There is no greater threat to the survival of the American farmer than the lack of profitability. Bankers want profitability and families demand it. No one can deny the success and often the opinion of a manager who is turning a profit. But, when managers are trying to analyze their specific management success or consider a management change the most important bit of financial information is the cost per unit of production. For cow/calf producers, this is the cost per pound of calf produced.
This point can be best illustrated by reflecting on the yearling and feeder calf prices of the last three years. Backgrounders sold their heifers three years ago at around 50 cents a pound. That was bad. However, they could replace their yearlings with calves for nearly the same price per pound. That appeared to correct that problem. When they sold those cattle nearly a year later the price was nearly 70-cents per pound. So, the backgrounder recovered and enjoyed a good year at the apparent expense of the calf producer. Had the backgrounder improved his or her management to turn a dismal year into a windfall? Or, what did the calf producer do wrong to see per calf income drop to one-half that of the previous season? Neither question is fair, and neither can be answered using profit as the measuring stick. For the manager to evaluate what happened, he or she must determine what it really cost to produce that pound of yearling or calf. Then managers can make appropriate adjustments.
The cost per unit of production can show the manager what impact a price swing had on the operation. More importantly, it can also expose the real progress made toward a more efficient production unit. Profit is mandatory for survival, but only cost per unit of production analysis can help a producer track management efficiency.
Arriving at this figure can be as simple as using the total cost from the federal income tax schedule F (Form 1040) Profit or Loss From Farming and dividing it by the pounds of calf weaned or sold. The manager can glean more detailed and explicit information from this basic data by changing the formula. This can be illustrated by using the same schedule F and considering only feed purchases, dividing that figure by the pounds of calf weaned or produced .The manager has many options to consider, but most agree that using that simple figure is a great start.
What else can you do with a cost per pound of production analysis? Consider the same 1995 cattle prices. Many farmers considered buying more cows and or culling fewer cows, so the operation would have more calves to sell. If a comparison of cost per pound of calf was applied to the actual pounds of calf (heifer or steer) a cow produced, a farmer would know which cows to consider for culling. There is no point to keeping cows producing below the break-even price. Replacement heifer decisions would be easier.
This per-unit-cost principle then becomes a comparison within your operation, not a comparison with your neighbors. Maybe a cow just isn't suited to your environment. It is imperative to know how individual cows rank in the herd. Some very well-bred and young cows don't match your management. This analysis helps you identify those cows and take appropriate action.
Comparison between herds, although not as important as a day-to-day management tool, has some utility. Being able to look at your inputs, using feed as an example, keeps you informed as to your relative success at cost containment. If your feed costs are 25 percent higher than a population you choose to compare yourself to, then a closer look at your feed costs might be profitable. Continuing along this comparison, if a change were incorporated relative to your feed costs, you will be able to measure the impact of that management change on next year's analysis.
Some caution about this comparison discussion is important. Recently shepherds attending a meeting on this topic revealed that their cost-per-pound of lamb varied almost 40 cents per pound. Every producer denied losing money; so, there must have been different production goals. Goals must be made very clear before analysis can be helpful.
The most important comparison derived from this exercise is that of a single operation from one season to the next. The manager can determine if the problems identified and the actions taken have made a difference.
Where do you start? Just get your schedule F, your calf receipts are on it anyway, and grab a calculator. If you want a more formal exercise, use the WV Quickview Analysis Sheet found on the WVU Extension Service's Farm Management web site, or ask your accountant or bookkeeper to help you. While you are in your records you might want to look at the last several years, and solve for that one figure -- the cost per unit of production.