Impacts of Annual Cow Costs
If we look back a few years in the cattle business, there was a lot of discussion on controlling annual cow costs. At the time, margins were thin and producers were looking for any edge in cost savings that would improve their bottom line. As the calf market began to get stronger, it appears that many producers put the war on costs on hold. Average annual cow costs have risen as dramatically as calf prices.
This fall, as we have seen calf prices drop, and looking ahead, prices certainly look to fall short of the recent records. It will be as important as ever now for producers to focus on annual cow costs.
In 2004 the estimated total average cash cost plus pasture rent per cow was just over $400. In 2004, annual average calf prices for 500-600 pound calves in the Southern Plains was near $110 per hundredweight. If we move ahead 10 years, in 2014 the estimated average cash cost per cow was just under $900, and 500-600 pound calves averaged just under $250. Just doing some simple math, this means that, for the average producer, cow costs have increased at a rate nearly identical to calf prices – approximately 225 percent in 10 years.
Certainly not all producers put the war on costs on hold. Although annual cow costs of $900 represent the average producer, many producers have kept a tight rein on their own costs. These producers may have costs significantly below $900 per cow. As calf prices begin to decline, this group of producers will be better able to manage and remain profitable in the coming years.
Not all increases in costs under conditions of substantial profits are bad. Producers who utilized the increases in returns to invest in their future may in fact be reaping more rewards as the market turns down than those producers who kept a tight rein on their costs. If a producer invested significant dollars into things such as range and pasture improvement or genetics, they may have greatly improved their situation. As calf prices decline they can reduce the amount of money invested in these categories, which would lower their overall cow costs.
However, that investment will still pay dividends. If the investment was in genetics, the producer will have a more productive pool of genetics to utilize until prices rebound. If the investment was in range/pasture improvement, the results of these projects may benefit the ranch well into the future.
Those producers who need to take the hardest look into the mirror and be prepared to make the largest adjustments as calf prices trend lower are the producers who neither held a tight rein on costs nor increased investments. If producers’ cow costs increased overtime due to spending money on inputs to achieve short-term production gains, they will see the greatest negative impact as prices trend lower. When we cut costs on inputs without improving our resources, we see direct impacts on production.
The concept of investing in future success is a key tenet of the Wyoming Ranch Institute. If you are interested in learning strategies and tools to analyze these investments and increase the economic sustainability of your operation, this is a good seminar to attend. This year’s institute will be Feb. 15-17 in Thermopolis. To register, contact me at firstname.lastname@example.org or 307-783-0570.
Over the next few years, keeping a close eye on cow costs will be important for ranching success. Hopefully you find yourself well prepared for the upcoming market conditions. If not, as always, learn from your mistakes and be better prepared to take advantage of increasing calf prices the next time around.