KEY SUCCESS FACTORS IN COW CALF ENTERPRISE
PROFITABILITY
Jeff Millang,
Financial Business Analyst
Business Management Innovations Branch
Alberta Agriculture Food and Rural Development
Abstract
This paper is an investigation of key success factors for determining profitability
in the cow calf enterprise using the AgriProfits report indicators for Alberta and
Saskatchewan producers. Profitability is defined as return to equity on a per
pound calf weaned basis.
Using the AgriProfits key indicators; total production costs, value of production
and total labor hours per cow were determined to be closely related to profitability
of the cow calf enterprises, having R2 values of .639, .406, .267 respectively.
Other factors closely related to profitability were winter feed costs and fixed
costs. Least related are; death loss of calves, weight per day of age and
weaning rate.
Acknowledgements
I would like to acknowledge the Economics Unit of Alberta Agriculture Food and
Rural Development (AAFRD) for the use of the AgriProfits Database. I would
especially like to thank Dale Kaliel who is responsible for the data collection,
methodology and reporting of the results. Dale's many years of working with cost
of production and research surveys has provided an invaluable database as well
as a consistent data set in order that research like this paper can be undertaken.
I would also like to acknowledge the support of my advisor Dr. Peter Stonehouse
whose support and challenges allowed me to complete this project with all its
steps in an efficient and effective manner.
I would also like to acknowledge Dr. Barry Dunn who provided to me his doctoral
thesis. It was good fortune for me to find his paper while I was in the middle of
my analysis. Dr. Dunn has provided additional insight to different success factors
and alternate analysis.
Background
A major challenge facing Alberta and North American cow calf producers is the
development, understanding, and use of their own farm production cost and
returns information. The effectiveness of budgeting, planning and risk
management activities increases dramatically for producers who:
??have their own farm and enterprise business analysis, and
??are comfortable with these basic procedures.
Cycle-by-cycle, the primary beef production industry becomes increasingly
competitive from a cost control point of view. For the Alberta industry to meet its
full potential, it is critical for producers to use their "own farm facts" in making
knowledgeable business management decisions.
As producers develop their own management information, they are asking
questions about how they can become more profitable using business analysis
information. The cow calf industry is truly a commodity business. Producers are
recognizing that they are price takers and, as such, are having their margins
pressured with every production cycle.
Kent Harrison Brand Manager from the Cargill packing plant at High River
packing plant estimates their commodity vs. branded beef program to be 95%-
5% of the total beef kill. They (Cargill) are targeting 90% - 10% for the near term
with an 80%-20% in the medium term outlook (5- 10 years). With this trend in the
packing industry and with the feedlot business being driven by margins, the cow
calf sector will also likely remain in the commodity stream. Long-term profitability
for the cow calf producer will be driven by the final product demand and the drive
to control costs.
For this paper, the measure of success by return to equity per pound of calf
weaned will be used. The return to equity provides a method to analyze a return
to the owners of the business. The business owners then have at their disposal
the return to pay for reinvestment, family withdrawals (family living) or any other
draws that are not related to that particular enterprise. By using return to equity
we obtain the residual of the business revenue and expenses that are left to the
owners of the business for their profit as well as any principal payments.
The choice of per pound weaned reflects the concept of unit cost of production.
Each cow enterprise is producing a pound of calf as their output. The choice of
weaned is because at this point in time (weaning) the cow calf enterprise can be
separated from other aspects of the beef business. This also provides us with a
natural separation of the cow calf enterprise with any other enterprises on the
farm. By also choosing weaning we then have a way to compare each firm using
a common and standard time frame in the production cycle.
Data Description, Methodology
The AgriProfits Survey program is a program initiated and conducted by the
Economics Unit of Alberta Agriculture Food and Rural Development (AAFRD).
The program is used to gather farm level data that is used for policy and program
design work. In the last 3 years Saskatchewan Agriculture and Food has used
the AgriProfits approach to methodology and data collection. As such, the data
set for this paper will include Alberta and Saskatchewan producers. The data set
is drawn from the last three completed fiscal years, 1998-2000. The following
table provides a breakdown of the data set that we will be using in this paper.
