| | The cow/calf business today seems to be a combination of good news and bad news. This may be the only thing that doesn’t change from year to year ...
On one hand, we expect that last fall’s strong calf prices will continue this fall. On the other hand, parts of the province are experiencing serious shortages of rainfall (and grazing), forcing producers to downsize herds, graze crops they originally intended to sell for cash, or both.
Events like this cause us to pause and ask, "how are we supposed to manage our way through these ever-changing conditions?" As the industry works through these events, three key themes come out.
1. Good information is the key to sound management decisions.
This includes:
- market outlook and marketing options
- knowing and using your own production costs in day-to-day production and business management
- how and what your peers and competitors are doing ... technologically, productively and financially.
2. "Management" is an integrated package.
Producers who monitor, control and keep a step ahead on productivity, markets and cost control perform better regarding:
- long term profitability
- cash flow & operational flexibility, and
- minimizing long term risk
"Integrated" also recognizes that the cow herd, as a profit center, works in conjunction with other farm enterprises.
3. Cow/calf production has evolved to a dynamic, cost control business.
Physiology defines the environment in which beef cows can be profitably managed.
- beef cows efficiently turn lower valued feed stuffs (forages) into lbs. of calf
- as calves are expected from only a percentage of the breeding herd, the focus shifts from volume to minimizing costs per lb. weaned.
- when using products from other farm profit centers (forages, grazing, cereal production), dynamic trade-offs occur. Profitability must be assessed within each enterprise, plus how each contributes to the farm level picture.
Constant attention to performance in all aspects of production, marketing, economics and finance, is vital.
So ... What is "benchmarking"?
Benchmarking is the process of objectively comparing your performance to your industry peers, locally, regionally and internationally. The purpose is to identify strengths, weaknesses and opportunities within your operation with "benchmark" performance as a reference.
Using your own business analysis, along with benchmarks, the following questions need to be at the front of your mind:
- how did the benchmark (group) perform?
- how did I do in comparison to the benchmark?
- what did the "group" do to achieve this performance?
- what do I do, both short and long term, to meet or beat the benchmark performance?
- what does the benchmark imply, for the industry as a whole, in the long term?
The benchmarks don’t provide answers. They provide focus for you in examining your own operation.
AgriProfi$ benchmarks
One of the products of our AgriProfi$ economic research program is a series of "Benchmarks for Alberta Cattlemen". These are reported by grass-type (region) across the province and are based on business analyses we’ve prepared for a number of Alberta cow/calf operations for 1999. (Copies of the detailed benchmark reports can be obtained from us or your local AFRD office.)
Each of the grass-type reports provides economic and production performance benchmarks noting regional average vs. "top performer" groups. In the following chart we’ve summarized some key benchmark elements for the Aspen Parkland region in 1999. Participants were divided into two groups based on enterprise profitability (Return to Equity per Lb. Weaned). Averages of the lower group (Bottom 1/2 in column A) and upper group (Top 1/2 in column B), are used in an example of the benchmarking process.
1999 Cow-Calf Enterprise Overview
Economic & Physical Performance Comparisons
Benchmark Comparables: Aspen Parkland Top 1/2 vs. Bottom 1/2 |
| Economic Performance Indicators: |
| | Aspen
Bottom 1/2
(A) | Parkland
Top 1/2
(B) | Difference
(A - B) |
| Production Stock Sales | 1.324 | 1.253 | 0.071 |
| Value of Production | 1.295 | 1.285 | 0.010 |
| Winter Feed & Bedding Costs | 0.418 | 0.320 | 0.098 |
| Pasture Costs | 0.276 | 0.217 | 0.059 |
| Labour Costs | 0.237 | 0.132 | 0.104 |
| Other Variable Costs | 0.266 | 0.144 | 0.122 |
| Fixed Costs | 0.214 | 0.124 | 0.090 |
| Total Cash Costs | 1.075 | 0.712 | 0.363 |
| Total Production Costs | 1.411 | 0.938 | 0.473 |
| Gross Margin | 0.220 | 0.573 | (0.353) |
| Return to Equity & Mgmt. | (0.116) | 0.347 | (0.463) |
| Total Investment ($/cow) | 2,116 | 2,118 | (2) |
| Physical Performance Indicators: |
| Cows Wintered | 108.6 | 146.9 | (38.3) |
| Calf Crop (%) | 90.2 | 89.5 | 0.7 |
| Lbs. Weaned/Cow Wintered | 482.7 | 553.6 | (70.8) |
| Weight per Day of Age (lbs.) | 2.71 | 2.68 | 0.03 |
| Labour Hours per Cow | 11.5 | 7.4 | 4.1 |
| AUM's/Cow Wintered | 7.8 | 7.0 | 0.8 |
| Feeding Season Days | 179.5 | 183.5 | (4.0) |
| Tonnes Fed per Cow (as-fed) | 4.26 | 3.50 | 0.76 |
| G rowth (weaning weight) | 527.7 | 588.6 | (61.0) |
| O pen Cows (%) | 4.4 | 8.3 | (3.8) |
| L ength of Calving Period (days) | 95.1 | 85.9 | 9.2 |
| D eath Loss of Calves (%) | 2.8 | 2.3 | 0.5 |
Starting the process
Knowing your own cost and returns profile is so important. Comparing your figures against peers within your grass-type (or your competitors at the provincial level) allows you to:
- identify significant differences, and
- differentiate between items needing short term (within year) attention vs. those requiring longer term planning and adjustments.
