Managing beef cows for a profit, without detailed management data is very difficult and will get even more difficult as time progresses. Northern Plains Farm Business Management Summaries indicate profit margins for beef cows have declined with each successive cattle cycle. These successively decreasing profit margins are forcing those remaining in the beef cow business to intensify their management systems. Following is a management intensification situation that occurred in Northern Plains Integrated Resource Management (IRM) benchmark herds. These Northern Plains Benchmark Herds are all IRM Cooperators with two or more years of formal IRM cost-cutting experience. These benchmark herds will be used to illustrate key factors that distinguish the “best 10%” of beef cow herds from the “worst 10%.”

Defining “Worst” & “Best”

Since this is an economic analysis, it seems only logical to define “worst/best” by profit per cow. Profit is defined here as the value added by the beef cow herd to a producer=s resources. It is evident what a banker earns for his/her resources, what a feed dealer earns for his/her resources, etc. But, what did the producer and/or the farm family earn for their contributed resources? The answer to this question is “profit,” which is defined in this discussion as the earned-net-returns to the unpaid family and operator labor, management, and equity capital contributed to the beef cow herd.

Describing the 1999 IRM Benchmark Herds

Figure 1 presents the weaning weights of the1999 benchmark herds sorted by weaning weight. Average weaning weights for the benchmark herds ranged from 476 lb to 715 lb B a range of 239 lb. The average weaning weight of the “worst-three” herds was 496 lb and the average weaning weight of the “best-three” was 667 lb B an increase of 34%.

Figure 2 presents the profit per cow generated by these benchmark herds. Profit per cow for these benchmark herds ranged from $46 to $281/cow. Profit for the “worst-three” herds averaged $62/cow while profits for the “best-three” herds averaged $250/cow. Profits in the “best-three” herds were 403% of the profits in the “worst-three” herds. So, what production and economic factors distinguish the “worst 10%” herds’ profits from the “best 10%” herds’ profits?

Statistical Analysis Shows Three Key  Factors Sort “Best 10%”
From the “Worst 10%”

A statistical study suggests three variables distinguish the “best 10%” from the “worst 10%” of beef cow herds (listed in order of their statistical significance):

• Unit cost of producing a hundredweight of calf

• Accrual-adjusted-gross-income per cow

• Winter feed costs per cow

Unit Cost of Production

Unit cost of production (UCOP) is calculated by taking the herd=s total production costs and dividing by the total hundredweights of calf produced.¹ In every single analysis that I have performed on any of my annual IRM data sets, including this one, UCOP has surfaced as the single most important variable determining profits per cow.

Figure 3 presents UCOP for three profit groups. The left hand side presents the UCOP for the three-lowest profit herds. The right-hand side presents the UCOP for the three-highest profit herds. The UCOP for the three-middle profit herds are presented in the middle of the chart. UCOP is highest for the low-three profit group and lowest for the high-three profit group, suggesting a significant trend between UCOP and profit. Statistically, 87% of the herd-to-herd variation in per cow profit is explained by UCOP. Clearly, UCOP is the single most important variable sorting the “worst 10%” from the “best 10%” profitable herds.

The most challenging aspect of UCOP is that very few producers attempt to calculate their herd’s UCOP. Keep in mind, if something is not measured, it cannot be managed. Many producers are trying to run profitable beef cow herds without even managing the single most important variable determining profitability—UCOP.

¹Technically you need to divide by the cwts of steer equivalents. Cwts of steer equivalents is calculated by dividing accrual-adjusted-gross-income by the hundredweight price of steer calves. This will give the total gross income expressed in cwts of steer equivalents.

Accrual-Adjusted-Gross-Income

Figure 4 presents the accrual-adjusted-gross-income relationship with profit per cow for the three profit groups. Another clear trend is visible and is confirmed by statistical analysis. Statistically, the accrual-adjusted-gross-income variable alone explains 57% of the herd-to-herd profit variation in the study herds.

The perception of most producers is that gross income, and thus profits, is predominately determined by weaning weight. This strong relationship, however,  simply does not exist in this data . Rather the data suggest that only 6% of the herd-to-herd variation in profits is explained by weaning weights. Why is it that producers perceive weaning weight to be the primary determinant of profits, yet it is not confirmed with data? Part of the answer comes from studying the components of accrual-adjusted-gross-income. The gross income of a beef cow herd is derived from the sale of animals:

• Steer calves

• Heifers not held for replacement

• Cull cow

• Cull bulls

• Cull open 2-year-old heifers

• Inventory change

Weaning weight, however, has no direct income effect on heifers held for replacements, cull cows, cull bulls, cull two-year-old heifers, or inventory change. In fact, weaning weight only affects two of the six sources of gross income, leading to tremendous slippage from weaning weight to gross income and even more slippage from weaning weight to profits. Statistically, weaning weight explained only 7% of the herd-to-herd variation in accrual-adjusted-income for the study herds. Producers need to move beyond looking at weaning weights as a measure of profitability.

Winter Feed Costs

Winter feed cost is the single biggest cost variable for these Northern Plains IRM Benchmark Herds and accounted for 40% of total costs of production. As a result, winter feed cost is also a key determinant of herd profits.

Figure 5 illustrates winter feed costs for the three profit groups. The trend between winter feed costs and profits is not very visible from this graph. Upon closer examination, a slight drop in average winter feed costs for the high-three herds can be seen. Statistically, winter feed costs explained 9% of the herd-to-herd variation in profits. Of the three key variables identified in this study, winter feed cost is the least statistically significant. The shear magnitude of being 40% of all production costs, never-the-less, makes it a variable that warrants management attention.

Summary

The goal of this discussion was to determine what differentiates the “best 10%” of beef cow herds from the “worst 10%.” Economic profits defined as the earned net returns from unpaid family and operator labor, management, and equity capital distinguishes the best from the worst. The three variables listed previously account for 93% of the herd-to-herd variation in profits per cow. Unfortunately, many producers have not incorporated the needed measures into their management systems. If they do not measure it, they cannot manage it. Typically, the higher the management intensity, the higher the profits generated from beef cows. By measuring UCOP, accrual-adjusted-gross-income, and winter feeds costs, management steps can be initiated to improve profitability.