Controlling production costs

Now, more than ever, attention to controlling cost of production in your cow-calf enterprise is critically important to ensuring your continued profitability. Over the last four months we have seen a dramatic decline in prices for all classes of cattle. This decline in prices has been driven in large part by an increase in supply (feedlots feeding cattle much longer and to heavier weights) and a strong dollar which has caused a decline in exports. In addition, we are also clearly in the expansion phase of the cattle cycle as heifer retention is up and cow slaughter is down. These factors signal the absolute need to get focused on controlling production costs in order to remain profitable.

The good news is that this is possible, even under tough business conditions. Data collected by Dr. Barry Dunn certainly indicates that there are wide ranging differences in production costs on ranches in the northern Great Plains. Table 1 gives you a brief snapshot of some of the key profitability measures and how they vary from top to bottom. The take-home message from this data is that it is possible to make money in the cow-calf business under a variety of price scenarios. In fact, the profitability measures in high profit cowherds in his data set indicate that the cow-calf business can be very profitable.

Many people mistakenly confuse high productivity for high profitability. Dr. Dunn’s data indicate that pounds weaned per cow exposed is important, however, high profit and mid profit herds had the same pounds weaned per cow exposed, while low profit herds were lower. Measures of profitability (e.g. net income and return on assets) were remarkably higher for the high profit herds. The question you should be asking yourself is, “How did they do it?” The answer is that they did it with a combination of better marketing (improved revenue) and better cost control (lower total costs).

Over the years, I’ve had a chance to share this data set with a number of audiences across the region and one of the things I try to stress is that improving profitability is not about wholesale cost reduction. It involves a thoughtful analysis of what input costs you can cut without reducing production to the point where the cost reduction takes away more dollars in revenue than you saved with the cost reduction. This is where management becomes much more of an art and a skill that likely takes a number of years of experience to develop.

Another item that should strike you about the data in Table 1 is that the investment per cow is similar for the high profit and low profit herds while mid profit herds had substantially greater investment per cow. This again leads me to conclude that ensuring profitability in the future is going to be determined by who understands which costs to cut and which inputs are critical to the productivity of the operation. It also indicates that there are definitely some investments that have much higher rates of return than other investments. Again, the art of management is figuring out which of those investments to make!

So as we approach the end of the year, I encourage you to take some time to analyze your operation. Do you know your production costs? Do you have the records necessary to determine how profitable your operation is? If not, now is the time to start working on developing those records. With increasing pressure on margins, it will be more difficult to make a profit. Well-managed herds where production costs are known will have a much easier time deciding what costs to cut. Having the decision-making tools in place now will make the decisions easier and much more effective as we enter the expansion phase of the cattle cycle.

The complete reports on the data Dr. Dunn collected are available at:

http://www.bifconference.com/bif2002/BIFsymposium_pdfs/Dunn_02BIF.pdf

Greg Lardy is the head of the NDSU Animal Science Department.