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Management, cost and price key to relative profitability

What has more impact on the bottom line? Selling calves 10% lighter than expected, pregnancy rate declining by 10%, prices declining 10%, feed costs increasing by 10% or total expenses increasing by 10%?

Wes Ishmael

December 26, 2019

4 Min Read
Marketing cattle

Profit potential always depends at least partly on timing, be it seasonal, in the midst of a black swan event or relative to the cattle cycle.

For instance, annual returns per cow over variable costs averaged $74.01 between 1975 and 2018 for the cow-calf enterprises enrolled in the Kansas Farm Management Association (KFMA). Sorting data into the best-third, middle-third and worst-third years, the average returns for the periods are $183.33, $62.42, and −$24.48, respectively.

“In other words, there is almost a $208 difference in the average returns per cow in the ‘good’ years compared to the ‘bad’ years, in nominal terms,” say Kansas State University (KSU) researchers in “Differences Between High-, Medium- and Low-Profit Cow-Calf Producers: An Analysis of 2014-2018 Kansas Farm Management Association Cow-Calf Enterprise.” The KSU researchers are Whitney Bowman, Dustin Pendell and Kevin Herbel.

There’s the same sort of variation and magnitude when considering returns over total costs.

Yet, according to the KSU folks, “What is much more important is that the variability across producers at a point in time is much larger than the variability over time. In other words, even in the ‘good years’ some producers are losing money; even in the ‘bad years’ some producers are making money … It indicates there are management changes producers can make to seek to improve their operations.”

Related:Markets close out 2019 strong

By way of illustration, they looked at gross revenue and total costs per cow for 2014-18 time period, confined to KFMA participants with at least three years of data during that period.

Revenue per cow for producers in the top-third profit category was $962.61. That was $152.32 more than the lowest-third profit category and $41.03 more than producers in the middle-third category. The average revenue per cow across all operations was $897.83.

Average total cost was $1,046.53 per cow. At $902.08, total cost for the top category was $259.93 less than the least profitable and $174.69 less than those in the middle.

In terms of net return to management, the top third realized $60.53 per cow, compared to −$155.20 for the middle third and −$351.72 for the bottom third. The average across all operations was −$148.71.

“This analysis suggests that while both production [weight] and price do impact profit, they are much less important in explaining differences between producers than costs,” say KSU researchers.

With that said, price and managing price risk can play a larger role than some expect.

At this year’s KSU Beef Stocker Field Day, Brett Crosby of Custom Ag Solutions (CAS) asked participants what has more impact on the bottom line: selling calves 10% lighter than expected, pregnancy rate declining by 10%, prices declining 10%, feed costs increasing by 10% or total expenses increasing by 10%.

Related:Keeping the operation whole: Risk management tools for beef producers

It’s price.

“About every year, there is an opportunity to make a marketing decision that helps you capture the highest 20% of the price cycle,” Crosby says.

Suppose the range during a price cycle is $120 to $140 per cwt. Most years during the cycle, there’s a crack at locking in $135 — the upper 20% of the range.

Exploiting such opportunities was part of the impetus to Crosby and CAS working with KSU to develop beefbasis.com. This online tool is designed to estimate calf values based on the nearby CME Feeder Cattle futures contract, for calves of any weight, sex and frame, within 12 months, at a variety of locations around the country. More simply, it estimates basis and uses that to forecast prices.

“I use it to estimate the impact of price movements. It helps me understand my exposure to price risk,” Crosby explains. His family has ranched in Wyoming and Montana for five generations.

Beefbasis.com contains a number of tools, including a value of gain calculator, which Crosby often uses.

“I use it with my stockers, but also my calves. It helps me understand the best timing to look at marketing, and what kind of gain I should put on,” Crosby says.

“When we started this, all of our cattle that weighed more than 550 pounds, weaned in October — we’d always just put them in the feedlot to gain 2.5 pounds per day and then sell them when they weighed 700 to 800 pounds. When I looked at this and calculated rations for different rates of gain, I realized that I was money ahead feeding them to gain 1.25 pounds per day and market them at 650 pounds at the end of February.”

These and countless management decisions represent both opportunities and separation.

“While numerous factors beyond the producer’s control impact the absolute level of profitability, producers’ management abilities impact their relative profitability,” the KSU folks say. “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.”

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