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The Importance Of UCOP

Here's how to determine your beef cow operation's economic unit cost of producing (UCOP) a hundredweight (cwt.) of calf.

Beef producers traditionally have focused their beef cow management attention on physical production traits. Typically, this has meant that weaning weights were the primary focus.

But economic analyses have confirmed that, while high production is important, it doesn't guarantee high profits. That's why astute beef cow producers recognize that beef-cow profits are determined by more than weaning weights.

Managers of high-profit herds are also focusing considerable management attention on the economic traits of their beef cow businesses. High production, coupled with a low unit cost of production (UCOP), is a sure recipe for achieving a high-profit beef cow herd.

Beef cow herd profit is determined by an equation of three critical components:

  • the cwt. of calf produced,
  • the price received for calves sold, and
  • the unit cost of UCOP.

The basic profit equation is: profit = cwt. (price - UCOP).

The first profit component (cwt.) is production oriented. The other two components are economics oriented.

Unit Cost Of Production

Statistical analysis of North Dakota's 1994 Integrated Resource Management (IRM) cooperator herds suggests that only 20% of the herd-to-herd variation in profits can be explained by weaning weights. Meanwhile, the cost of production explains most of the remaining 80%.

Further analysis suggests that UCOP, rather than costs of production per cow, plays a major role in determining beef cow profits. As we go through the next cattle cycle, beef producers must expand their management attention beyond weaning weights to include their herd's UCOP.

Table 1. Unit Costs Of Producing A Cwt. Of Calfa Based On Economic Analysis For Your Beef Cow Profit Center
$56 $62 $70
Low Cost Average Cost High Cost
aThe unit costs of production range presented are the averages for the low-cost ⅓ of North Dakota herds, average of all herds, and the average for the high-cost ⅓ of North Dakota herds producing 1999 calves.

While cost per cow has little management power to reflect a herd's productivity, UCOP takes both costs and production into account. UCOP is an index of total costs divided by total units of production. Production efficiency and economic efficiency are measured simultaneously by UCOP. UCOP's analytical power comes from taking all production costs and all units of physical production into account simultaneously.

During times of high cattle prices, producers should build a financial reserve. This requires calculating the herd's UCOP. The second step is to compare the herd's UCOP to a set of benchmark herds' average UCOP to find out if the herd being studied is a low- or high-cost herd.

For a high-cost producer, the third step in building a financial reserve is to lower the UCOP by increasing the herd's production efficiency and/or economic efficiency. Meanwhile, a low-cost producer needs to ensure that his operation remains low-cost, even in times of high prices. Economic survival in the next downturn may depend on the financial reserved built by being a low-cost producer during good times.

Managing Profit Centers

Rather than treating a farm or ranch business as a single unit, producers must divide their operations into profit centers. Each center is then treated as a stand-alone business. The key to enhancing overall business profits is to make each profit center stand on its own with its own profit-and-loss statement. Then, the profitable centers can be expanded and the losing centers culled.

A typical operation can be divided into profit centers for beef cows and backgrounding. The beef cows' profit center goes from conception to weaning, while backgrounding goes from weaning until selling as feeders (or transferring to a retained-ownership profit center). These two profit centers are two different entities, even though most ranchers usually consider them as one profit center. Other centers can include forage, pasture and cash grain.

The market value of the weaned calves is credited to the beef cow herd and entered as a cost to the backgrounding profit center. A critical question each producer must answer is: “Did I make my profit pre-weaning or post-weaning?” Pre-weaning profit is generated from the beef cows, while post-weaning profit is generated from backgrounding and/or retained ownership.

Pasture is also treated as a stand-alone profit center. Pasture grazing should be priced to the beef cow profit center at the going local pasture rental rate. The pasture profit center should then be credited with that same amount as income. By comparing your pasture income to your pasture costs, you will know if you are making any profit with the pasture profit center.

