As important as revenue is, the expense side of the ledger has a greater impact on profitability.
Over the last 40 years, only six years were profitable when inputting return over total costs, according to Kansas Farm Management Association data from cow/calf operations. Total costs include all variable costs plus the fixed costs of depreciation, real estate taxes, unpaid family labor and interest charged on assets.
Before you sell all the cows, understand that the range in profit was a low of -$286.71 to a high of $233.35 per cow. The point the authors make is that given the large variation in farm profitability, it is possible to be profitable most years, if the manager is willing to identify the factors that increase profitability on their farm. The only way to do this successfully is to collect production and financial data and then turn this data into information that you can use to inform your decision.
For now, let’s look at what the Kansas researchers discovered when evaluating high and low profit herds from 2010 – 2014.
Compared with the bottom third, the top third had more cows (172 versus 117) but also sold 2 percent more calves. This would indicate that they kept more calves alive from birth to sale. The calves they sold were 5 percent heavier, but sold at a similar price. Profitable farms were more specialized in cow/calf operations compared with crops. The impact on the receipt side of the ledger was that high-profit farms banked an additional $134/cow compared with low-profit farms.
As important as revenue is, the expense side of the ledger has a greater impact on profitability. According to the authors, two-thirds of the variation in profitability is explained by total costs (variable and fixed). Profitable farms spent 24 percent less per cow per year than farms in the bottom third. Stored feed and depreciation were the major items on which profitable farms spent less.
Lower depreciation translates into lower machinery costs. High cost farms (low profit) certainly suffered from “iron disease!” Interestingly, profitable farms had a higher pasture expense, indicating that they grazed longer. This is probably the reason that their stored feed costs and machinery/depreciation expenses were lower.
In the Northeast our average herd size is much smaller than the Kansas herds from which this data was obtained (\>25 hd vs. \>130 hd). Although there is tendency for larger farms to have lower costs and be more profitable, there were small farms that were competitive with larger farms.
What Matters Most?
Management – Although external factors have a large impact on profitability, even in the bad years there are profitable cow/calf operations.
Expense/cow – Production and price matter, but expense/cow is more important and drives profitability.
Size – Larger operations have lower costs and are more profitable, but there are smaller operations that are competitive.
Specialization – Operations that spent more labor on the cowherd compared with the crop operation were more profitable.
Non-feed Costs: Farms that spent more on feed compared with non-feed items were lower cost and higher profit. Minimize machinery and depreciation costs.
The importance of knowing your costs cannot be overstated. In New York, Cornell Cooperative Extension Educators are trained to help you analyze your farm’s profitability, identify strengths and weaknesses and pinpoint areas for improvement.
December is the perfect time to work on this New Year’s resolution.
The following statement is a direct quote from the authors and sums this up very succinctly:
“As the data reported here clearly show, there is tremendous variability across producers, which means there is room for producers to improve their relative situations. However, before one can improve they need to know where they stand relative to other producers. Thus, benchmarking and identifying an operation’s strengths and weaknesses is the first step to deciding where to focus management efforts.”
Contact your local Extension educator for assistance in moving your farm toward profit.