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Determining Cost of Production is Useful to Cattle Producers

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Posted May 31, 2002

Some amazing occurrences took place in the world, and in the cattle market, during the past year. We have seen the extremes calf prices at or near historical highs, at the same time we saw significant losses in the feedlot. We have seen wide margins in the basis (the difference between cash and futures price). We have seen 2002 cattle market forecasts by some of the nation's brightest minds revised by the end of the first quarter because they were already out of date. And all the while, cattle numbers continue to decline.

What does this all mean?
More importantly, what do you do about it, if you are a rancher in southern Oklahoma or northern Texas? Since producers have little control over areas outside their ranches, the best approach is to focus on management at the ranch level.

There are cow-calf operators in this region who will make a profit with $70/cwt, 500-pound calves. There are also cow-calf operators in this region who will lose money, even if calves are $125/cwt for 500-pound calves.

The only way to find out if you are financially a "Top 25 Percent" or a "Low 25 Percent" producer (see Table 1) is to determine your cost of production. Even today, most cow-calf operations are profitable but four years from now, if an operation's cost of production is $90/cwt, it will most likely lose money. For margin operators (stocker and feedlot operators), today's market conditions are not good, so operators must determine their cost of production to accurately calculate their breakeven. Using average cost of gain in the feedlot or average costs for stocker operations in determining breakevens is accurate if you are an average producer. But in today's cattle industry, an average producer may not survive.

So how do you compare?
Are you a high-cost producer, a low-cost producer or somewhere in between? For any producer to be competitive and profitable in the long run, they must strive to be in the top 25 percent (based on net income). As the Standardized Performance Analysis (SPA) summary shows in Table 1, the cost of production for a top 25 percent cow-calf producer should be $65 to $70/cwt. It also shows that total cost of production per cow should be from $300 to $325 and grazing and feed costs per cow should range from $125 to $145.

If you know your cost of production, take a look at the table, which shows data from other cow-calf producers in this region, to see how you compare. If you haven't determined your cost of production, I suggest you take the time to do so. It will help you identify areas of improvement so you can become a "Top 25 Percent"producer.