What's The Future For Small Guys?

Whether you run 10 cows or 10,000, concern about your future in the business has likely crossed your mind. With the perception that the trend is toward fewer, larger operations, what does that mean for small producers?In an industry where 80% of the nation's calf crop comes from operations of less than 50 cows, it's hard to imagine that numerous business opportunities don't exist for this group. And

Whether you run 10 cows or 10,000, concern about your future in the business has likely crossed your mind. With the perception that the trend is toward fewer, larger operations, what does that mean for small producers?

In an industry where 80% of the nation's calf crop comes from operations of less than 50 cows, it's hard to imagine that numerous business opportunities don't exist for this group. And a lot of folks agree, particularly for smaller operators who know production costs, understand genetic improvement and are serious about contributing to a consistent, quality beef supply.

"A lot the nation's beef supply comes from the smaller herd operators," says Patsy Houghton, manager of Heartland Cattle Co., McCook, NE. "A good portion of these are striving to improve genetics and profitability while sending a quality product through the supply chain."

Smaller herd owners don't always produce lower-quality cattle, nor do they always produce the highest-quality cattle. The same goes for larger operators. Overall, the percentage in each category is about the same, says Rodney Jones, Extension livestock production economist at Kansas State University.

"There's no 'set-in-stone' definition of a small producer," Jones says. "From an economic standpoint, I consider about 50 head of cows to be a smaller operation, and less than 150 cows to be a part-time operation."

Economics sort out good producers from bad ones and will continue to do so, he says. Good producers on average, he adds, are profitable over the long haul, responding to economic signals and changing to remain profitable.

"If there is such a thing, 'bad' producers are consistently unprofitable and subsidize the cow/calf operation with old equity, off-farm income or income from other farm enterprises," Jones says. "They don't respond to economic signals and are slow to change production practices."

Jones says research confirms a huge difference in the cost of production in the cow/calf sector. It's not uncommon to see ranges of $300/cow/year from low cost to high cost.

"This translates to an approximate range of 60 cents to $1.20 to produce a pound of weaned calf," he says. "This isn't tied to the size of operation, either. Research reveals a small degree of economies of scale in cow/calf production, but the magnitude isn't as large as other enterprises."

The issue isn't "how big am I?" but "how cost efficient am I?" Jones says. "The economies of size findings are somewhat self selecting. Could it be that large producers aren't necessarily low-cost because they're large, but rather their operations grew because they are low-cost operators?"

Know Your Costs Jones says the most important piece of information about an operation is unit cost of production or cost per pound of weaned calf. That summarizes all production and cost information into one standardized measure, plus it accounts for production problems and cost problems.

"Before you can evaluate the merits of any marketing option or change in production practices, you've got to know these figures and understand the long-term viability of the options you consider," Jones adds.

He says several state data sets reveal costs savings of more than $100/cow, once all costs are known. And, it's a goal that's realistic and achievable in many instances. This translates to about 20 cents/lb. of weaned calf.

"Measuring costs is simply a matter of enterprise analysis or looking at the profitability of the cow/calf operation separate from the entire farm," he says.

Jones says to get the full benefit of measuring and benchmarking costs, follow the Standardized Performance Analysis (SPA) guidelines established for:

* measuring production,

* accounting for inventories,

* documenting costs and

* defining production and fiscal years.

These guidelines have been in place for several years, so if your analysis is consistent with them, it will produce production and financial measurements that can be compared across many operations.

"Don't go halfway," Jones warns. "Production benchmarks without financial benchmarks are dangerous. It's easy to go halfway and only calculate the production measures to compare to existing benchmarks. This leads to the trap of striving for high production without considering the costs. Always look at the production and the financial considerations within the SPA framework."

Timing for getting costs under control couldn't be better, according to Harlan Hughes, an Extension economist with North Dakota State University.

