Techniques to curb cow-calf operation inputs

Few businesses have tighter profit margins than cow-calf operations, and with the rising costs of feed, fuel and labor, managing the financial side of a beef operation has never been more critical.

Dave Delaney, vice president and general manager of livestock and ranching operations for the King Ranch Institute for Ranch Management at the Texas A&M University-Kingsville, spoke recently on an Oklahoma State University Extension webinar about lowering the costs of a cow-calf enterprise. He said one of the first steps is to adopt a mindset to adapt and change to what is going on in the markets. Cow-calf operators have to juggle a number of elements that figure into their bottom line, which include costs, geography, climate, natural resources, size, and economies of scale, which can add up quickly.

“We have the highest investment per head and even though we’re profitable many or most years, we have the lowest return on investment in market value when the land is considered,” Delaney said. “We’re also land-based and family owned for over 93% of the operations, which adds further complexities to the equation.”

Additionally, Delaney said ranch property has risen steeply in price and part of the reason for that is not all landowners are profit motivated. Some of buyers are purchasing land and property as a hobby, not necessarily as a livelihood, which creates a challenge for profit-driven producers looking to expand. Additionally, the time it takes to breed females, calve out a herd, wean calves and bring those calves to market is so absorptive, it often puts producers in a bind as the beef prices change quickly, drought sets in and feed prices fluctuate, making it difficult for producers to pivot in their operations.

“We have lowest turnover of inventory and it takes us a year to produce and sell a calf, so we can’t respond quickly to market changes,” he said. “We see tremendous market demand right now, but due to the fact that packers and others have more leverage, that profitability is probably not equitable within the industry.”

Producers are only as successful as their record keeping

Delaney said one of his frustrations is when cow-calf producers say the cattle business is not profitable.

“I’ve been fortunate that in over 40 years, I’ve never managed a company that didn’t make a profit,” he explained. “I think one of the primary reasons is most of the companies I’ve worked for have had excellent record-keeping systems that helped make decisions. As our operations increase in size, locations, and complexities, and we diversify, I think that the need for better and more sustainable accounting systems increases. If you’re a small or part-time producer with 100 cows, you know what your leverage points are, but even in that situation I think some scrutiny over records is warranted.”

Although data is a friend in the cow-calf business, do not get so fixated on gathering more data than is appropriate.

“I’ve probably been guilty sometimes of collecting more data than I can use,” Delaney said. “You can measure too much. It’s necessary to understand the difference between minimizing versus managing costs.”

Delaney said one of the key pieces of information needed to properly manage a cow-calf enterprise is knowing the unit cost of production, which is highly dependent on fertility and growth.

“As you look at the formula for unit cost of production, it’s total cost of production divided by units produced,” he said. “You may have enough accounting systems in place for tax purposes, but if you can’t establish what your breakeven is when you sell cattle, you’re not going to make progress.”

He said one of the most useful benchmarks he has found within the cow-calf business is annual breeder costs, which is highly related to calf costs, both dollars per head and dollars per hundredweight. Additionally, he said one measurement that is undervalued is effective turnover rate on the profitability of a rancher.

“Given that 15 to 20% of the profit of most cow-calf operations come from selling salvage cows and bulls and whether you’re doing an accrual or cash basis accounting, the big difference is on the timing of the expense,” he said. “Anything you can do to increase that retention in the herd is extremely important.”

In Delaney’s experience, the weak point for most cow-calf enterprises is that producers tend to be really good stockmen, but not good bookkeepers.

“Small operations may not be keeping detailed monthly income statements, however, keeping a simple balance sheet can be an easy way to keep expenditures on the track to profitability,” he said. “Another thing that’s highly useful is starting the year with some kind of budget system for your cow-calf operation.”

He said many cow-calf operations don’t have good or accurate inventory systems, which are necessary to keep track of herd trends.

Recognizing high cow or calf loss early is the best way to solve an issue and prevent future deaths. Other management techniques can be employed to reduce overhead, such as sorting cattle out by nutritional requirements to prevent overfeeding and waste. Additionally, evaluating alternative feed stuffs to lower nutrition costs can equal large savings. Delaney said King Ranch’s primary way of increasing pasture productivity is to use cost efficient herbicide measures.

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“Obviously, the improvement is a lot cheaper than buying another acre,” he explained.

Depreciation is another topic addressed.

“What you invest in your replacement stock or how often you replace vehicles, has as much effect on depreciation as it does on any other cost,” he said.

Finally, Delaney warned producers not to be distracted by investing in fads, whether it is a popular breed at the time or a product.

“There’re a lot of ideas out there, but we should discipline ourselves and make sure any management program we implement is science-based, proven to some extent, and we use financially sound modeling that is positive toward cost of production.”

Lacey Vilhauer can be reached at 620-227-1871 or [email protected].