Considerations To Remain Profitable When Cattle Prices Decline

DR. ANDREW P. GRIFFITH

KNOXVILLE, TENN.
   When cattle prices are at historically high levels, being profitable in the cow-calf business is almost impossible. If anyone reading this article was not profitable in 2014 and 2015 then the reader either needs to take notes or the reader needs to pick up a new hobby such as master napkin folding. This is a respectable hobby for men, women and children alike.
   As the year progresses and most cattle producers are gearing up for hay season and breeding season, several production practices come to mind that influence the profitability of cow-calf operations. In order to evaluate costs, it may be beneficial to consider data from the Kansas Farm Management Association from 2010 to 2014 for cow-calf operations. This data is from operations that work closely with the association and is then compiled and analyzed by economists at Kansas State University. The data is analyzed based on profitability and categorized into attributes of the high one-third of profitability, the middle one-third, and the low one-third.
   Comparing the high profit and low profit operations, the high profit producers maintained on average 172 cows while the low profit producers maintained 117 cows. The high profit operations sold 0.924 calves per cow in the herd which is 2 percent higher than low profit operations. Similarly, high profit producers marketed calves at an average weight of 628 pounds which is 30 pounds heavier than the low profit producers. The marketing price for high profit producers was $1.90 per hundredweight higher than for the low profit producers which resulted in high profit producers generating $133.51 more in gross income per cow than low profit producers.
   It is first important to mention that only 32.2 percent of the difference in net returns between high profit and low profit producers was due to income. Regardless, what can be addressed on the income side to improve profitability? In this particular case, 12.1 percent ($16.15 per head) of the gross income difference between high profit and low profit producers was due to the number of calves sold per cow. This stresses the point of calving and weaning percentage. Open cows cost money and it pays to pregnancy check cows. The rest of the income difference is mainly due to marketing practices. The high profit producers were able to market calves weighing 30 pounds heavier than the low profit producers for $1.90 per hundredweight more. Thus, producers should evaluate marketing alternatives and timing to optimize the revenue side of the balance sheet.
   Though the size of the operation can impact profitability due to economies of size, the purpose of this exercise is to spur producers to evaluate their operation’s cost structure, management, and production practices impacting profitability. Based on this data 67.8 percent of the difference in net returns between high and low profit operations was due to cost differences. Thus, it would appear producers can make a larger impact on their net returns by improving cost management than by managing the sale side of the business.
   High profit producers had total costs that were $281.51 per head lower than the low profit farms. The biggest difference in costs was due to feed where low profit producers spent $131.52 more per cow on feed than high profit producers though low profit producers spent $17.65 less per cow on pasture costs. It is not necessarily possible to extrapolate much from the pasture and feed costs, but here are some things to consider. Mechanically harvested feedstuffs such as hay, grains, or grain by-products are almost always more expensive than pasture harvested by the animals. Thus, it may benefit producers to spend a little more on pasture in order to reduce the need for harvested feedstuffs.
   Depreciation and machinery costs were $71.75 per head higher for low profit producers than high profit producers. The difference is not unexpected considering there are fewer animals to spread those costs across for the lower profit producers who on average had smaller herds. Machinery and depreciation costs bring to light that many low profit operations have too much invested in equipment relative to the number of cows being raised. This is where economies of size come into play or where producers may want to consider liquidating some of their equipment. Does a cattle producer really need three tractors for 40 cows?
   In closing, the high profit producers’ net return to management averaged $81.62 per head from 2010 to 2014 while the low profit producers averaged -$333.40 per head. With these few things in mind, producers should evaluate where dollars are being spent and how changing those expenditures can impact profitability. ∆
   DR. ANDREW P. GRIFFITH: Associate Professor,  Department of Agricultural and Resource Economics, University of Tennessee