Which of the following herds is more profitable: herd A that weans a 90% calf crop of 450 lb. calves that go on to grade 60% Choice or herd B that weans a 95% calf crop of 600 lb. calves that go on to grade 80% Choice? Obviously the question can not be answered with the information at hand. We have only the output side of the profitability equation and none of the inputs. It is likely that herd B will generate more revenue, but without knowing the costs of producing that revenue we can never know which herd is more profitable. Unfortunately, measuring costs to track true profitability in cow herds has been a difficult task. Therefore, identifying production factors that are correlated to profitability could possibly help producers make management changes to improve the financial standing of their cow-calf enterprise

Boggs, Don

Hamilton, Eddie

English

DigitalCommons@University of Nebraska

University of Nebraska - Lincoln DigitalCommons@University of Nebraska - Lincoln Range Beef Cow Symposium Animal Science Department December 1997 Cow/Calf Analysis: Key Indicators of Profitability Don Boggs South Dakota State University Eddie Hamilton South Dakota State University Follow this and additional works at: https://digitalcommons.unl.edu/rangebeefcowsymp  Part of the Animal Sciences Commons Boggs, Don and Hamilton, Eddie, "Cow/Calf Analysis: Key Indicators of Profitability" (1997). Range Beef Cow Symposium. 167. https://digitalcommons.unl.edu/rangebeefcowsymp/167 This Article is brought to you for free and open access by the Animal Science Department at DigitalCommons@University of Nebraska - Lincoln. It has been accepted for inclusion in Range Beef Cow Symposium by an authorized administrator of DigitalCommons@University of Nebraska - Lincoln. Proceedings, The Range Beef Cow Symposium XVDecember 9, 10 and 11, 1997, Rapid City, South DakotaCow/Calf Analysis: Key Indicators of ProfitabilityDon Boggs and Eddie Hamilton, DVMSouth Dakota State UniversityINTRODUCTIONWhich of the following herds is more profitable: herd A that weans a 90% calf crop of 450lb. calves that go on to grade 60% Choice or herd B that weans a 95% calf crop of 600 lb. calvesthat go on to grade 80% Choice?  Obviously the question can not be answered with theinformation at hand.  We have only the output side of the profitability equation and none of theinputs.  It is likely that herd B will generate more revenue, but without knowing the costs ofproducing that revenue we can never know which herd is more profitable.  Unfortunately,measuring costs to track true profitability in cow herds has been a difficult task.  Therefore,identifying production factors that are correlated to profitability could possibly help producersmake management changes to improve the financial standing of their cow-calf enterprise. RELATIVE ECONOMIC IMPORTANCE OF TRAITSSince our first introductory animal science course we have all been instructed thatproduction traits have twice the relative economic importance of carcass traits and reproductivetraits have ten times the relative economic importance of carcass traits.  These relationships wereestablished some time ago when costs were low and the concept of value based marketing had yetto be introduced.  More recently, Melton (1995) used a bioeconomic model to compare therelative economic importance of traits for a commercial cow-calf producer versus an integratedbeef firm that owns the product from conception through marketing to the consumer.  For thecommercial cow-calf producer, with consumption (carcass and palatability) traits set at a value of1.0, production traits had a relative economic value of 2.87 and reproduction traits had a relativeeconomic value of 3.24.  In other words, a one standard deviation change in reproduction traitswould have 3.24 times the economic impact as a one standard deviation change in consumptiontraits.  For the integrated firm, the bioeconomic model set reproduction traits at 1.0 and showedthe relative economic importance of production and consumption traits to be 9.79 and 13.52,respectively.  In the integrated firm, a one standard deviation change in consumption traits had13.52 times the economic impact of a one standard deviation change in reproduction.  In themodel for the integrated firm, the demand for beef was assumed to be static, thus increases inreproduction resulted in increased supply and decreased the market price.  In addition,improvements in the product could be captured in improved sales at the consumer level.  InMelton's model, two very important points are drawn out.  First, the integrated firm had thecapability of capturing three times the amount of economic benefit from genetic change as did thecommercial cow-calf producer.  