Cost of Production
Between the autumns of 2006 and 2008, we have seen some real volatility in the cattle and grain markets. This condition has forced producers to reevaluate how they go about doing business. We have seen prices for corn double, and fertilizer and fuel triple. While it would be great to think that the price of grain, fertilizer and fuel could return to fall of 2006 levels, it doesn't appear probable. This has made it increasingly challenging to make money in an agricultural business.
While the Livestock Marketing Information Center graph for 2008 shows average cow-calf producers operating with a negative return, there are still opportunities for the above average cow-calf producers, margin cattle (stockers and feedlot) and grain producers to be profitable. Today, the value of gain on stocker and feeder cattle is ranging from 85¢ per pound to $1.25 per pound.
So what can a producer do?
First, calculate the cost of production and determine a breakeven point for each segment of the operation. Second, determine ways to lower operating costs. Below are examples of cost-cutting measures already being implemented by producers to help lower operating costs.
- Reducing trips to town to get parts or supplies by being more organized.
- Driving the vehicle that gets the best gas mileage, even if that means the vehicle is a 4-wheeler.
- Fertilizing only in areas that have had a recent soil sample.
- Simplifying operations to cut back on labor and vehicles.
- Reducing stocking rates.
- Considering alternate feedstuffs.
These are just a few of the ways to reduce costs and don't address the income part of a profitable operation. With cattle, three income factors seem to generally determine the profitability of producing calves: calf prices, bred animal prices and cull animal prices. All three - calf, bred and cull animal prices - are primarily determined by the market. Cost of production, on the other hand, is under direct control of the manager. He or she will make the decisions that determine the inputs of the operation.
To be competitive and profitable in the long run, each operation needs to be a lower-cost producer with expenditures carefully scrutinized; but this doesn't mean that all of your costs are reduced. It might even involve increasing costs in an area or two. 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 veterinary costs (services and medicines) than the high-cost producers.
Analyze all costs and challenge yourself to become a very efficient producer.
Let us know if you have any questions about determining your specific cost of production.