Controlling Cost Is Best Way
To Ensure Profitability

By Colleen Schreiber

ABILENE — Producers attending a recent beef cattle meeting here were told that about the only sure-fire management decision a producer can be guaranteed to see results from is that of saving money.

That was the gist of the message presented by Extension economist Dr. Jason Johnson. Johnson is the new Extension economist based at the Texas A&M Research and Extension center in San Angelo. The position, which he filled in January, has been vacant for the past 12 years.

His comments were based on seven years (1991-1997)of production and financial data gathered through the Standardized Performance Analysis, better known as SPA, from producers with beef cattle herds ranging from 36 cows to more than 13,000 for a total of 145,000 head.

"I can't say there's any one production measure that is going to tell you whether or not you’re going to be profitable," Johnson told listeners. "Calving percentage, weaning weights, pregnancy percentage, none of those translate without a question into the most profitable operation. Controlling costs probably is the one thing that has more influence than any other, and it’s really the one thing that we can use management to control.

"We are a Webster’s Dictionary definition of a price-taker," he continued. "We don’t have any control at all over the price of calves. Sometimes we have a market that rewards us for certain production measures; other times it doesn’t."

SPA was developed through support from the National Cattlemen's Association and the National Integrated Resource Management coordinating committee. The development of it, Johnson said, was primarily producer-driven, and Texas A&M and Oklahoma State were the key academic institutions. The program was designed to help analyze profitability performance of cow-calf herds.

"It's not a recordkeeping system," Johnson said, "but rather a tool used to assist producers to become more competitive and improve their management abilities. It uses production and financial data and integrates them into key performance measures for decision-making. It also allows producers to compare their own operations over time as well as comparing one's operation to similar operations of the same size."

The objective of SPA was to identify some standardized measures, some benchmarks of performance, to give producers some indication of where they need to focus their managerial efforts and where that effort will be best rewarded. Many use SPA as an alternative to individual tax returns as an indicator of overall financial performance.

"We recognize that we can’t change what we don’t measure. Tax returns will tell you what your bottom line is, but they can’t tell you what caused the bottom line to get that way," the economist explained. "You have to take into consideration various production and financial indicators."

Production indicators measured in the SPA analysis are calving percentages, pregnancy percentages, weaning percentages, and production per exposed female.

As for financial indicators, SPA takes into consideration cost of production per exposed female and cost of production per hundredweight of calves weaned.

Johnson presented a summary, of sorts, of the data collected from 1991-97. Of the operations analyzed, 70 had between one and 199 head, 63 had between 200 and 499 head, and 62 had 500-plus head, Johnson said.

"The data shows that profitability is not solely a function of herd size. You don’t have to be large to be profitable in all cases," he told listeners.

The data was presented in quartiles with the upper 25 percent being the most profitable and the fourth quartile the least profitable.

The data showed that the most profitable herds had the highest weaning weights, but even more important, Johnson said, producers in the top quartile had the highest weaning weight per exposed cow. Not surprisingly, the most profitable operations also had the lowest grazing and feed cost per cow.

Cost of production per cow for producers in the top 25 percent was $304 compared to $486 per cow for the 25 percent least profitable producers, a difference in cost of $182 per cow. Net income per cow pre-tax on the most profitable operations was tallied at $153 per female compared to those in the lowest 25 percent showing a loss of $157 per female. The profit average across all herd sizes is about $5 per female pre-tax, Johnson said.

Furthermore, the SPA data indicated that those producers in the top quartile made about a 7.9 percent return on their investment, those in the upper half a three percent return, while the average return was about 1.3 percent.

General management objectives to achieve profitability, Johnson said, include an 83 percent calf crop based on exposed females; 450 pound-plus weaning weights and a production cost less than $370 per cow or less than $75 per cwt.

"If I learned anything from looking at this data, I gained an appreciation for not just looking at weaning weight in absolute terms. You need to look at it in terms of weaning weight per exposed female," he said.

He reiterated that the size of one’s herd isn’t an indicator of profitability.

"You can have less than 100 head and still be profitable with good management practices."

In summary, he encouraged producers to clearly outline their goals and objectives and he reiterated the importance of keeping overhead costs in check.

"In reality, there’s not any one thing that I can point to and say if you do this you’ll be in the top quarter in terms of profitability. There’s too much variability between management and too much variability between what the market pays us for doing it. Sometimes it pays us to do something and the next year it might not return us a dime.

"But I know that the market rewards me for controlling costs. I may not make money, but if I do a good job controlling costs I’ll lose less."