Table 1 Data Source Breakdown by Year and Province
Alberta Saskatchewan Total
1998 33 30 63
1999 68 48 116
2000 57 14 71
Total 158 92 250
Statistical regressions were calculated to determine if correlations and
predictions of profitability (Return to equity per pound of calf weaned) could be
made with reliability based on selected AgriProfits measuring sticks (key success
factors). Each measure was evaluated on its own merit. Combinations or colinearity
is not considered in this study's analysis.
Table 2 Key Data Descriptors
Minimum Maximum Mean
Cows Wintered 13 596 143.01
Growth (wean wt) 318.50 809.85 566.04
Open Cow % 0.00% 32.35% 7.73%
Length of Calving (days) 33 264 97.89
Death loss of Calves (%) 0.00% 11.54% 2.25%
Wean Weight as % Mature Cow Weight 25.11% 67.49% 44.61%
Total Production Cost / Pound Weaned $0.64 $3.24 $1.20
Return to Investment -0.3734% 0.3448% 0.0615%
Total Investment / Cow 522.77 5122.38 2032.62
Pounds Weaned / Cow Wintered 245.00 832.29 537.39
Value of Production / Cow Wintered 183.30 1266.17 720.12
Gross Margin / Pound Weaned -1.06 1.39 0.39
Return to Equity / Pound Weaned -2.13 1.10 0.15
Return to Equity / Cow Wintered -903.44 548.47 87.26
Data Analysis
As mentioned previously, there are two basic avenues to manage cow calf
enterprises; those that are related to the production and production inputs, and
those related to the financial structure of the enterprise. Using linear regression
of these indicators to the profitability measure of return to equity per pound of calf
weaned, provides us with the evaluation of "can this measuring stick be used as
a predictor of profitability"? If so, is it a reliable one and what might the variation
be when using this predictor. Using the regression statistics of Standard Error,
R, R squared and adjusted R squared, we will be able to answer these
questions.
While there are many ways to manage these indicators there is no right way and
producers need to consider their own management skill levels, resources
available to them and match these production practices to their individual
situations and business goals.
Physical Production Indicators
The AgriProfits program produces a report that provides analysis for the following
measures.
??Mature cow weight
??Breeding season days
??Growth
??Open
??Length of calving period
??Death loss of calves
??Calf Weight per day of age (WPDA)
??Wean weight as % mature cow weight
??Pounds weaned per exposed females
??Pounds weaned per cows wintered
??Percent calved in the first two cycles
??Percent conception rate - bred / exposed
??Percent calving rate - live births / bred females
??Percent wean rate weaned / live birth
??Percent calf crop weaned / exposed
These measures provide some indication of how well the cow calf enterprise is
performing in terms of its production and production efficiency. Mature cow
weight gives us a feel for how physically large the cows are. Often there is belief
that big cows produce big calves. It also provides the comparison for interpreting
the feed and grazing resources consumed. This comparison also applies to the
calf weight per day of age indicator. Producers will wean calves at different ages
and such by using the standard of weight per day of age a closer comparison of
like animals and performance. The data set did not go deep enough on some
indicators for further evaluation. More research into specific management
practices needs to be done in order to separate out practices that increase any
one or combination of these factors.
There are production benchmarks referred to as the GOLD indicators. GOLD
standing for growth, open cows, length of calving season, and death loss of
calves have in the past been used as benchmarking criteria for herd
performance. The benchmarks used for these production targets are growth to
be measured as a percentage of pounds weaned per mature cow weight being
45% or better, open cows to be less than 5%, length of calving to be determined
as less than 65 days, and calf death loss to be less than 2% (Alberta Beef Herd
Management Binder, Alberta Agriculture Food and Rural Development 1985)
Other measures include pounds weaned per exposed female and pounds
weaned per cow wintered provides for some comparisons of input / output
relationships based on the physical production unit per cow.
The other indictors are used for evaluating the fertility and reproductive
performance of the herd. A tighter calving period, a higher conception rate, a
higher calving rate, and a higher calf crop per exposed all indicate a higher level
of reproductive performance.
With these physical indicators the range of statistics showed no large indication
that any of these were strongly related to profitability of the cow calf enterprise.
