November 2016 Articles

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Factors Affecting Costs and Returns

Factors Affecting Costs and Returns—In the simplest way, annual costs can be described as the total dollar input necessary to run a cattle operation for a year. EVERY input cost!! For many reasons, cost of production remains an illusive figure for most. Many producers seriously underestimate the total dollar input, giving a false impression about net returns. The ability to estimate production costs accurately is as important as a restricted breeding (calving) season in herd management and financial evaluation. Costs are generally expressed on a per cow basis. Research reports and synthesized budgets generally show the average cost of production per cow in the U.S. has increased 225% or nearly 5.6% annually over the past 15 years (Source: LMIC). Each operation is different, so this estimate will not apply to all situations. The point is, a thorough record of all expenses, not just the out-of-pocket expenses, should be kept. Feed, fertilizer and fencing seem logical, but what about four-wheelers, horses and horse feed, water lines, wells and pumps, electricity, equipment, trailers, etc.? Income from the sales of products (bulls, cows, calves, yearlings or fat cattle, and excess hay) determines the usual source of gross returns. In Louisiana, income from calf sales represents the largest portion of returns. Weaning rate, weight and price at sale time are the most important factors affecting returns in a cow-calf operation. Quality and genetic make-up are also considerations in fixing prices. The concept of breakeven price should be understood. Breakeven is a figure resulting from the ratio of total cost of production per unit and total product available for sale per unit.
For a thorough list of costs, reference the 2016 Projected Commodity Costs and Returns for Beef Cattle and Associated Forage Crop Production in Louisiana. The last few years have been great times in the cattle business. During this time a majority of cow-calf producers have been profitable. However, cow-calf producers need to strategize in order to maximize sustainability and profitability over the long haul. Regardless of fluctuations in calf prices (as there has always been in the cattle industry), facts about cow-calf operations and certain strategies remain constant across various parts of the cycle:
Know and analyze your production costs. Particularly focus on pounds of calf sold per cow exposed and cost per pound of calf marketed. Decide on an obtainable goal for cost of production per pound of calf sold.
Keep detailed production records. Record keeping and planning is an important management function for any business, particularly one as unpredictable as the cow-calf business. However, good record keeping and planning will not lead to improved profits unless the records are used to identify management opportunities, and cost savings. Knowing the cost of production is a critical aspect of a marketing plan.
Manage and market cull animals effectively.
Pay attention to the basics. Solid nutrition, forage management, health, reproduction, genetics and management programs are still the key to sustainable and profitable beef production.
The beef industry has enjoyed record profitability in recent years. While the ride has been enjoyable, the industry has witnessed remarkable change in the opposite direction in a short period of time. Now is the time to gear up for the long-term and take the necessary steps for future profitability and sustainability. As these market changes take place, the gap will widen between the most and least profitable. Being a low-cost producer has always been important, and cost control will always be a defining component of a successful beef enterprise. However, practices which can be documented, add value, and have favorable consumer impact provide the most opportunity to increase returns and stay in business. —Jason E. Holmes, LSU AgCenter