Unit Cost of Production
In the past year or so, we have enjoyed calf prices at or near historical highs. This condition won't last forever, but we hope it will last another year, or maybe two. You should use this opportunity to pay off debt or save for the time when there is a decline in the cattle market.
Now is also the time to find out what your costs of production are and explore ways of lowering your operating costs. Over the past ten years, we have seen prices for 500-pound steers range from a low of $60/cwt to the current $100/cwt and from the upper $50/cwt to today's low $90/cwt for 500-pound heifers.
You must know your cost of production. Today most operations are profitable, but four years from now, if your cost of production is $90/cwt, you will most likely be losing money.
Three factors seem to generally determine the economic profitability of producing calves: calf prices, bred and cull animal prices, and unit cost of production. Of those three, calf prices and bred and cull animal prices are primarily determined by market factors. Unit cost of production, on the other hand, is under your direct control. You make the decisions that determine the inputs for your operation.
To be competitive and profitable in the long run, you need to strive to be a low-cost producer, which means that each of your expenditures is scrutinized carefully; it doesn't mean that you cut out all of your costs. It might even mean increasing your costs in an area or two. In fact, data from the Standardized Performance Analysis show that the low-cost producer was willing to pay more for bulls than the high-cost producer. These producers consistently pay more for better genetics than their high-cost counterparts. Also, the data show that these low-cost producers tend to spend more for their veterinary costs (services and medicines) than the high-cost producers.
Once you have determined your unit cost of production, take a look at the table, which shows data from the Standardized Performance Analysis. You can see how you compare with other producers who have similar-sized operations.
I suggest that you try to become a low-cost producer and prepare yourself for when calf prices decline.
NOTE: For more information on the cow-calf standardized performance analysis, visit our Web site at http://agecoext.tamu.edu/spa.