A deal you can't turn down

My last two articles introduced a basic profit equation for beef cow producers. I suggested the three key components of profit in a beef cowherd are hundredweights (cwt.) of calf produced, market price of calves sold and the unit cost of producing (UCOP) a cwt. calf. This is the profit equation: Profit = Cwts.(Price - UCOP)

This article focuses on the UCOP in this profit equation.

Even though most ranchers don't measure cost of production, my Integrated Resource Management (IRM) analyses suggest the cost of producing a cwt. of calf is all-critical in determining profits. My data also suggests weaning weight explains only 20% of the herd-to-herd variation in profits.

Cost of production, when linked to the level of production, goes a long way in explaining the remaining 80% of the herd-to-herd variation in profits. This link is best made through the UCOP ratio. If cattlemen will adopt the UCOP ratio and follow it during these times of high prices, the high profits will become even higher.

What is UCOP?

Unit cost of production (UCOP) = herd's total cost/total lbs. produced

UCOP is a ratio of all production costs associated with operating a beef cowherd placed in the numerator position, while the total pounds of calf produced is placed in the denominator (see tinted box below). This ratio gives the unit dollar cost of producing a cwt. of calf. Anything that you want to talk about is included either in the numerator or in the denominator.

Let's go one step further with this UCOP concept. Producers should always express their costs of production in the same unit that they sell their production.

To say it cost Northern Plains beef cow producers an average of $322 to run a cow in 1999, tells you nothing about the production level of those cows. A herd with the highest per-cow cost may, due to its higher production, have the highest profits. This is why I dislike seeing costs reported on a per-cow basis.

If I told you it cost Northern Plains beef cow producers an average of $62/cwt. of calf produced in 1999, what would you know? You now know something about their costs relative to their production.

By comparing this $62 UCOP with the $90 average Northern Plains' calf price in October 1999, we immediately know that these producers averaged a net return of $28/cwt. of calf raised. This figure is the return Northern Plains producers earned in exchange for their resources of unpaid family and operator labor, management and equity capital.

The beauty of UCOP comes in comparing it to the market price to generate a profit estimate for your herd. For instance, if you compare a $62 UCOP with my current $102 price projection for 2001 calves, Northern Plains herds could net $200/cow from their 2001 calves.

A Path To Cost Reduction

Cost identification leads to cost reduction. A producer who routinely thinks about his herd's UCOP tends to lower his costs through management actions. A producer who's unaware of his costs tends to increase his UCOP through his management actions.

The National Cattlemen's Beef Association launched a major educational program on production costs in the late 1980s. The centerpiece was the IRM Standardized Performance Analysis (IRM-SPA) Program. Many states have since formed state-level IRM-SPA educational programs focused on implementing the IRM-SPA Guidelines.

In the early 1990s, North Dakota Extension integrated the guidelines and North Dakota's Cow Herd Analysis Performance System (CHAPS) herd performance records into an IRM Herd Analyzer. The rest of that decade, Northern Plains beef cowherds were analyzed one herd at a time.

Even in retirement I am still analyzing herds. If you're interested, contact me at 701/238-9607 or [email protected].

Figure 1 summarizes the annual average UCOP for my Northern Plains IRM Cooperator herds for 1993-1999. It's clear that average UCOP changed as these producers went through the last cattle cycle.

Calf prices peaked in 1993 and worked dramatically lower into 1996. Fig. 1 illustrates that producers reduced costs as times got tougher. I had some cooperators who cut out all preventive medicine, while others cut bull expenditures in half during this time.

My biggest concern during the last cycle downturn was that producers would cut costs too far. Could a producer cut $1 in costs and reduce income by $2 with the net result of lowering net revenue even more?

My IRM data confirmed this was the case. In 1996, the year of the lowest calf prices, these IRM Cooperators experienced a UCOP increase. As the market price turned upward in 1997 and relieved some of the input pressure, 1997 also saw another increase.

UCOP turned down again in 1998 and 1999. I'm projecting that the increased heifer retention reported in the January 2001 USDA All-Cattle Inventory will increase UCOP on 2001 calves.

Institute cost control programs in the good times, not the bad, then annually measure your herd's UCOP and diligently control costs. Cattlemen who implement a UCOP ratio for their herds in times of high prices will reap a huge economic reward during these good times.

Others, without their herd's UCOP data, will try to convince me that production costs, in general, are continuing their ever-upward trend. That's something my data just does not support.

Harlan Hughes is a Professor Emeritus at North Dakota State University. Retired last spring, he is now based in Mankato, MN. Contact him at 701/238-9607 or [email protected].

Evaluating Market Alternatives For 2000 Calves

These planning price projections (Table 1) are based on both the futures market price and Western North Dakota sale barn prices for the current week. The price projections in Table 1 were used to evaluate five marketing alternatives for year 2000 calves shown in Table 2.

The “buy/sell margin” in Table 2 is the buying price of animals going into a lot subtracted from the selling price of animals coming out of the lot. Since selling price is normally less than purchase price, the buy/sell margin is normally negative. The negative buy/sell margin represents the marketing loss/cwt. on the purchase weight of the animals. The cost of gain (COG) represents the cost of the added weight while in the lot. Profit/head represents the combined marketing losses and profits from gain.