The cost of production has far more to do with farm profitability than does the value or volume of your production.
This statement is proven by Kansas State University in a study at http://www.agmanager.info, comparing characteristics of high, medium, and low profit beef producers.
Here in Virginia, we know there are premiums to be had in the feeder cattle market place, discovered through the added value of health, sire, source, and age verified marketing programs.
Buyers show they are willing to offer premiums for these features and for the additional value they see in feeder cattle prepared for the feedlot through a short co-mingled feeding period prior to sale.
However, the Kansas study suggests we can make nearly three times as much difference in our bottom line through cost savings.
Kansas State University, Department of Agricultural Economics offers its beef producers the opportunity to enroll their herds in their Farm Management Association.
A program with cow-calf enterprise records accumulated over 32 years, used to evaluate and compare member’s profitability.
Virginia offers similar program
Here in northern Virginia, we offer similar management services under the Beef Management Institute records program. The intent is similar — keep records, use records, and compare records from multiple producers to evaluate differences and identify reasons for profitability.
From the Kansas study, it is “important to recognize which characteristics determine relative farm profitability between producers.” We must ask questions about the size of the operation, the weight and price of calves sold, the level of costs and areas these costs cover. What are the features of profitable producers?
Answers to these and related questions provide curious managers choices.
“High profit farms were larger on average and had slightly heavier calves.” They also received “slightly higher prices” and generated “almost $95 more revenue per cow, but the “differences in costs between operations were much larger than the revenue differences.”
“High profit operations had a cost advantage in every cost category” resulting in a net return advantage of as much as $345 per cow between the most and the least profitable farms.
To be clear, the study found cost competitive farms in all categories — large size does not guarantee low costs. Overall, the analysis found the largest cost to manage is winter feed costs.
Most of the net return (72 percent) came from cost differences, while a much smaller amount (28 percent) of the net return came from the gross income from higher prices and heavier calves.
Dhuyvetter summarizes this situation as not “unexpected in a commodity market where producers are basically price takers, i.e. the ability to differentiate oneself financially from the average is typically done through cost management.”
While economists tend to speak a different language than the rest of us, we all understand the power of profit.
The reasons for profit are uncovered through keeping records and then using them to manage among other things, your biggest cost, which is winter feed.