Lessons from a Decade of "Integrated Resource Management" in North Dakota

(Editors Note: Harlan Hughes is one of the best market economic analysts on the USA cattle scene. His huge experience, practical down-to-earth style and easily understood messages will be instructive to Australian cattlemen. We will publish some of Harlan's excellent articles here from time to time. If you ignore the 'leased cow' comments in this article (they don't apply in Australia), its principles are as relevant to profitable cattle production in Australia as in the US.)

By: Harlan Hughes
Extension Livestock Marketing Specialist
North Dakota State University USA
harlan.hughes@gte.net

Those involved with the North Dakota Integrated Resource Management program for beef producers have learned some important lessons over the past decade. Ten years ago, I promised North Dakota's beef cow producers that I would spend the coming decade dedicated to the IRM program. In that time, we've seen some good times in the cattle industry and some bad as we've covered the biggest portion of the 10-year cattle cycle.

With 10 years of experience to provide some perspective, I'll use this Market Advisor to summarise what we've learned from IRM educational programming.

We learned, over this last decade, that if beef farmers and ranchers want to know where money is earned in the farm or ranch business, that they need to divide the ranch into profit centres and treat each profit centre as a stand-alone business. We then learned how to specifically calculate economic return, costs and cash flow associated with the beef cow profit centre.

We learned that a beef cow producer needs to count females exposed to the bulls in order to measure reproductive efficiency. We learned that percent calf crop is calculated by taking live calves weaned and dividing by the number of adjusted females exposed. Some adjustments are allowed for females bought and sold after bull turn-out date.

We learned that herd performance records lead to more intensive management. Intensive management, in turn, leads to more production and more production typically leads to lower unit costs of production. We learned that today's beef farmer or rancher needs to monitor both profitability and net cash flow, as these are two separate and distinctly different business performance measures.

We learned that business profitability can be measured only after we have taken a beginning and ending inventory. True profitability can be calculated only by including a measure of inventory change. Profitability is made up of both cash and noncash components. Inventory change is one of the noncash components.

We learned that unit cost of production (UCOP) is the ratio of total herd costs divided by the total pounds of calf produced. We also learned that an adjustment first has to be made for noncalf income. We learned that UCOP varies substantially from herd to herd. Yet, most beef cow producers do not calculate their own UCOP, defined as the cost of producing a hundredweight of calf. In North Dakota's case, it is specifically a hundredweight of steer calf.

We learned that there are a lot of leased cows being run across the northern plains. We also learned that leased cow herds were typically high unit cost of production herds. This is due to the fact that considerable amount of gross income was paid to the cow owner. The belief is that the capital cost of owning cows is the single largest cost; in reality, feed cost is the single largest cost of running cows.

It is not uncommon for the cow owner to get 40 percent of the calf crop and all cull cow income. Given the fact that cull income can be 10 to 20 percent of gross income, more than 50 percent of the gross income typically goes to the cow owner.

We learned that many cow leases were not equitable. I would define an equitable lease as one where the calf crop is shared in the same proportion that the costs are shared. If the cow owner provides 30 percent of the costs and the working rancher provides the other 70 percent of the costs, then an equitable lease would call for 30 percent of the calf crop going to the cow owner and 70 percent of the calf crop going to the working rancher. We learned that the most common leases were 60/40 and our economic analyses showed that these 60/40 leases were typically not equitable.

Throughout the cattle cycle of the 1990s, we learned that big cows producing big calves can be very profitable with high calf prices. We also leaned that big cows producing big calves can be very unprofitable with low calf prices.

We learned that there are four critical success factors for running a high-profit herd: calf weaning weight, low feed costs, high gross income and low overall costs. We also leaned that beef cows will not support a lot of debt—probably less than 40 percent of the capital invested in the beef cow profit centre.

We learned that a beef cow manager can not manage what he does not measure. If a manager does not measure feed consumption, he can not manage feed costs. Without measurement, how does he know if he is making progress?

Low-cost producers tend to know the nutrient requirements of their cows, know the nutrient quality of their feeds, and feed their cows according to the cows' nutrient needs—when they need it. On-the-other-hand, we learned that high-cost producers dump feeds. If in doubt, they dump more feed. They typically don't know the nutrient quality of their farm-raised feeds and they typically don't know the nutrient requirements of their cows—particularly bred heifers. They typically feed the same ration in the second and third trimesters and in lactation. They feed the 2-year-old heifers with the mature cows.

We learned that feed costs accounted for 60 percent of all costs of production. Yet, relatively few producers balance rations. We learned that feed disappearance is a key determinant of unit costs of production. We confirmed that the cost of farm raised feeds are typically lower than purchasing the feeds—with one exception: when money is borrowed on the feed land and harvesting machinery. In this case, some producers could consistently purchase feeds at a lower cost than raising them. Machinery costs are the one cost that has inflated substantially over the years. As a result, the machinery cost is dragging ranching profits down.

We learned that high-cost producers are high-cost in all categories. Debt costs were less on the low-cost producers, but the low-cost producers were not debt free. Debts on low-cost herds averaged $314 per cow in 1996 while debts on the high-cost herds averaged $574 per cow.

We learned that one-third of the IRM cooperators studied produced calves for less than $50 per hundredweight. These low-cost producers made a profit in 1994, 1995, 1996, 1997 and 1998 with their beef cows.

In summary, we learned that ranchers have to weigh calves to measure herd performance. They have to count cows on bull turn-out date and Jan. 1 of each year. They have to treat their beef cows as a profit centre. We leaned that ranchers have to measure production costs to manage production costs. Finally, we leaned that conducting a comparative analysis of our beef cow herd against benchmark herds is the single most powerful ranch management tool available, bar none!