How Do You Compare With Your Competitors?
No, I'm not talking about the chicken or the pork guys. I'm talking about the other cow-calf producers in your area, in the states of Oklahoma or Texas, the United States and even in foreign countries. These all are your competitors. They compete to produce cattle more valuable in the market and at a lower cost.
As we head into a lower cattle market, operations that produce heavier, higher-quality and healthier cattle will have an advantage in the market. These traits are valuable when the market is very good, as it has been in the last couple of years, but they will be especially important as supplies of cattle increase and buyers have more cattle to choose from. Another factor that will drive this value is your documentation of these traits and performance. This information will be needed, will have a value to the subsequent owner of your cattle and may allow you to participate in some type of marketing alliance in the future.
It will be equally important to evaluate all of your operating costs. You might not be the lowest-cost producer, but you need to make sure each dollar spent is appropriate, and you are getting a good return for each of those dollars. Because, ultimately, your cows have to pay all of your costs, or they come out of your pocket.
As you can see from Figure 1, the average returns to cow-calf producers in the last couple of years have been more than $100/cow. You will also notice the average returns in 1994 through 1996 averaged about -$50/cow. While we might not return to the prices that generated those negative returns, we could. But what is more important to note is that the high-return producers were profitable in 23 out of the last 25 years. It is equally important to note that the low-return producers were only profitable a couple of years out of the last 25.
How do you determine where you are? You must calculate your individual operation's profitability using basic financial tools first, by developing a cash accounting system using a tool such as Quicken or Quickbooks to provide income and expense information as the basic data for preparing financial statements and to meet tax reporting needs.
However, information prepared for tax purposes does not measure the profitability of a business. Additional information from a balance sheet/financial statement and a depreciation schedule must be added to determine profitability.
This information should be addressed in each operation. Too many operations have only had tax-based information from which to make decisions or no information at all. If you are not comfortable in the preparation of this information, get some assistance. If the Ag Division can be of any help, please give us a call at (580) 224-6500.