Pick up any newspaper these days and you’ll see similar stories. Consumers faced with skyrock-eting energy prices, declining real estate values, a shaky stock market and generally gloomy economic outlook are finding ways to cut back. They’re driving less, cooking more meals at home or skipping their morning cappuccino.
Beef producers face similar issues. With the dual challenge of higher input prices and declining cattle prices, ranch profitability in coming years will depend on strategic cost reduction, careful management and smart investment.
Barry Dunn, PhD, director of Texas A&M University’s King Ranch Institute for Ranch Management, points out that reducing production costs is not the only way to improve returns. Breakeven equals total costs divided by the total value of pounds of calf sold, and there are three ways to reduce breakevens.
One is to reduce costs, especially fixed costs, without reducing pounds produced. Another is to increase pounds without increasing costs such as feed. The third strategy, which Dunn says producers sometimes overlook, is to incur additional variable costs while increasing production even more.
Costs on the rise
Dunn says calf prices over the past few years actually caught people off guard, climbing higher and staying higher than most expected. That has been good for producers, he says. But while we’re all watching calf prices, escalation of costs for feed, labor, rent, energy, transportation and purchased land have combined to increase the cost of maintaining a beef cow more than some producers realize.
Dunn says although actual costs might vary between regions, the overall trend likely affects everyone. “We used to figure that on average it cost around $1 per day, or $360 per year, to maintain a beef cow,” he says. “Now the data show the average is closer to $560 per year.”
Dunn encourages producers to think in terms of returns to management rather than just in terms of cow costs. One useful measure for calculating returns is the cost per head of calf weaned. If the cost per cow is $560 per year, and weaning rate on the ranch is around 92 or 93 percent, the cost per weaned calf is around $600. A 500-pound calf selling for $120 per hundredweight just breaks even.
The news isn’t all bad. Domestic beef demand remains strong and growth in international demand has great potential for helping support U.S. cattle prices. Excess feeding capacity, as much as 25 percent excess according to Cattle-Fax, helps keep buyers in the market and supports feeder-cattle prices. So far, the jump in corn prices has not caused as much of a narrowing in the price spread between calves and fed cattle as we might expect based on historical trends.
Tighten the belt
While there are other ways to increase returns, many producers can benefit by cutting costs in some areas of their operations. In a Cattlemen’s College presentation at the 2008 Beef Industry Annual Convention, Cattle-Fax analysts listed the 11 habits of high-return producers (see sidebar). Not surprisingly, the first five habits relate to lower-than-average production costs.
Dunn says that in research conducted in South Dakota, his team tracked financial records and returns from 140 herds over several years. “We found that the most profitable ranches tended to share several common attributes,” he says. These are:
- Low levels of investment
- Average production
- Excellent marketing for their calves and cull cows
- Low costs, and thus low breakevens.
“If a ranch has high investments, high depreciation and overall high costs, they had better have very good production and marketing,” he says. To reduce your levels of investment, rent at least some of the assets you need. Use production systems that do not require expensive investments in depreciable assets.
Another step Dunn says can reduce costs is to minimize the portion of your production system dedicated to replacements. Replacements lose money for at least the first two to three years. “Longevity is an important trait in your cow herd, and the payoffs are higher levels of total production and lower expenses — both annual expenses and depreciation.” Rapid generation turnover, he notes, is only important for making genetic change through selection. “This is not a time for high replacement rates.”
Improvements in feed efficiency could become a critical strategy, reducing the cost of producing beef, says Mike John, a Missouri cow-calf producer and director of the MFA Health Track Beef Alliance based in Columbia, Mo. John also served as 2006 president of the NCBA.
Feed efficiency always has been an important consideration for feedyards, he says, but it has become even more critical at every state of production. Producers who have retained ownership or participated in value-based marketing chains have focused much of their genetic selection on carcass value. That still has merit, he says, but selecting for feed efficiency could become even more important in terms of profitability.
There are some cattle out there that can do it all, efficiently producing a high percentage of Choice, high-yielding carcasses, John says. But it could be that some high-quality carcasses come at too high a price based on feed efficiency.
Spend some to make some
“Anyone who is paying today’s higher prices for inputs without increasing their gross revenue is moving backward,” John says.
As noted earlier, sometimes increasing revenue requires spending money in some areas. “Increasing expenditures can actually lower costs if you think in terms of cost per unit of production, such as per pound of weaned calf,” Dunn says. “If a $20 expense results in 40 additional pounds of weaned calf, you come out ahead.” Examples include expenses for implants, preconditioning or better genetics.
Leslie Callahan, who operates Crossroads Cattle Company Ltd., an order-buying and cattle-trading operation in Austin, Texas, agrees. He specializes in trading yearlings and calves direct from producers across the country and says a rancher’s first priority should be on core management issues. “Focus on what makes profits,” he says, “such as heavier weaning weights and optimum marketing windows.”
