid for calves, more than weaning weight, more than any other factor, cost management determines the difference between high and low-profit operations.
That’s the result of a study by Kevin Dhuyvetter, Kansas State University ag economist, that looked at the financial performance of 88 ranches that are part of the Kansas Farm Management Association Enterprise Analysis.
The differences were stark. High-profit operations had about a $250/cow advantage over low-profit farms and a $119 advantage over the mid-profit operations, Dhuyvetter says in his analysis. In fact, 72.4% of the average difference in net return to management between high- and low-profit operations is due to cost differences. The remaining 27.6% is due to gross income/cow, part of which is because high-profit operators tend to receive higher prices for their calves and/or that higher-profit operations tend to wean heavier calves.
Bottom line – high-profit operations had a cost advantage in every cost category compared with low-profit operations.
As any cattleman knows, however, many of the factors that contribute to profit and loss are beyond control. “Given that factors at the macro level – interest rates, fuel and feed prices, trade policies and consumer demand – are basically uncontrollable by producers, it stands to reason that variability of returns over time is inherent to the industry,” Dhuyvetter says.
However, even in the bad years, producers who are able to manage costs tend to fare better. The variability across producers at a point in time is much larger than the variability over time, he says. “In other words, even in the ‘good years,’ some producers are losing money and even in the ‘bad years,’ some producers are making money.”
So, while numerous factors beyond the producers’ control impact the absolute level of profitability, producers’ management abilities impact their relative profitability. “In a competitive industry that is consolidating, such as production agriculture, relative profitability will dictate which producers will remain in business in the long run,” Dhuyvetter says.
In looking at the cost side of the equation, feed costs represent almost half of the total costs for an operation. However, Dhuyvetter says managing non-feed costs is important as some of the operations in the top third of the analysis have higher feed costs than some of the bottom third operations.
Generally, larger operations tend to have lower costs/cow. That was particularly true in some of the other cost categories, such as labor, machinery and depreciation, where larger operations were able to spread those fixed costs over more animals.
“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,” Dhuyvetter says.
“In the data analyzed, economies of size exist such that larger operations tend to have lower costs and hence are more profitable than smaller operations. However, it’s important to point out that being a large operator doesn’t guarantee low costs and high profits, as a number of mid-sized to smaller operations were competitive.”
To read the complete report, go to www.agmanager.info/livestock/budgets/production/beef/Cow-calf_EnterpriseAnalysis%28Jun2011%29.pdf