Critical control points for profitability in the cow-calf enterprise

Abstract

Financial, economic, and biological data from cow-calf producers participating in the Illinois and Iowa Standardized Performance Analysis programs were analyzed. Data were collected from 1996 to 1999; each herd-year represented one observation. The database consisted of 225 commercial herd observations (117 Iowa; 108 Illinois) and ranged from 20 to 373 cows. Analyses were conducted on financial and economic costs of production. Each observation was analyzed as the difference from the mean for that given year to eliminate environmental and cattle cycle effects. The dependent variable used as an indicator of profit was return to unpaid labor and management per cow (RLM). Independent variables were feed, operating, depreciation, capital, hired labor costs, calf weight, calf price, cull weight, cull price, weaning percentage, calving distribution, herd size, and investment. Family labor was used in the economic analysis. All financial factors analyzed were correlated to RLM (P

calf weight, cull weight, and cull price. A financial prediction equation using eight variables accounted for 82% of the variation among farms. For both economic and financial analyses, feed cost accounted for over 50% of the variation among farms. In the financial regression model, depreciation cost was the second critical factor accounting for 9% of variation in RLM followed by operating cost (5%). Calf weight was the fourth indicator of RLM in the financial model (5%). Cost factors accounted for more variation in RLM than production, reproduction, or producer-controlled marketing factors. Feed cost was the most critical control point, as it accounted for 50% of the variation in profit among the herds.

(Key Words: Cow-Calf, Economics, Profitability, Standardized Performance Analysis.)

Introduction

Identifying practices to enhance profitability is an objective of any effective business manager. According to Harris and Newman (5), breeding objectives over the last century progressed from being predominately based on visual appearance to criteria involving performance. Selection for improved biological performance has led to dramatic increases in growth rates of beef cattle, but has not necessarily led to increased profitability among commercial cow-calf producers (1). Therefore, the transition from selection based on performance criteria to selection based on economics is untested. There is an inconsistency in the definition of profit in agricultural enterprises. Yet, profit is the most fundamental measure of business success (12). Using the Farm Financial Standards procedures (4), the appropriate definition of "farm or ranch profit" is the "net farm or ranch income from operations minus the value of unpaid family labor and management."

To position beef cow herds as sustainable business entities, production practices that maximize profit must be identified. In 1994, a Standardized Performance Analysis (SPA) program was implemented in Illinois and Iowa to provide cow-calf producers with an evaluation tool to measure the biological, financial, and economic performances of their operations. This program was designed in accordance with the Integrated Resource Management-SPA (IRM-SPA) Guidelines as set forth by the National Cattlemen's Beef Association (16). Research in farm and ranch profitability has been significantly hindered because of the lack of actual financial and economic costs of production data. Research has shown how specific management strategies (e.g., cross-breeding systems, feeding systems, reproductive performance, health practices) affect profit. A beef production system is a highly complex combination of many biological and economic factors. A producer must view the beef-cattle operation in its entirety and understand how its component parts interact with one another to ultimately affect profitability (1). Bruce et al. (2) utilized a computer simulation of various management factors and identified annual cost of maintaining a cow as the most influential factor determining profit, followed by calf sale price and weaning weight. Hughes (7) analyzed averages from farm business records of herds in North Dakota and reported that total feed costs, followed by selling price of calves and number of cows in the herd, were the three most important factors explaining variation in profit.

This study analyzed actual cowcalf enterprise data to identify specific management factors that influence profitability. In addition, a database of actual financial, economic, and biological production information for Midwestern cow-calf producers is presented.

Materials and Methods

Data collected from cow-calf producers who participated in the Illinois or Iowa SPA program were used in this study. Data were collected for 1996 through 1999 calendar years; each herd-year represented one observation. Data were collected using the SPA Beef Cow Business Record program developed by Iowa State University, in accordance with the SPA guidelines, developed by the IRM. Coordinating Committee of the National Cattlemen's Beef Association (16). Data were from the cowcalf enterprise only. Allocations for equipment and inputs shared with other livestock or farming enterprises required a percentage allocation to the cow herd by each producer. Excluded from the final data set were purebred seedstock producers, herds with less than 20 cows, and one herd with more than 2,000 cows. Producers who were involved with the program more than 1 yr may be included multiple times. This resulted in a final database of 225 observations (117 from Iowa; 108 from Illinois) from 126 different producers who operated commercial beef herds with a range of 20 to 373 cows. In the stepwise regression analysis, 164 observations were utilized, as 61 were missing weaning percentage data.