There is a clear difference between the most profitable cow-calf operations and those that are least profitable. And while efficiencies of size can help spread costs over more animals and improve profitability, that's not always true in practice. In fact, smaller, better-managed operations are often more profitable than larger operations.

Cow-calf operations examined through Standardized Performance Analysis (SPA) data collected by Texas A&M University show a huge difference between the top net income herds and the low net income herds. Agricultural economics professor James McGrann found the cost of production varied as much as $180 per cow between the most profitable herds and the least profitable herds in results of 215 Texas operations with 151,000 cows.

Results for 291 herds from southwestern states with 162,000 cows found a cost of production difference of nearly $100 per cow between the top net income quartile and the low net income quartile. This large difference in net income, for both the Texas and the southwest states, is also evident in the cost per hundredweight of calf weaned because top herds also are more productive, Dr. McGrann says.

"In the Texas herd analysis, unit cost of production of top producers is 48 percent of low net income herds, and in the southwest states, unit cost of production of top producers is 25 percent of low net income herds" he says. "To be cost competitive, producers need to strive to keep production costs under $350 per breeding cow."

In the Texas herds, cost of production for the high net income quartile was $311 per cow, while the low net income group had an average cost of production of $491 per cow. The best producers had unit cost of production per hundredweight of calf produced at $55. The low net income group was $114 per hundredweight of calf produced. Net income ranged from a positive $143 per cow for the high net income group, and a negative $164 for the low net income group.

"There are economies of size in cow-calf production," Dr. McGrann says. "But there is limited opportunity for making the cow-calf sector more competitive through increasing size. Just 1,000 operations, or less than 1 percent of the 131,000 cow-calf operations in Texas, have more than 500 cows."

The SPA data also reveals that cow-calf production is capital intensive (over $3,500 per cow for Texas operations) and produces a very low return on investment-under 2 percent. Dr. McGrann emphasizes that cow-calf enterprises cannot support debt that costs 8 percent to 10 percent.

He says this explains why over 90 percent of cowherds are small (less than 100 cows) and supported by non-cow-calf income. Top net income herds in the Texas data set earned nearly 8 percent return on investment, a competitive ROA.
All herds, Dr. McGrann says, regardless of size, can lower costs of production. Producers should focus on reducing grazing and feed costs as they account for 40 percent of total costs.

To become cost competitive, you must develop efficient grazing systems and reduce supplemental feed costs. A controlled breeding season that matches grazing production with cow nutritional requirements also is important to lowering your costs. And you should limit your investment in heavy metal items such as vehicles and machinery.