Greg Lardy: Inflationary trends in cow production costs continue | TSLN.com

Greg Lardy: Inflationary trends in cow production costs continue

There has been a lot of interest in the feed grain market this growing season. The corn market has been driven higher by a number of factors, including: predictions of tight ending stocks; concern over widespread drought in Russia and the former Soviet republics; and speculation over whether or not EPA would recommend an increase in the percentage of ethanol used in blended fuels (this was officially announced on Wednesday, Oct. 13). Corn futures prices are up over $1 from their lows near the end of July. Along with the increase in the price of corn, we have seen pressure on feeder cattle markets.

The increase in corn prices will have direct and indirect effects at the cow-calf level. Continued pressure on feeder calf prices (in the absence of price increases for fed cattle) will drive feeder prices lower. In addition, and perhaps more of a concern in the long run, is the continued inflationary pressures on the costs to maintain a cow.

By some estimates, over 60 percent of the energy expenditures in beef cattle production are based on what we nutritionists term as maintenance costs. This is simply the nutrients necessary for an animal to survive. Compared to the swine and poultry industries, beef cattle have a much greater proportion of costs associated with maintenance. This puts the beef industry at a competitive disadvantage when it comes to feed costs. Consequently, when we see a general inflationary trend in feed costs, producers, or at least astute business managers, should sit up and take notice.

Table 1 shows the trends in feed and total costs for cow-calf producers enrolled in the North Dakota Farm Business Management Program. You can see that there have been inflationary pressures on both feed and total costs since 2003. Remarkably, these pressures were actually in place before everyone started getting excited about the price of corn! If one examines the relationship between feed and total costs more closely, you will notice that feed costs average 63 percent of total costs (varying between 60.6 and 65.3 percent over this data series).

The nationwide recession and resulting drop in crude oil prices, has helped ease the price escalation we faced in fuel and oil costs (Table 2). However, long term, one should probably expect that inflationary pressure to resume as the world economy begins to recover. We have an industry heavily dependent on indirect relationships with the price of crude oil. Inputs (especially inputs used in the feedlot sector) such as corn are now heavily tied to crude oil prices. In addition, we are heavily dependent on crude oil for transportation (e.g. diesel fuel) to get our product to market, to move feedstuffs, and to produce inputs used in feed production (e.g. use of natural gas to produce fertilizer).

The good news is that based on the data in the North Dakota Farm Business Management datasets, it is possible to manage these costs and improve profitability. For example, in 2009, the top 20 percent of the cow-calf operations in the dataset had net revenue of $73.25 per cow while the average operation in the dataset lost $12.85 per head. This phenomenon is not unique to this dataset and has been reported in many other similar datasets across the country.

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What does this mean for your operation? Based on the data from the North Dakota Farm Business Management group, there are ways to become more profitable. It requires a dedication to focusing on managing production, careful cost cutting, and improved revenue generation (better marketing). In order to do this, you must maintain enough records to know your cost of production and baseline productivity levels.

Do not become complacent about looking for opportunities to strategically reduce costs. In order to thrive in this business, one must constantly manage the cost and the revenue side in order to be successful.

There has been a lot of interest in the feed grain market this growing season. The corn market has been driven higher by a number of factors, including: predictions of tight ending stocks; concern over widespread drought in Russia and the former Soviet republics; and speculation over whether or not EPA would recommend an increase in the percentage of ethanol used in blended fuels (this was officially announced on Wednesday, Oct. 13). Corn futures prices are up over $1 from their lows near the end of July. Along with the increase in the price of corn, we have seen pressure on feeder cattle markets.

The increase in corn prices will have direct and indirect effects at the cow-calf level. Continued pressure on feeder calf prices (in the absence of price increases for fed cattle) will drive feeder prices lower. In addition, and perhaps more of a concern in the long run, is the continued inflationary pressures on the costs to maintain a cow.

By some estimates, over 60 percent of the energy expenditures in beef cattle production are based on what we nutritionists term as maintenance costs. This is simply the nutrients necessary for an animal to survive. Compared to the swine and poultry industries, beef cattle have a much greater proportion of costs associated with maintenance. This puts the beef industry at a competitive disadvantage when it comes to feed costs. Consequently, when we see a general inflationary trend in feed costs, producers, or at least astute business managers, should sit up and take notice.

Table 1 shows the trends in feed and total costs for cow-calf producers enrolled in the North Dakota Farm Business Management Program. You can see that there have been inflationary pressures on both feed and total costs since 2003. Remarkably, these pressures were actually in place before everyone started getting excited about the price of corn! If one examines the relationship between feed and total costs more closely, you will notice that feed costs average 63 percent of total costs (varying between 60.6 and 65.3 percent over this data series).

The nationwide recession and resulting drop in crude oil prices, has helped ease the price escalation we faced in fuel and oil costs (Table 2). However, long term, one should probably expect that inflationary pressure to resume as the world economy begins to recover. We have an industry heavily dependent on indirect relationships with the price of crude oil. Inputs (especially inputs used in the feedlot sector) such as corn are now heavily tied to crude oil prices. In addition, we are heavily dependent on crude oil for transportation (e.g. diesel fuel) to get our product to market, to move feedstuffs, and to produce inputs used in feed production (e.g. use of natural gas to produce fertilizer).

The good news is that based on the data in the North Dakota Farm Business Management datasets, it is possible to manage these costs and improve profitability. For example, in 2009, the top 20 percent of the cow-calf operations in the dataset had net revenue of $73.25 per cow while the average operation in the dataset lost $12.85 per head. This phenomenon is not unique to this dataset and has been reported in many other similar datasets across the country.

What does this mean for your operation? Based on the data from the North Dakota Farm Business Management group, there are ways to become more profitable. It requires a dedication to focusing on managing production, careful cost cutting, and improved revenue generation (better marketing). In order to do this, you must maintain enough records to know your cost of production and baseline productivity levels.

Do not become complacent about looking for opportunities to strategically reduce costs. In order to thrive in this business, one must constantly manage the cost and the revenue side in order to be successful.

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