The most influential indicator was pounds weaned per cow exposed. This
indicator could only explain 5.7% (R2 of .057) of the variation in profitability. The
next most influential indicators were percent calf crop, and pounds weaned per
cows wintered with R2 of .039 and .037. On the other extreme calf death loss
could not be related to profitability with a R2 of 0.00 and an adjusted R2 of -.004.
None of the physical production factors were of any great help in explaining the
variability of profitability.
Input Indicators
The AgriProfits program produces a report that provides analysis for the following
input measures.
??Animal unit months per cow wintered
??Pasture cost per cow wintered
??Winter feed cost per cow wintered
??Feed, bedding, pasture cost per cow wintered
??Days on aftermath
??Days on pasture
??Days on feed
??Labor hours per cow wintered
??Exposed females
??Cows wintered
Cows need to consume feed whether that is delivered feed, grazing pasture, or
grazing aftermath. (Aftermath may be defined as crop residues, typically it
involves grazing cereal crop stubble or hay land after the crop has been
harvested.) The use of the total winter feed, bedding and pasture also allows for
the comparison of the entire feed resource the cow needs for its production. The
use of animal unit months provides the ability to compare different grazing
qualities based on the cow unit as compared to the physical grazing resource
(acres). The measures of days on feed, pasture, and aftermath allow for the
comparison and rationalization of different feed systems. Typically a producer
that has a high number of days on feed will also have a high winter feed cost,
and conversely producers with a large grazing cost will likely have a lower winter
feed expense (the reason to use a sum of feed bedding and pasture rather then
the separate components).
Labor use on farms is of particular interest especially for smaller and medium
farms. The labor indicator for some farms provides a benchmark to allocate to
other enterprises (if labor is a restricting factor) to possibly more profitable
enterprises.
The physical number of females exposed and wintered provides the comparison
of herd size. There is the belief that the larger herds are more profitable and are
able to capture economies of scale over smaller herds.
In this set of indicators the strongest relationship with profitability (return to equity
per pound of calf weaned) was labor hours per cow with a R2 of .267 or in other
words 26% of the variation in profitability could be related to labor hours. The
next two strongest are winter feed cost and cows wintered with R2 of .193 and
.106 respectively. Contrasting the least reliable indicators, days on aftermath and
pasture cost per cow wintered were the least related to profitability with R2 of
.038 and .004 respectively.
Financial Indicators
Having dealt with the production and input factors that would leave the financial
indicators that include the following:
??Value of production (VOP) per cow wintered
??Total production costs per pound of calf weaned
??Fixed costs per cow wintered
??Gross margin per pound weaned
??Total labor cost per cow wintered
??Total investment per cow wintered
??Operating expense ratio
??Interest cost per total investment
??Pounds weaned per total investment
As mentioned earlier the components of the profitability equation equal total
revenue (value of production) minus total costs (total production costs). These
two indicators are calculated on a per pound weaned reflecting the literature
review of unit costs of production being pounds of weaned calf. The indicator of
fixed costs is included as a method to evaluate the overhead of the cow calf
enterprise. Typically these are referred to as machinery and buildings but include
other fixed costs as identified in Appendix 2.
Total investment per cow is provided as a method to help identify those
enterprises and firms that may have more invested than others. Interest cost per
investment provides the producer with an indicator of his debt load (through
interest payable).
Operating expense ratio is included to help individual firms understand and
evaluate what proportion of each dollar of revenue is used for operating
expenses. Producers can use OER as a measure of short-term ability to meet
operating production costs.
Gross margin is used to help producers understand what is left over to cover
non-cash costs in the enterprise. Pounds weaned per investment combines
production with a financial indicator to provide us with an investment - production
efficiency measurement.
In this group of indicators (which has the strongest indictors the most closely
related to profit) gross margin per pound weaned, operating expense ratio, and
total production costs have the strongest relationships with profitability with R2
values of .894, .726, and .639 respectively. The least related in this group is the
interest per total investment ratio with an R2 .011. Interestingly, this group (even
the lowest related) has higher relationships than any of the production indicators.
Success Indicators
Other measures that the AgriProfits reports provide are:
??Return to equity per cow wintered
??Return to investment
While these measures provide different measures of success and have different
interpretations or applications they do provide extra information for the producer.
