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Why are high-profit farms high-profit farms?

by Wyoming Livestock Roundup

The Kansas Farm Management Association (KFMA), in conjunction with Kansas State University, has been involved in farm-level decisions and record keeping for over 80 years. They publish annual reports based on actual producer records, which can be useful in analyzing the variation in how farms respond to changes in both weather and markets. 

Unfortunately, Wyoming does not have this detailed data, so we cannot perform a similar analysis for our state.  However, the trends in Kansas appear to be similar to anecdotal evidence I have seen across our state.

KFMA publishes a document comparing the top, middle, and bottom-third producers in terms of profitably by enterprise. I’ll focus this report on the comparison of cow/calf producers that market calves less than 750 pounds.  

In general, it is interesting to note that, over the last 40 years, returns over variable costs range from negative $76.40 to $589.50 per cow, with an average return over variable cost of $78.01 per cow per year. However, when accounting for total costs, including unpaid family labor, real estate taxes, and depreciation, the average returns are much lower.  Returns over total costs are negative $85.72 per cow on average, and have ranged from negative $286.71 to $233.35 over the last 40 years. 

There are farms, however, that have shown returns over total cost to be much higher than average over that period. In fact, KFMA records show that variation across farms in a given years is larger than variation in average annual returns over the 40 years. There are farms that make money in most years, and farms that lose money in most years.

From 2010-2014, there are a few characteristics that the higher profit firms tend to share.

First, they tend to be slightly larger and sell slightly heavier calves. The data implies some economies of scale for ranches but only up to about 550 cows. Farms larger than that do not realize additional economies of scale, as they tend to need larger equipment and more fencing, which negates some of the benefits from being able to spread fixed costs over larger herd sizes. 

Another interesting comparison is that high-profit farms tend to receive better prices, implying some level of management is likely dedicated to marketing. 

The combination of better prices and heavier weaning weights resulted in high profit farms receiving roughly 16 percent more revenue on a per-cow basis than their lower profit counterparts. 

Higher profit farms also tend to have lower costs than the lower profit firms, with total costs being roughly 24 percent lower than the low-profit firms.  The higher profit firms from 2010-14 did spend more on pasture or grazed feeds compared to the other firms, but were able to save money on fed feeds.

It is important to note that these results tend to change as both weather and market conditions change. 

For example, in 2015 in northwest Kansas, the results are somewhat different. The highest profit producers still received much higher revenues per cow, at $1,193 as compared to the middle, and lower-third operations, at $849 and $802, respectively.  This is due to the fact that the higher profit firms had heavier calves that were 582 pounds, and received the highest price per hundredweight seen in the chart below. 

The lowest-third profit producers actually had heavier weights, at 571 pounds, than the middle-third, at 530 pounds, but due to lower prices received, they had the lowest revenue per cow. 

Also of note is that the middle-third profit producers actually had the lowest costs seen in the lefthand column, followed by the high profit farms. The high profit firms spent more on veterinary care and medicine, as well as more time working with animals compared to the middle-third of producers, implying they were more likely to be involved in a pre-conditioning program, partly responsible for the higher prices received. 

The results are that the high-profit farms averaged returns to labor and management of $281.73 per cow, whereas the other two-thirds of producers actually lost money on a per-cow basis last year as seen in the righthand column.

In the meantime, I think there are a few things to think about as we deal with the current market condition. 

Remember, all the farms that are still in business and associated with KFMA have had to deal with years that were unprofitable. Those that are more profitable than others focus on both keeping costs low, as well as ensuring continued production and revenues through proper herd and marketing management. 

During the next few years, keep your sights on the long run and make sound business plans that are able to withstand a few down years. And remember to focus on both sides of profit, revenues and costs. Learning how to better market your animals is just as important as raising them cheaply.

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