January 21, 2000

Ninety percent of the state’s cow-calf producers do not generate a profit over time. To help turn the situation around, the Texas Cooperative Extension holds periodic workshops to help cattlemen look at the big picture and then deal with the ranch level when thinking about ways to influence profitability, or minimize cost. Called Standardized Performance Analysis, or SPA, the program is an annual tool for cow-calf producers that provides ranchers an opportunity to analyze their ranch operation from both a production and financial side. SPA facilitates the comparison of an operation’s performance between years, producers, production regions and production systems.

According to Dr. Jim McGrann, professor and Extension economist at College Station, cattle producers are not very profit-oriented. If they were then the low rate of return would persuade them to take their capital out of the sector. The majority of the capital in the cow-calf sector could generate higher earnings in other activities.

"The cowboy culture is not a business culture. The cow-calf sector has very few producers developing annual financial statements that measure profit. Business financial performance analysis is a shortcoming of the sector. This is true even for those producers that depend on the enterprise for a living," says McGrann.

In order to identify opportunities that will increase business profitability or equity growth, McGrann says various parts of the business should be evaluated. He suggests this is achieved by using a partial budget that captures the added revenue and cost to determine if business profits can be increased by use of the specific practices or inputs.

"The challenge, of course, is to capture all the costs and associated added returns in the analysis. Often, it’s necessary to complete the partial analysis in a total business projected income statement to capture the reality of the impact of a change in business equity," he advises.

McGrann says the 90 percent of the cow-calf producers that cannot generate a profit should focus on ways to reduce costs, produce better quality calves and promote resource stewardship. He refers to this segment as the "reduce cost" group.

The attention of the other 10 percent, which he calls the "business profitability" group, should be on finding ways to truly make a profit and, in many of their cases, a living in the sector.

McGrann says it is easy to identify the audience that you would expect to generate a profit by evaluating four conditions: 1) location of the operation; 2) size of the herd; 3) occupation of the owner; and 4) attitude and commitment.

McGrann says "gentleman farmers" or retired people with herds of fewer than 100 cows near urban areas seldom offer an opportunity for a true profit.

"They often need technical assistance, but business management is not the issue for them. Most of these producers, if they wish to make the effort, can reduce the cost of their life-style and produce better quality calves," he suggests. "Potential is determined by attitude, commitment, size, and want for change. Education and services that focus on this audience can identify ways to reduce cost, improve quality, and insure resource stewardship."

When looking at the "bigger picture," which is beyond the ranch level, McGrann can cite a number of factors influencing the industry. Four good ones include: 1) Cow-calf operations in Texas that are building equity from raising and marketing cattle are rare. Growth in equity is coming from minerals, off-ranch income, and appreciation of land; 2) The cow-calf sector is the most highly subsidized segment of U.S. agriculture—subsidized by non-ranch income; 3) Ten percent of the producers account for 90 percent of the gross value of agricultural sales; and 4) Urbanization of rural land and associated cow-calf recreation ranching creates a difficult financial situation for the producers making a living in the cow-calf business.

"Lifestyle producers bid up land cost and rental rates. Current tax laws favor these recreational producers, and they greatly outnumber cow-calf business producers, so don’t expect tax laws to change quickly," McGrann explains.

The Extension economist says changes in the industry favor the business-oriented producers with 300 cows or more. Several reasons he gives include: 1) The potential of growing economic benefits from improved quality measurement and improved product value sharing through vertical integration is much more feasible for the large producer; 2) The inability of 90 percent of the producers to exercise market power means that they will not participate in the integrated market movement, giving larger producers an edge; 3) Larger operations can capture economies of scale in the use of human capital; and 4) Creators of the quality market or branded products will have to work with the larger producers to insure adequate supplies of quality products.

At the ranch level, McGrann says a number of inferences can be drawn from performance data of 151,000 cows maintained in Texas herds. They are:

• Productivity and financial performance is highly variable between herds. High levels of production do not insure high levels of net income. Production efficiency and cost effective management must go hand in hand.

• Supplemental feed and grazing are the big cost items and account for a large part of the difference in cost between herds. Management focus in these areas can help reduce costs.

• Weaned calf crops are lower than often communicated. There is room for improvement in this area.

• There is evidence of economies of scale in the cow-calf sector.

• The herds in the top 25 percent, based on net income, generate a competitive return on investment.

• Producers who control raised/purchased feed and grazing cost also have productive herds.

• In general, herds in West Texas are more competitive than herds in East Texas. Furthermore, herds in Texas are generally not as productive and have about the same cost as the national average.

McGrann notes that 91 percent of the cow-calf producers in Texas run fewer than 100 cows each and typically subsidize these ventures with off-farm income.

"Small producers can minimize the cost of their recreation or life-style activity by using basic (low input cost effective) practices. They need to control supplemental feed cost, and use proper stocking rates on grazing land," he says.

Some other suggestions for minimizing the cost are: 1) Prepare financial statements annually and monitor business equity changes. Budget and monitor expenditures against your given budget; 2) Minimize investment in machinery, vehicles, and equipment. Custom hire machinery services when possible; 3) Stay away from seedstock production activities; 4) Clearly define goals and decide just how much you are willing to spend on cows. Write goals and plans down and communicate them to participants; 5) Learn what breed(s) are adapted to the production environment and try to produce the type of quality the market desires. The first step is to use the right bulls; and 6) Keep accurate records of supplemental feed use and don’t overfeed.

In addition to the above suggestions, the business-oriented producers can minimize costs or increase retained earnings by: 1) Operating as a business first and a life-style second; 2) Selectively using retained ownership with a sound risk management program for stocker and finished cattle (Establish a target margin above the feedyard costs that makes retained ownership worth the risk); 3) Calculate your cost to find ways to develop cost effective product and marketing systems; 4) Have a good management information system that keeps decision makers informed. Face realities instead of denying them; and 5) Make every effort to stay debt free. Use debt only when its return is greater than the cost of capital.

Remember, says McGrann, it is easy to find production and management practices that will increase production.

"However, it is much more difficult to find opportunities where the added revenue generated offsets added cost," he advises. "It is the role of management to find the cost effective ways to increase net income and business equity. SPA has proven to be a valuable tool in identifying where a cow-calf operation is, which is the first step in identifying motivations and opportunities for change."