Return to Equity per cow wintered has an R2 of .948 and Return on Investment
has an R2 of .852. Both highly related to return to equity per pound weaned. It is
not surprising that either of these two indicators is related to Return to equity.
Pounds weaned is the denominator in one and cows wintered is the denominator
in the other. In return to investment, the cost of capital interest is included in the
denominator.
Summary
In summary there are several indicators that have some relation to profitability
and some that seem to have no measurable ability to predict or explain the
variation in profitability of cow calf enterprises. The following tables identify
(arbitrarily divided into thirds) the highly related, moderately related and those
with little relation to profitability as defined by return to equity per pound of calf
weaned.
Table 3 AgriProfits Indicators By Degree of Relationship to Profitability
High relationship Moderate relationship Low relationship
Return to Equity per Cow
Wintered
Females Exposed Open Cow Percent (%)
Gross Margin per Pound Weaned
Feed Bedding Pasture per Cow
Wintered
Length of Calving (days)
Return to Investment Pounds Weaned per Total
Investment
Length of Calving (days)
Operating Expense Ratio Days on Feed Wean Weight as Percent of
Mature Cow Weight (%)
Total Production Cost per Pound
Weaned
Animal Unit Months per Cow
Wintered
Conception Rate (%)
Value of Production per Cow
Wintered
Pounds Weaned per Cow
Exposed
% Calved in First 2 Cycles
Labor Hours per Cow
Days on Pasture Breeding Season (days)
Total Labor Cost per Cow
Wintered
Calf Crop (%) Interest per Total Investment
Fixed Cost per Cow Pasture cost per Cow Wintered Days on Aftermath Grazing
Winter Feed Cost per Cow
Wintered
Pounds Weaned per Cow
Wintered
Mature Cow Weight
Total Investment per Cow
Wintered
Calving Rate (%) Wean Rate (%)
Cows Wintered
Growth (wean weight) Calf Weight Per Day of Age
Death Loss of Calves (%)
Conclusions
There are several measures that are results of different factors or different
combinations of factors. The previous example of return to equity per cow being
strongly related to return to equity per pound weaned provides this concept.
There are indicators that the producer has no way of managing or controlling
directly, (such as return to equity per cow) but there are indicators that the
producers can manage or have some influence in. If we look at table 3 using the
highly related column list of indicators, the first one producers can have some
influence is operating expense ratio. This is the equation of dollars spent on
operating costs (excluding interest and depreciation) divided by total value of
production. While the producer may not be able to manage this one directly, what
the indicator tells us is that this ratio is highly related to profitability. If we examine
the scatter graph we can infer through general tendency that as the operating
expense ratio increases the lower the profitability of the cow calf enterprise.
Figure 1 Operating Expense Ratio Vs Return to Equity per Pound Calf Weaned
Return to Equity / Lbs Weaned
-2.5 -2.0 -1.5 -1.0 -.5 0.0 .5 1.0 1.5
Operating Expense Ratio
4.0
3.5
3.0
2.5
2.0
1.5
1.0
.5
0.0
If we look at the next indicator total production cost again this indicator is highly
related, though some may argue that producers cannot manage total costs. If we
examine the following scatter graph of the data set we can see there is a general
linear relationship - that as we reduce total costs profitability increases. There is
potential to manage for reducing these total costs one by one.
Figure 2 Total Production Costs Vs Return to Equity per Pound Calf Weaned
Return to Equity / Lbs Weaned
-2.5 -2.0 -1.5 -1.0 -.5 0.0 .5 1.0 1.5
Total Production Cost / Lb Weaned
3.5
3.0
2.5
2.0
1.5
1.0
.5
The third indicator to examine is the Value of Production. While this indicator is a
function of price (market price of calves) times the weaned calf weight there still
is a strong relationship. The following chart illustrates that as VOP increases so
does profitability.
Figure 3 Value of Production Vs Return to Equity per Pound Calf Weaned
Return to Equity / Lbs Weaned
-2.5 -2.0 -1.5 -1.0 -.5 0.0 .5 1.0 1.5
Value of Production / Cows Wintered
1400
1200
1000
800
600
400
200
0
The next most related to profitability is one that is quite interesting. The chart for
Labor hours per cow suggests that the more hours spent on the cow calf
enterprise the less profitable the enterprise may be. Even though the relationship
is much looser for this indicator it is one of the pure (not interrelated) indicators
we have.
