Beef Market Advisor

Tuesday, December 21, 2004

Costs Of Producing A Hundredweight Of Calf Is Increasing

My Integrated Resource Management Databank clearly documents that when cattle prices trend

downward, ranchers cut production costs. While I can not document this, I suspect that when

prices go up, ranchers tend to increase their production costs. Certainly, higher prices tend to

stimulate added capital investments and expenditures delayed during the tough times. Ranchers

continue to remind me that their costs are also going up each and every year. The one cost that

certainly does go up every year is the cost of "iron" - meaning machinery.

I took a look at the University of Minnesota's Northern Plains large data set for 1996

through 2003, representing 3064 ranch years, to see what was happening to ranchers' costs.

This data indicates that costs per cow trended downward from 1997 through 2000. Since 2000,

costs per cow have been trending upward. My statistical analysis suggests that from 2000

through 2003, costs per cow have trended upward $12/cow per year.

This $12 increase in costs per cow probably is a conservative estimate - at least for the

Western half of the U.S. As ranchers progressed into the 1999-2004 droughts, many depopulated

their beef cow herds - some up to 40 percent. Depopulation clearly drives fixed costs per cow

upward for the remaining cows in the herd. Increase feed costs for the remaining herd drives up

operating costs. When fixed costs and operating costs are combined, drought send costs of

production dramatically upward. Combine this with the missed profit opportunity of having fewer

calves to sell now that prices are high, and the cost of the past drought will be huge. So huge, that some

ranchers will never recover. The economic impact of the 1999 - 2004 drought will impact ranchers for at least

a full decade.

My October BEEF Magazine Market Advisor, entitled "Zap Up Your Info System" suggested that now is

the time in the cattle cycle for ranchers to stockpile money. We have long talked about stockpiling

feed during the good years and now we need to talk about stockpiling money in the good years.

In that same October article, I suggested that in order to maximize the profits generated in these

good times, that a Third-Generation Management Information System (TG-MIS) should be

implemented. I went on the suggest that a TG-MIS system should consist of a herd performance

and economic/financial measures integrated into a single management information system that

sends one set of integrated management signals. This is best summarized in the title of my July

Market Advisor "The Money Is In The Details." This title supports my belief that increasing

management intensity increases beef cow profits.

posted by Dr. Harlan Hughes 9:56 AM [edit]

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