Driving profit Identifying profit drivers improves ranch sustainability
If ranchers can find ways to develop the skills and tools to make good decisions for their ranches during the good years, they can easier manage the complexities that may arise during the bad ones, according to the director of the King Ranch Institute.
Clay Mathis spoke to producers during the Range Beef Cow Symposium, telling producers about the key drivers of profitability in their operations and how they put those pieces together will have the most influence on profitability.
He sees the most important values that determine revenue as the three largest expenses, which are labor, purchased feed and depreciation.
“When we can sell calves for $2.75 a hundredweight, the biggest influencer of cost is energy,” he says. “Oil is $30 a barrel. When that happens, it is not hard to make money in this industry.”
“Everyone should have been making money in 2014-15. But, it’s those other years that define good versus great management,” Mathis adds.
Mathis questions the impact of the rest of the cattle cycle, commenting that some Texas research conducted from 2008-12 shows that 25 percent of 44 herds surveyed were the most profitable, based on dollars per cow exposed of net income. The most profitable herds represented 30,000 head.
“The most profitable quartile, at that time, made $160 a head. The least profitable herds lost more than $300 a head. It was a range of over $450,” Mathis says, which he explains is pretty typical in the cow/calf business.
The most profitable operations in the study had the lowest cost but the highest revenue.
“They had acceptable reproductive performance in weaning weight rates, weaned bigger calves and marketed bigger calves for more money than other quartiles,” he explains. “Those operations were doing it all. It is related to how they think through the process and make the decisions that they make in management to do that.”
“More than 90 percent of the revenue in a cow/calf operation comes from calf sales. It is based on weaning rate, weaning weight and how those calves were marketed. Marketing cull cows and bulls, the class of culls and how we market them has a smaller impact,” he notes.
Breakeven costs were stable from 2003 through 2012, Mathis explains. But when the drought struck much of the U.S., production costs increased. Labor, purchased feed and depreciation became very important.
“If we want to make a change or leverage, we need to know what the biggest pieces of the pie are. Those will affect profitability the most and likely there will be opportunities to reduce expenses in those areas,” he explains.
Mathis points out that depreciation can be tricky.
“We can write checks for labor and feed, but we don’t for depreciation,” he said.
He shows in an example that a producer purchased a bred replacement heifer for $2,500 in 2015, depreciates her over five years and determines she has a salvage value of $750. Based on that, the total depreciation of $1,750 divided by five years would be $350 each year in depreciation.
“Depreciation is real, and it’s a big expense. That’s why it is important to know what it costs to have cows,” he says.
Mathis expressed his concern to producers regarding rising labor costs.
“Looking ahead 20 to 30 years, I think labor could get to be more of a problem,” he says.
In a 1,000-cow operation with four employees, those four employees are drawing a salary, benefits, housing, utilities and possibly a beef, he shows, as an example.
“The total compensation will be about $50,000 an employee each year, which would be $200,000 a year for four of them,” he explains.
“If we reduce the number of employees to three, what could we change that would have the biggest impact on the entire system?” he continues. “In this scenario, labor costs go down by $50,000, and there will be one less vehicle needed, so that reduces maintenance, depreciation and repairs.”
“There would also be less fuel and less maintenance or ownership and maintaining fewer horses on the ranch,” he adds.
Mathis figures ranch labor would be reduced by about $50 a cow in this scenario.
“In reality, $200 a cow in labor is pretty in line with where we are at in most places,” he says. “But, I would challenge each of us to see if we can change our system to get by with less labor while still maintaining output.”
“We may have to do more outsourcing and lose some of the convenience, and there will be some costs involved. But we may be able to reduce our equipment needs,” he says.
“I think it is worth considering,” Mathis states. “In the future, there is going to be less skilled labor for the work we want these cowboys to do.”
“It is a challenge. Do we hire fewer people that are better and keep them on the ranch, or do we continue to work the same way we have?” he asks.
Know your costs
To maximize profitability, producers must be willing to know their costs and put all the pieces together. Mathis says they should focus on finding ways to optimize the price of everything they sell from the operation for the good of the operation, as a whole.
“Maximizing profitability entails good ranch management, sustainability, managing labor to balance with maximizing calf revenue and controlling these costs,” he explains.
Sixty to 70 percent of the expenses in a cow/calf operation are usually fixed costs. Variable costs make up 30 to 40 percent.
“Ranching is mostly a fixed cost business. Variable costs are important, but controlling, managing and spreading out these fixed costs is critical to maximizing profitability,” he says. “Successful managers understand how important it is to minimize fixed costs per unit.”
Gayle Smith is a correspondent for the Wyoming Livestock Roundup. Send comments on this article to email@example.com.