Homegrown forages fed to the beef cows should be priced into the beef cow profit center at the going market price (opportunity costs). Next, credit it to your forage profit center with the market value of the forage fed. Now you can determine if you are making any profit by raising forages.

Once you have several years of profit-or-loss statements for each profit center, you'll have a good feel for the changes needed to increase overall profits or reduce losses.

Once your UCOP is known, you can compare it to a set of benchmark herds represented by North Dakota's IRM cooperators' 1999 calf crop. These Northern Plains herds are primarily in North Dakota with a few in Minnesota and eastern Montana.

These benchmark herds were divided into three groups based on UCOP: low, high and average. The low costs ($56) represent the average of the low-cost ⅓ of the benchmark herds. The average costs ($62) represent the average of all of the 1999 Northern Plains benchmark herds. The high costs ($70) represent the average of the high-cost ⅓ of the benchmark herds (Table 1).

Keep in mind these benchmarks are group averages. Individual herd UCOP was much wider, ranging from a low of $38/cwt. to a high of $81/cwt. of calf produced.

Now Let's Calculate Your UCOP

UCOP plays a major role in determining overall profits from the beef cow herd. I encourage readers to calculate their herd's UCOP by using the following worksheets. In order to keep data input to a minimum, the worksheets have been designed just for the beef cow profit center, using a producer's previous year's production and economics figures.

This simplified worksheet is not intended to replace the more in-depth, computerized analyses available from the national IRM-Standardized Performance Analysis (IRM-SPA) and IRM-Financial and Reproductive Management System (IRM-FARMS), but to motivate producers to utilize those resources.

Section 1: Production Profile

The IRM-SPA Guideline suggests that reproductive performance of a beef cow herd needs to be based on females exposed to the bulls. The percent calf crop (Item I, Section 1) is based on the females exposed (Item C, Section 1). The guideline for calculating females exposed allows producers to subtract out those females that were tagged as culls before bull turnout. In addition, producers are to add in any bred females purchased or subtract out any bred/exposed females sold.

Section 1. Production Profile
A. Jan. 1 Number Of Beef Cows = _____ Head
B. Jan. 1 Inventory Of Replacement Heifer Calves = _____ Head
C. SPA Adjusted Females Exposed To Bull Last Year = _____ Head
D. Live Calves Born = _____ Head
E. Live Calves Weaned ____ Steers, ____ Heifers, ____Bulls = _____ Head
F. Number Of Cows Replaced = _____ Head
G. Number Of Cows That Died = _____ Head
H. Calves That Died = _____ Head
I. Percent Calf Crop (E/C) × 100 = _____ %
J. Replacement Rate (F/A) = _____ %
K. Cow Death Loss (G/A) = _____ %
L. Calf Death Loss (E/D) = _____ %

Producers should not subtract out cows because of lightweight calves, or cows that died, were culled for poor performance or are open. This final number, SPA Adjusted Females Exposed, is a primary number used in calculating reproductive performance of a cow herd.

Section 2: Gross Income

A beef cow profit center needs to take into account both cash and non-cash income. Cash income is cash generated at sale time, while calf sales are reflected in Items 1 and 2, Section 2. If you didn't actually sell the calves, value the steers and heifers not held back for breeding as if they had actually been sold at weaning.

The economic value of cull cows is the capital gains. A capital gain is the difference between the book value (purchase price minus depreciation taken to date) and the selling value of the cull cow. Capital gains can be both positive and negative.

Capital gains are also used to account for cull bulls, and is the difference between the book value and the cash value when sold.

The final component of the center's accrual-adjusted income is inventory change. This is calculated by subtracting the beginning inventory value from the ending value.

Totaling the six components of income generates the accrual-adjusted income for the beef cow profit center.

Since a beef cow profit center generates joint products such as steer calves, heifer calves and cull cows, calculating costs per cwt. of calves produced is difficult. The best procedure is to convert all income from the six different products into the equivalent cwts. of income from steer calves (Item 9, Section 2), referred to as cwts. of steer equivalents.