"In North Dakota SPA data for 1997, the production cost difference between our high-cost producers and low-cost producers was $46 per cwt.," hesays. "Yet, people will spend days and weeks shopping alliances hoping to gain $4 and $5 per cwt. The big payoff is in controlling costs, but most of us don't want to deal with it.

"However, with cattle prices trending upward in the next two to three years, controlling costs means you can increase profit potential even more," he says.

Genetics Is Another Critical Area Another critical area that offers long-term solutions is genetics, Houghton says. Consistent and uniform genetics doesn't mean everybody has to produce the same thing - far from it, she adds.

"Different people want different things for different reasons and there are a number of niches out there. If you're talking uniformity, a producer must set goals, then strive to produce that product. If the goal is low Choice, Yield Grade 1 and 2 product, don't select the highest marbling bulls, but don't ignore marbling either. Pay more attention to cutability," she says.

Goal setting applies to producers of all size herds, Houghton adds. Rather than reproduce maternal genetics, which is more practical with larger numbers, a smaller operator can produce terminal cross cattle to go into meat production and achieve genetic uniformity more quickly and economically by buying the right replacement heifers and bulls or semen.

In addition to genetics, Houghton says that Total Quality Management (TQM) practices add value from birth to harvest.

"Adding value should be done first and foremost at the calf or genetics level," she says. "Certainly there needs to be financial incentives for TQM practices, but sometimes we should do a specific thing because it's the right thing to do.

"One low-cost procedure is early weaning," Houghton says. "This let's you take cows into winter at higher body condition scores. It also reduces cow costs and let's them enter calving in better condition."

And, if you're striving for uniformity of production and genetics, Houghton says to move into short calving intervals to wean calves of similar size. This simplifies all management, health, feeding and marketing programs.

Cow management should be a part of the plan, too, Houghton says. She recommends separating two- and three-year-old cows from mature cows to increase the rebreeding rate. Also, provide the best feed resources for the young ones and don't overfeed older ones.

Commodity Or Added Value? So, your genetics are in order, production costs are under control and TQM is an everyday practice. How should you sell - a commodity system or value-added or grid system?

"The advantages or disadvantages of targeting a commodity vs. a quality market depend on the individual situation," Jones says. "In an ideal world, the higher-quality product will be rewarded with a price premium. We're seeing those market alternatives develop and it may or may not cost more to produce the upper-end product.

"It's going to take a detailed analysis to answer this question. The commodity product may be produced at a lower cost and receive a fair compensation in some instances. Or, it may be that a premium can recoup additional costs of producing higher-end carcasses. Each producer must determine where his operation fits within our current system."

One way to make the decision is to retain some level of ownership on your cattle.

"Human nature is such that if you don't retain a financial stake, your interest level is diminished as to how that product goes all the way through the system," Houghton says. "And, if you don't have the interest in following that product all the way through, you won't make progress."

Jones paints a similar picture.

"Any serious producer will know costs, manage costs and understand how cost structure must be integrated with whatever marketing alternative is chosen or he won't survive. That, more than size of operation, contributes more to ongoing viability than anything else."

Profitability isn't the size of margins - it's the return to equity, says James McGrann, Texas A&M University Extension economist. If your herd isn't contributing to equity, consider additional measures to lower production costs.

"This is more about land stewardship and keeping forage at optimum levels," McGrann says. "It keeps pastures in better condition and lowers supplemental feed costs. With grazing and feed costs being 40% of total costs, any management practice that lowers this is a benefit."

In addition, he recommends producers:

1 Minimize machinery investment.

2 Maintain separate accounts for a cow operation and keep close track of expenses in those separate accounts.

3 Target to keep costs under $350 to $400/cow. This includes production, cash costs, depreciation, labor and management costs.

4 Buy replacements rather than raise.

5 Be considerate of what you put into the marketplace.

McGrann says Texas Standardized Performance Analysis (SPA) data shows that cost of production is $180/cow less in top herds than in low net income herds. Table 1 shows variations in herd size costs and opportunities to lower costs.

"All herds, irrespective of their size, can lower the cost of production," McGrann says.