Beef Cow Enterprise Profits Highly Variable
11/03/2009 01:33PM
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It is well known that economic returns to cow-calf producers fluctuate widely over time. Figure 1 shows return over variable costs, on a per cow basis, for Kansas Farm Management Association (KFMA) members that kept beef cow enterprise records from 1979 to 2008. The number of KFMA members that kept beef cow enterprise records varied from 93 to 258 over the 30-year period.
Average annual return over variable costs ranged from a low of -$71.52 per cow in 1995 to a high of $218.55 per cow in 2004, and averaged $63.06 over the entire time period. If the annual return over variable costs in Figure 1 are sorted into thirds, the average returns for the 10-year periods would be $150.65, $61.52, and -$22.99, for the top-, middle-, and bottom-periods, respectively. In other words, there is almost a $175 difference in the average return over variable costs per cow in the “good” years compared to the “bad” years.
The variability in returns over time is due to many factors, but one of the largest drivers is the cattle cycle. During “poor” return years, producers tend to reduce the size of the herd which then leads to shorter supplies in the future. These shorter supplies lead to higher prices, which lead to producers expanding their herds creating a larger supply resulting in lower prices (and the process starts over again). Cattle cycles are not perfectly predictable because factors other than price, such as forage availability, input costs, and operator age, also influence producers’ decisions to expand or contract their herds. Thus, it is difficult for producers to manage the variability depicted in Figure 1. Given this difficulty, it stands to reason that variability of returns over time is inherent to the industry.
Figure 2 shows similar data as figure 1 only it reflects return over total costs rather than return over variable costs. In addition to variable costs such as feed, fuel, repairs, and veterinarian expense; depreciation, real estate taxes, unpaid family and operator labor, and interest charge on assets have been included in the total cost. The average return over total costs was -$94.41 and ranged from -$239.75 to $68.21. Only four of the years exhibited a positive return over the 30-year period. Sorting the annual returns into thirds results in the following 10-year averages: -$3.35, -$88.31, and -$191.57, for the top-, middle-, and bottom-periods, respectively. There is almost a $190 difference in the average return over total costs per cow from the “good” years to the “bad” years. At first glance one might ask why anybody would remain in the cow-calf business if return over total cost is almost always negative. It is important to note that the value assigned to unpaid family and operator labor, and assets used in the total cost estimates reflect opportunity costs which vary significantly among operations.
Rather than trying to control the variability in Figures 1 and 2, many producers try to either receive a higher price through a quality enhancement strategy and/or minimize cost per pound of beef produced through a cost leadership strategy. To be successful in any business, it is extremely important for producers to benchmark their gross returns and costs with producers with similar operations. A quality enhancement strategy should lead to relatively higher gross returns while a cost leadership strategy should lead to a relatively lower cost structure.
To examine the competitiveness of individual producers, beef cow enterprises from KFMA members were divided into three profitability groups: high, middle, and low, based on the per cow return to management (return over total costs). To alleviate the problem of random differences in returns among producers in a given year, a multi-year average is used for each producer. Specifically, we examined the returns for any producer that had a minimum of three years of data over the 2004-2008 time period. Operations with an average selling weight of 700 pounds or greater were excluded from the analysis as this likely would represent operations that backgrounded their calves.
In addition to being excluded from the analysis because of insufficient data (i.e., less than three years of data), operations were also excluded if they had less than 10 cows, if they had no recorded production, if their cattle purchases were greater than 20 percent of their herd in any one year, or if their net sales (sales less purchases) of breeding stock were greater than 20 percent in any one year. After these “filters” were applied, there were 65 operations with multi-year average returns to analyze. These multi-year averages of individual producers’ returns should do a better job of characterizing profitability differences due to managerial abilities than looking at returns in a single year.
Returns and costs for the 65 operations sorted into the three profit categories are reported in Table 1. Also reported are the differences between the high- and low-third groups both in absolute and percentages. The top return group had a gross income per cow that was 17 percent higher than that of the bottom return group. Though calf price was similar, the top return group devoted more of their labor to livestock production, had a larger herd size, and produced slightly larger calves. In addition to having a higher gross return per cow, the top return group had a total cost per cow that was 34 percent lower than that of the bottom return group.
With the exception of veterinarian expense, there were large differences in per cow costs between the top and bottom return groups. The largest cost differences, in absolute dollars, were for feed ($71.47 difference), labor ($54.41 difference), and interest ($45.81 difference). It is important to note that the top return group had a positive net return to management (i.e., return over total costs) of $15.05 while the bottom return group had a loss of $345.42 per cow. The results in Table 1 indicate that it was possible for individual producers to have a gross return and cost advantage over their competitors. Furthermore, the results in Table 1 when compared with those in Figures 1 and 2 suggest that profitability differences between producers at a point in time are much larger than differences in average returns across time. Thus, knowing how you stack up against other producers is much more important than worrying about where we are at in the cattle cycle.
As indicated in the introduction of this article, there are many factors that impact the variability of returns for cow-calf producers. A second article, appearing in January, will further examine the factors impacting cost and profit differences among cow-calf producers. Specific factors examined will include herd size, calf weight, calf price, and the percentage of cost represented by labor and feed.
The complete summary of this data set “Differences between high, medium and low profit cow-calf producers” is available on line at: http://www.agmanager.info/livestock/budgets/production/default.asp .
Source: Kevin Dhuyvetter and Michael Langemeier, Agriculture Economics, Kansas State University Research and Extension