Dividing the combined gross income from all six products (Item 8, Section 2) by the price of steer calves (Item 1, Section 2) calculates the cwt. of steer equivalents. For example, if the total income is $500/cow and the price of steer calves is $98, then this $500 income equals the income from 5.10 cwts. of steer calves. The UCOP is then calculated with the 5.10 cwts. of steer equivalents. This UCOP can be compared directly to the market price of steer calves.

Section 2. Gross Income
Herd # Avg. wt. Amount Units Price Total
1. Steer Calves ______ ______ ____lbs. $______ $______
2. Heifer Calves ______ ______ ____lbs. $______ $______
3. Cull Cows ______ ______ ____lbs. $______ $______
4. Cull Rpl Heifers ______ ______ ____lbs. $______ $______
5. Cull Bulls ______ ______ ____lbs. $______ $______
6. Inventory change Beginning $______ Ending $______ Change = $______

7. Total Gross Income $______
8. Gross Income/Cow (Item 7/Item A) $______
9. Total Income/Cow Is Equal To How Many Cwts. Of Steer Income? $______
9a. Price Received Per Cwt. Of Steer Calf Sold $______

Section 3: Feed Cost

The SPA Guideline suggests a beef cow profit center should value farm-raised feeds at fair market value (opportunity costs). If local hay prices are $50/ton, then your cows should also “pay” $50 for that hay.

Section 3. Feed Cost
Herd # Per Cow Per Cwt.
12. Pasture — Going Rent ___Acre/Cow @ $____/Acre = $_____ = $_____
12a. Public Land Payment $_____/Herd ÷_____Cows = $_____ = $_____
12b. Aftermath Grazing $_____/Hd Day X_____Hd Day = $_____ = $_____
13. Pasture Maintenance $_____/Hd Day X_____Acre/Cow = $_____ = $_____
14. Hay [email protected] $_____ = $_____ = $_____
15. Grain _____/[email protected] $_____ = $_____ = $_____
16. Salt & Mineral [email protected] $_____ = $_____ = $____

16a. Total Feed Costs $____
16b. Total Feed Costs Per Cwt. Of Calf Sold $____

Pastureland is also to be charged to your beef cows at the going rental rates, including both deeded and rented pasture. Public land should be priced at actual cash cost. Aftermath grazing costs, if any, should also be included and is typically expressed on cost/cow/day basis.

Total feed costs/cwt. of calf sold is calculated by dividing the total feed costs per cow (Item 16a, Section 3) by the cwts. of steer equivalents (Item 9, Section 2).

Section 4: Livestock Costs

The only expenses that should be charged to the beef cow profit center are directly associated operational costs. This includes feeding, checking pastures and pumping water. However, when farm-raised feeds are priced to the beef cows at fair market value, production expenses for these feeds can't also be charged to the center. It is very easy to double account.

The cost of growing and breeding replacement heifers includes the period from weaning a heifer calf until a preg-checked heifer is transferred into the main cow herd. The market value of the weaned heifer calf isn't directly included because heifer calves held back for replacements were not also valued in the gross income (Section 2).

Heifer growing costs are prorated out to all cows by multiplying the heifers' growing costs with the replacement rate of the herd. If growing the replacement heifer costs $300 and your replacement rate is 15%, then a heifer replacement cost prorates to $45/cow.

Interest on borrowed capital should cover interest paid on the debt from the breeding herd and the building and equipment used by beef cows. Interest should not include farmland debt or farming machinery debt. Pastureland debt interest is put on its own separate line in Section 4 if pasture is charged at the going rate of the economic costs of the herd (see Item 25 above).