Second, marketing time is critical to determining which traitsshould be included in a cow-calf producer's selection criteria.  Producers who own cattle throughthe feedlot and onto the rail require a different set of selection criteria than those who sell atweaning.  In Melton's model, the cow-calf producer that puts selection pressure on post-weaningtraits, yet sells the calves at weaning will have a difficult time recouping the cost of the geneticimprovement.FACTORS AFFECTING HERD PROFITABILLTYMcGrann and co-workers (l992) related various production factors to the profitability(measured as percent return on assets) of 88 cow herds in an early IRM-SPA data set.  In thisstudy, pregnancy percentage and weaning percentage had positive relationships with percentreturn on assets.  As reproductive performance among these herds increased so did the likelihoodthat they were profitable.  On the other hand, average weaning weight had no relationship withpercent return on assets.  Herds weaning 400-, 500-, or 600-lb. calves had the same likelihood ofhaving a positive (or negative) return on assets.  This does not suggest that high weaning weightsare necessarily bad, but it would indicate that efforts to maximize outputs without regard to inputsare misdirected.Iowa researchers (1996) found that the highest profit one-third of producers in their BeefCow Business Record program were able to wean heavier calves while reducing production costs. In a thirteen year summary of these records, reduced costs accounted for 55% of the $233difference in net profit between the top-third and the bottom-third of the herds.  Hughes (1995)found a similar trend in his evaluation of North Dakota herds in 1994.  In this evaluation the lowcost one-third of the herds also had the highest weaning weights.  These data would suggest thatthe targeting and timing of inputs to the areas in the herd where they will have the most impact isthe key to economically improving herd output.A summary of the current IRM-SPA data set for small (less than 200 cows), medium(200-499 cows) and large herds (500 or more cows) is shown in tables 1 through 4.  Thissummary represents over 300,000 cows from 388 herds in 15 states.  As seen in Table 1, netincome is closely related to cost of production.  In all herd size groups, net income increased ascow costs decreased.  There is also a tendency for the larger herds to have higher net income percow; however this is much more exaggerated in the higher cost quartiles reflecting the widervariation in cow costs among the herd size groups in these higher cost quartiles (Table 2).  Thisincreased variability in cow costs among smaller herds is also clearly shown in the standarddeviation for costs per cow being approximately two and one-half times higher for the smallerherds.  It is important to note that there is tremendous variation in cow costs within all herd sizegroups which indicates an opportunity for producers of all sizes to make improvements inreducing production costs.In these herds, production traits were not highly related to net income.  Neither increasesin weaning percentage (Table 3) nor weaning weight (Table 4) were associated with increased netincome per cow.  In fact there was more of a tendency for cow costs to increase and net incomeper cow to decrease as the herd outputs increased.  Both weaning percentage and weaningweights tended to be highest in the highest cost herds with the lowest net incomes.UNIT COST OF PRODUCTIONUnit cost of production (the costs required to produce a hundred pounds of weaned calf)has been identified as a critical factor in herd profitability (Hughes, 1995).  As unit cost ofproduction (UCOP) decreased, percent return on assets and profitability increased (McGrann et.al., 1992).  Unit cost of production is a critical factor because it considers both the inputs andoutputs of the cow-calf enterprise.  Unit cost of production is sensitive to production parametersas well as costs.  Neither low costs nor high performance ensure a low UCOP.  A herd that weans400 lb. calves with costs of $280/cow has the same $70/cwt.  UCOP as a herd that weans 600 lb.calves but has costs of $420/cow.In the current IRM-SPA summary, unit cost of production, calculated as the total financialcow costs divided by the pounds of calf weaned per cow exposed, is also highly associated withincreased profitability.  In all herd size groups, the cost quartile groups with the lowest cow costshad the lowest unit cost of production and the highest net income per cow (Table 5).These data would all suggest that producers should develop strategies to lower unit costof production.  These strategies could entail lowering costs without sacrificing performance,reallocating expenses to increase productivity without increasing costs, or in some situations evenincreasing costs to improve a substantially below average area of performance.  