Figure 4 Labor Hours Vs Return to Equity per Pound Calf Weaned
Return to Equity / Lbs Weaned
1.5 1.0 .5 0.0 -.5 -1.0 -1.5 -2.0 -2.5 Labour Hours /
Cow
40
30
20
10
0
In conclusion there are several indicators within the AgriProfits database that
provide strong relationships or predictors of profitability (as measured as return to
equity per pound of calf weaned). Several of the indicators are combinations of
others indicators or outcomes of managing both the physical and financial
aspects of the cow calf enterprise.
There is no one key success factor that can be managed directly or purely that
will lead to profitability in the cow calf enterprise. There is however the
opportunity to use total production costs as a management indicator for profit.
Reducing total production costs should lead to increasing profitability. Jones
(2000) suggests that with feed and capital expenses the two most prominent
expenses (that make up 76% of the total cost per cow) are arguably the most
important to concentrate on. In the AgriProfits data winter feed, bedding and
pasture represents $336 of the $632 total cost of production (averages). Total
fixed costs represent $79.77 per cow making it the third largest cost per cow
behind feed, bedding, pasture and total labor cost. As such to reduce total
production cost the first three areas to consider are winter feed bedding
combinations, total labor costs, and total fixed costs. Evaluating these to look for
potential reductions should be the first step in increasing profitability.
On the other end of the profitability equation is the value of production. It may
also indicate a key success factor for cow calf profitability. Value of production is
derived by market value price multiplied by pounds weaned. As stated earlier in
the paper, cow calf producers are typically price takers and typically are price
competitive, as such the real opportunity to increase value of production is
increase pounds weaned. It is interesting that none of the traditional production
indicators were able to show strong relationships to profitability but when
combined with price shows such a strong relationship exists.
By taking the difference between the high cost and low cost group and converting
it to a percentage over the low cost number we can gather a relative measure on
how far apart the two groups are. For example using cows wintered - the low
profit group average was 87.18, the high profit group was 187.45. The difference
of 100.12 which divided by 87.18 gives us 115%. Table 4 presents the largest 10
differences.
Table 4 High and Low Profit Group Means
High Profit
Group Mean
Low Profit
Group Mean
% Difference
Between Groups
Cow Wintered 187.45 87.18 115%
Females Exposed 204.71 95.68 114%
Value of Production / Cow Wintered 901.81 520.90 73%
Interest / Total Investment 0.0036 0.0105 -65%
Operating Expense Ratio 0.4516 1.2194 -63%
Fixed Cost / Cow 52.17 120.85 -57%
Labor Hours / Cow 6.67 14.63 -54%
Total Labor Cost / Cow Wintered 66.59 145.28 -54%
Total Production Cost / Pound Weaned 0.9764 1.8259 -47%
Open Cow % 6.38 11.23 -43%
I
n general the high profit group was a larger herd size, had higher value of
production, had lower fixed costs per cow, used less labor per cow, and had less
interest expense per dollar invested (suggesting lower debt).
Comparing this list to the factors that are closely related to profitability we see
that value of production, total production costs, labor, and fixed costs are listed in
both analysis. It is interesting that open cow % was identified as a large
difference among low profit and high profit herds but open cows % showed very
little explanation of the differences in profitability. Looking further there are 4
themes or areas that costs can be grouped, the feed bedding pasture
combination, labor cost, fixed cost and other operating costs. While considering
all the AgriProfits indicators concentrating on the feed bedding and pasture
combination would likely provide the greatest economic return. Reducing fixed
costs and especially reducing the debt associated with unnecessary fixed costs
will also increase profitability. Reducing total costs should be the ultimate goal of
cow calf producers.
This paper also confirms the previous findings that the cow calf enterprise's key
to success is to reduce cost of production, based on the assumption that cow calf
producers produce a commodity in a seller being a price taker marketplace. This
suggests that if producers want to remain in the commodity business that they
pursue the least cost strategy, or if they wan to get out of the commodity
business they should follow a product differentiated strategy to remain successful
in the long term.