Section 4. Livestock Costs
Per Cow Per Cwt
17. Vet & Medicine $____/Hd $______ $______
18. Breeding $____/Hd $______ $______
19. Marketing $____/Hd $______ $______
20. Growing Costs Of Rpl Heifer _____%/Cow @ $____/Hd = $______ $______
21. Machinery & Equipment $____/Hd $______ $______
22. Other $____/Hd $______ $______
23. Interest On Operating Capital $____/Cow @ ____% = $______ $______
24. Interest On Borrowed Capital (Cows, Building & Equipment) $______ $______
25. Interest On Pasture Land Money Borrowed $xxxxxx

26. Total Livestock Costs ($/Cow) $______

26a. Returns Above Feed And Livestock Costs ($/cow) $______ $______
26b. Breakeven Price Per Cwt. To Cover Direct Costs $______

The bottom of Section 4 presents a direct cost summary of feed and livestock costs.

Section 5: Overhead Costs

Overhead costs are asset costs directly associated with the breeding herd. A common error is to charge all farming overhead costs (including machinery investment) to the profit center. This leads to double accounting when farm-raised feeds are also charged in at fair market value.

Overhead costs are estimated with some general farm management rules of thumb. The rules of thumb for depreciation, insurance, repairs, taxes and interest, also referred to as the DIRTI-5, are presented in Table 2 at right. Interest in the generalized DIRTI-5 is set to half of the going interest rate to adjust for market-value depreciation.

The interest is set to zero in this example because return-on-equity capital is part of the residual claimant in the bottom line. Due to property taxes, your state's DIRTI-5 for buildings could be higher than the example of North Dakota, which doesn't have property tax.

The DIRTI-5 for equipment includes breeding-cow overhead costs, which covers a 1% insurance charge on the investment value of the breeding herd. Your DIRTI-5 numbers may be different if your state has a property tax on building and/or equipment.

Section 5. Overhead Cost
Per Cow Per Cwt.
27. Breeding Herd Investment $_____/Herd @ 1.0 % $______ $______
28. Buildings (Beef Cows Only) $_____/Herd @ ___% $______ $______
29. Equipment (Beef Cows Only) $_____/Herd @ ___% $______ $______

30. Total Overhead Costs $______ $______

Section 6: UCOP Summary

This section summarizes the income and costs on a per-cow and per-cwt.-of-calf-produced (steer-equivalent) basis. Earned returns per cow are used to measure the ranch family's earned returns to labor, management, equity capital and unpaid family and operator.

The Per Cwt. column presents the unit cost of producing a cwt. of steer calves, and that UCOP becomes your breakeven cost of producing a cwt. of steer calves. By using the “steer-equivalent” procedure for calculating UCOP, your UCOP can be directly compared to the market price of steer calves.

Now, you can compare your UCOP with those from a set of benchmark herds, represented by North Dakota's IRM cooperators' 1999 calf crop, described earlier in this article. Which of the three groups — low, high or average — does your herd fall into?l

Table 2. DIRTI Factors For Capital Asset Costs (North Dakota)
Buildings Equipment Cows
Ours Yours Ours Yours Ours Yours
Depreciation 5% ____ 10% ____ ____
Interest 5.5% ____ 5% ____ 10% ____
Repairs 1% ____ 2% ____ ____
Taxesab ___% ____ ___% ____ ___% ____
Insurance 1% ____ 1% ____ 1% ____

DIRTI Factor 12% ____% 18% ____% 11% ____%
Excluding Interest 7% ____% 13% ____% 1% ____%
aLand taxes are charged to the crop/pasture profit centers and not to the cow herd.
bProperty taxes vary from state to state so this number is left blank for users of this form to enter in their own property tax numbers.
Section 6. Unit Cost Of Production Summary
Per Cow Per Cwt.
31. Total Income $______ $______
32. Total Costs $______ $______
33. Earned Returns To Unpaid Family & Operator Labor, Management & Equity Capital $______ $______

34. Breakeven Price/Cwt. Of Calf Sold To Cover All Costsa $______ $______
aBreakeven Steer Price = (total costs/cow,[32])/Cwts. Of Steer Equivalent Income, [9])