If you have your own numbers, pencil them in. If you don’t, this comparison should give you incentive to do so. Benchmarking is the first step in identifying opportunities to change or fine- tune your operation, with the goal to improve your bottom line ... Where do you fit in?
What do the numbers say?
When we compare unit production costs between the two groups, for the low profit herds:
- combined feed & pasture costs are $0.157/lb. weaned ($75/cow) higher,
- cost of labour, both paid and family, are $0.104/lb. weaned ($50/cow) higher, and
- fixed costs (eg. term interest and depreciation) are $0.090/lb. weaned ($43/cow) higher.
Just for these items, the bottom group averaged $0.35 per lb. weaned (roughly $168/cow) higher!
On the physical production side, the lower group:
- weans 71 lbs. less per cow,
- has a marginally better calf crop percentage,
- uses roughly 4 hours more labour/cow,
- requires modestly more grazing AUMs, and
- provides about 3/4’s of a tonne/cow more feed (as-fed) to the herd ... although, this difference could be due to feeding silage vs hay.
This comparison shows clearly that there is room for improvement in Alberta cow herds. By doing this for yourself, with your own "on farm facts", you will be able to identify areas for improvement in your operation, ... or simply identify constraints that may, or may not, be "fixable" in either the short or long run in your operation.
Where to next?
The next steps are to:
- move forward into the benchmarks in more detail to see how the (per unit) cost savings were achieved,
- examine the productivity ratings to see what can be done to improve physical performance (in other words, produce more lbs. of weaned calf for at, or near, the same cost),
- consult with reference sources (farm magazines, research reports, extension production specialists, etc.) to find alternatives that suit your production program and reduce unit costs, increase productivity, or both,
- pencil out how these alternatives might affect your unit costs, in the short term and over the longer term, and
- work out a plan to systematically incorporate these alternatives into your operating plan.
This will start a dynamic process, building from:
- partial budgets (assessing change options), to
- enterprise budgets (assessing changes to cow/calf profitability), to
- farm level income statements, balance sheets and cash flows (assessing short and longer term changes in farm profitability and risk exposure), and ending with
- "benchmarking" against yourself. Use your own year-to-year information to follow the progress you’ve made in your herd’s physical and economic performance.
The end result will be greater control of your business and improved profits.
The August "Cattlemen" magazine contains an article titled, "Surf the Beef Cycle to Higher Profits" based on an interview with Harlan Hughes, an extension specialist from North Dakota. Hughes’ theme, based on his work with U.S. producers, is that high prices come and go, but operations that focus on being consistently "low-cost" are more profitable in the long haul. The article wraps up with,
"Hughes’ last bit of advice is to not get complacent during times of high feeder cattle prices. Always strive to be a low-cost producer by concentrating on the unit cost of producing 100 lbs of calf. Avoid focusing on weaning weights because they tell you little about the profitability of your operation unless you’ve factored in the cost of getting that higher weaning weight. Remember, if you’re producing on very low costs, your profit margins are that much better during the good times."
Know where you’re at ... benchmark your cow/calf operation!
Jake Kotowich
Production Economist: Livestock
Dale A. Kaliel
Sr. Economist: Production Economics |
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