Cost management influences cow/calf profits

By keeping detailed records, producers can know how to best manage costs in a market where they don't set prices.

Profitability in cow/calf production can vary widely, so knowing which practices help support an operation can be crucial for a beef producer.

Dustin Pendell, Kansas State University livestock economist and co-author of the "Analysis of 2010-2014 Kansas Farm Management Association Cow-Calf Enterprise," along with co-authors Youngjune Kim and Kevin Herbel, analyzed the differences among low-, medium- and high-profit cow/calf producers.

The report was written as an update to a similar publication that analyzed cow/calf enterprises for 2008-12, and data were compiled from available information on revenues and expenses from producers enrolled in the Kansas Farm Management Assn. (KFMA).

“We wanted to take a look again at the drivers and characteristics of producers who tend to be the most profitable,” Pendell said.

Keeping thorough records of costs and revenue is one of the best ways to control profitability, the analysis found.

In 2014, beef producers in Kansas saw their largest average annual return since 1975, at $589.50 per head, according to KFMA data. Six years earlier, in 2009, the average annual return was at its lowest in the past 40 years, at negative $76.40 per cow.

“What we saw in 2009 was the lowest inventory, and what we’re seeing now is that the cow/calf herds are being rebuilt,” Pendell said. “We’re starting to see the cattle numbers increase, but there are other factors that are contributing to the difference in average returns as well.”

Several factors account for the almost $670 difference in average return per cow between 2009 and 2014, he said. Along with cow/calf herds rebuilding in the past few years, decreases in beef demand in 2008-09, a widespread drought in 2012 and an increase in beef demand in 2014 all contributed to the fluctuations within a relatively short time span.

A high correlation exists between net returns over total costs and net returns over variable costs, according to Pendell. For instance, a medium-profit producer is likely to remain in the medium-profit category when all costs — not just variable costs — are factored in.

Using the KFMA data for returns over total costs during the past 40 years, he said six years had a positive (average) return, while “the other 34 years resulted in a negative return per cow.”

When only six years of the past 40 years are profitable, staying in business may be a challenge, according to Pendell.

“However, if you’re keeping records, that allows you to make better-informed management decisions,” he said. “If you’re able to make better-informed management decisions, hopefully in those bad years, you are in the positive.”

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Cost management is key

The purpose of the analysis was to break down the different factors for high-, medium- and low-profit cow/calf producers, Pendell said. Over a five-year span (2010-14), researchers examined the profitability of cow/calf enterprises, ranked them from highest to lowest profitability, divided them into thirds and analyzed the different practices of each group.

The highest-profit beef producers tended to allocate a higher percentage of their labor to livestock production than to crop production and tended to be more specialized. They also had larger herds, slightly heavier cows at selling time and generated 16% — or close to $134 — more revenue per head.

Since beef producers are price takers rather than price setters, profitability can be controlled best through cost management, Pendell added.

Two-thirds of the differences between net returns come from the costs; the remaining third comes from gross income, the economist said. When fixed costs are favorable for the producer in only six out of 40 years, that’s where the difference is made up.

“From a management standpoint, if producers track their records, they can use those records to figure out if there’s any opportunity for improvement, and that’s probably going to come on the cost side,” Pendell added.

Additionally, producers who specialized more in livestock production relative to crop production tended to have lower costs, although the reasons why need to be studied further, he said.

When data from 2015 become available, those will be added to the study, Pendell said.

“What we expect to see in the 2015 average net returns is probably not going to be as high as the 2014 returns, but we might see our second highest in the last 40 years,” he added.

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