He recommends investing in good health and nutrition programs, which can improve weaning weights, and documenting those practices to help ensure market access and prevent discounts at sale time.
Preconditioning has become an expected practice, he says. In-stead of thinking in terms of premiums for doing it, producers can expect discounts if they don’t. “I won’t bid on cattle unless they have some documented health background,” he says. “Health is the standard.”
On the other hand, he adds, desperate times call for desperate measures, and some buyers might be willing to take even higher risks then normal on undocumented calves. Buyers will purchase them at steep discounts, though, knowing there is higher risk of health and performance problems.
Also, adjusting production systems to allow keeping calves longer can give a producer more marketing options and the opportunity to sell more weight. High production cost in the feedyard will mean narrower price spreads between calves and yearlings. By this fall, we could even see a reverse of the typical price slide, with heavier cattle worth more per hundredweight than light calves. Cattle feeders this year will be looking for cattle they can put right into the feedlot rather than spending time with extended receiving or growing programs.
Producers in many areas, Callahan says, are understocked after dry years. If they have grass available this year, they could have an opportunity to keep at least some of their calves and sell them at yearling weights, or possibly add cattle, purchasing additional calves for a growing program.
Dunn agrees, explaining if it costs $400 per year to maintain a cow, and you produce 400 pounds of calf per cow exposed, your breakeven is $100 per hundredweight. If you can boost production up to 500 pounds of calf per cow exposed, breakeven is re-duced to $80 per hundredweight.
In addition to his order-buying business, Callahan operates a 450-cow operation with a cousin in Texas. He says his standard marketing strategy is to run most of the calves to yearling weights. “We sort off the heavy end and light end for sale after weaning in the fall and keep about 300 until January or February, selling them at 700 pounds instead of 500.”
The key is to increase productivity with existing resources at reasonable cost, Callahan says. Pay attention to details — the things that improve production such as weed control and sound grazing management. “After several years of strong profitability in cow-calf production, it would be easy for some producers to have become complacent, accepting some lost production. Now it’s time to tighten up.”
Dunn cautions that there are biological limits on how much anyone can increase production, at least cost-effectively. A 98 to 100 percent pregnancy rate could be possible, he says, but the price probably exceeds the benefits. In most production systems, a 92 or 93 percent pregnancy rate probably is reasonable. The same applies to weaning weights, where the cost of additional pounds eventually reaches a point of diminishing returns.
“In our studies,” Dunn says, “weaning weights have not changed much over time, but the percentage of calves weaned can vary significantly from one ranch to another. Improving weaning percentage by investing in bulls that provide better fertility, better cow nutrition and animal health could be a good opportunity for many producers to improve overall returns.”
Once you have cut costs and boosted productivity, another opportunity is to add value by differentiating your product. “Demand for cattle coming through verified health programs will grow,” John says, as feeders become less willing to take chances on animals that are more likely to get sick or have inadequate performance. Documentation of source, age, processes, health and performance history will become increasingly valuable. “We’re already seeing price spreads of more than $30 per head between lots of calves based on documentation, some as high as $65 per head, and those spreads will widen.”
Age and source verification will continue to add value even if trading partners such as Japan eliminate age restrictions for beef imports, John says. Demand for high-quality beef is growing, and age verification helps buyers target cattle for premium programs. Also, buyers will increasingly want, and pay for, source verification, and verifying age just seems like a natural component of any program that verifies source and any other production information.
Callahan says the actual value of any attribute depends on who’s bidding at the time, but records, and source and age verification all can add value. Producers, he adds, should take steps to participate in programs that help document their practices, which they can do at relatively low cost.
In their Cattlemen’s College presentation, Cattle-Fax analysts listed key value-added attributes, which they called the “stair steps to profitability.”
- Performance history from the feedlot and packer adds $2 to $5 per hundredweight.
- Certification of preconditioning and weaning programs adds $4 to $8 per hundredweight.
- Source and age verification adds $10 to $25 per hundredweight.
- Verification of production practices that qualify for natural or premium programs adds $3 to $7 per hundredweight.
It all comes back to flexibility and marketing options, Callahan says. The key to producers getting the most value in marketing is in giving themselves the most opportunities or marketing windows. A producer who has some flexibility as to sale dates, and who has documented practices such as source, age, health, nutrition and performance history, has the opportunity to find the best market and best price for his/her calves.
In a Cattlemen’s College presentation at the Beef Industry Annual Convention in February, Cattle-Fax analysts listed the “11 habits of high-return producers.” These are:
1. Below average annual cow costs.
2. Lower than average calf breakeven levels.
3. Lower feed costs.
4. Lower interest expense, less debt.
5. Lower general operating expenses.
6. Higher average weaning weights.
7. Higher conception rates.
8. More pounds weaned per cow exposed.
9. More high-quality bulls with good genetics.
10. Preventative herd-health programs.
11. High-quality pastures to maintain nutritional requirements of the cow.