January 27, 2012
Production costs, rather than selling weight and price, were the most important contributors to profit differences between high- and low-profit cow-calf producers, according to Kansas State University economists.
Cow-calf cost and return records for the 2006-2010 period (Kansas Farm Management Association Enterprise Analysis) were divided into high-profitability operations (HPO), as well as medium and low (LPO) categories, based on annual net return to management (NRM). NRM is gross income minus total costs of production/cow.
HPO and LPO firms had an average NRM of $-75 and $-420, respectively, whereas annual return over variable costs were $117 and $-146/cow. The magnitude of these differences allowed economists to determine which production and management parameters account for the relative profitability differences between groups.
HPOs were larger (187 vs. 85 cows/herd), sold slightly heavier calves (587 vs. 573 lbs.), and allocated more labor to the livestock enterprise (47% vs. 32%) compared to LPOs. This may account for the slightly higher calf-selling price ($1.46/cwt.) and higher percentage of calves sold/cow (2%) for the HPOs. In total, HPOs generated $95/cow more income than LPOs.
Despite the production advantages, HPOs had a large cost advantage over LPOs, in all cost categories evaluated. Total annual production costs were $250/cow less for HPOs compared to LPOs. Almost ¾ of the NRM difference between HPO and LPO producers was due to cost-of-production differences. Total cost of production had a high negative correlation to profit (-0.82). High total costs lead to lower profits.
Feed costs, which accounted for nearly half of all total costs, were the single largest cost difference ($87/cow) between HPOs and LPOs. As feed costs increased, profit/cow decreased. There was a strong positive correlation between feed costs and total costs. While positive, the relationship between feed cost/cow and calf-selling weight wasn’t particularly strong.
Herd size and feed cost were also only weakly correlated, but larger herds did tend to have lower feed cost/cow. Overall, producers having a high percentage of their total costs as feed were more profitable.
One factor that was extremely important regarding profit and cost differences was producers’ management of non-feed costs. Those with a lower percentage of total costs as non-feed costs had lower total cost, resulting in greater profits.
Interest and labor ranked second and third in total cost/cow with the differences between HPOs and LPOs being $34 and $60, respectively. Machinery and depreciation were also major cost components with differences of $26 and $18/cow. Strong positive correlations between total cost and labor, depreciation and machinery occurred. Larger operations also tended to have an advantage in these categories.
Herd size favored the larger operations for profit as larger operators tended to have lower costs per cow for most cost categories. Being a large operator, however didn’t guarantee low costs and higher profits, as a number of mid-sized to smaller operations were competitive and profitable. Profit for larger herds increased up to about 400 cows and then began to decrease.
Producers who specialized more in the livestock enterprise relative to a crop enterprise tended to have lower costs and be more profitable.
Costs of production were much more important in explaining profit differences between producers than selling weight or price of calves. A great deal of variability exists among producers, which indicates room for improvement. Benchmarking against other producers to identify strengths and weaknesses is a big step to determining where to focus management efforts to improve profitability.
Cow-Calf Producer Profit: http://www.agmanager.info/livestock/budgets/production/beef/Cow-calf_EnterpriseAnalysis(Jun2011).pdf
Scott B. Laudert, Ph.D., is a beef cattle technical consultant and former Kansas State University Extension livestock specialist based in Woodland Park, CO. He can be reached at 719-660-4473.
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