This situation ismost likely to occur if reproductive performance is well below average and an economicalsolution can be found.  Whatever the strategy, it appears imperative for cow-calf producers toKNOW and REDUCE their UNIT COST OF PRODUCTION in order to improve theprofitability of their herds.IMPACT OF POST-WEANING PERFORMANCEThere is currently a great deal of interest and emphasis on measuring the feedlotperformance and carcass merit of individual cattle and tracing this information back to theirmother cows.  This is outstanding information that can certainly help improve the quality andefficiency of beef production.  However, care must be taken when this data is used as the solecriteria for making culling decisions in the cow herd.  In integrated beef enterprises, feedlotprofitability represents only a portion of the overall profitability of the enterprise.  Coloradoresearchers (Lankister et. al., 1997), evaluated the critical points in determining profitability of ten ranches that retained ownership and marketed fed cattle in 1995.  On eight of the ten ranches,the cow-calf phase of production had a greater impact on overall profitability than the feedlotphase.  Since 1995 was a year of high feed grain prices and low fed cattle prices the researchersreanalyzed the herds using average feed and market prices for the region.  Under these conditionsmore of the herds made an overall profit, yet in nine of the ten herds profitability was still morehighly influenced by the cow-calf phase than by the feedlot phase.Producers should also be aware that feedlot performance of individual cattle in a herd isoften inversely related to their preweaning performance.  Lighter weight calves at weaning, thatlikely have a higher unit cost of production within the herd, often compensate with higher feedlotperformance.  In an unpublished data summary, carcass weight was determined to be highlyrelated to feedlot profitability; however, carcass weight is also correlated with larger cow sizewhich would result in higher maintenance costs in the cow herd.  Both pre- and post-weaningperformance of offspring as well as several input or cost factors need to be considered whenculling the cow herd.SUMMARYNo production or reproduction traits show a consistent relationship to profitability in cowherds.  Data would indicate a threshold for outputs from a cow herd.  If outputs are below thatthreshold, management changes to increase productivity will have a good chance of increasingprofitability.  However, if outputs already exceed the threshold, increased inputs to attempt toraise outputs will likely not be cost effective.  Unit cost of production, or the cost perhundredweight of beef produced, considers both the inputs and outputs of a cow herd and hasconsistently been related to cow herd profitability in numerous studies.  Producers who areinterested in improving the profitability of their cow herds need to have an accurate measurementof the costs per hundredweight of beef produced in their herds as well as an understanding of theinput and output components of the unit production costs.  These producers can then implementmanagement strategies that are appropriately targeted at either the cost or production side of theequation to lower the unit cost of production for their herds.REFERENCESMcGrann, J., J. Parker, L. Falconer, G. Clary, S. Neibergs and P. Gutierrez. 1992.  StandardizedPerformance Analysis (SPA) shows low profit, effects of economy of size andopportunities for change in the cow-calf sector. Texas Ag Ext Ser, Texas A&MUniversity. College Station, TX.Hughes, H. 1995. "Financial & Reproductive Management Systems FARMS Workshop IIISummary For Demo Herd", IRM Cooperator Workshop. North Dakota State Univ.Lankister, W., R. Green, N. Dalsted and R. Taylor. 1997. Identification of critical control pointsin the cow-calf enterprise for achieving and maintaining consistency and low cost ofproduction: summary of overall economic results. 1997 Beef Program Rep., ColoradoState University, Ft. Collins, CO.Strohbehn, D. 1996. A 13-year summary of the ISU Beef Cow Business Record. 1996 Beef Research Rep., Iowa State Univ., Ames, IA.

Cow/Calf Analysis: Key Indicators of Profitability

UNL | Libraries

University of Nebraska - Lincoln 
DigitalCommons@University of Nebraska - Lincoln 
Range Beef Cow Symposium Animal Science Department 
December 1997 
Cow/Calf Analysis: Key Indicators of Profitability 
Don Boggs 
South Dakota State University 
Eddie Hamilton 
South Dakota State University 
Follow this and additional works at: https://digitalcommons.unl.edu/rangebeefcowsymp 
 Part of the Animal Sciences Commons 
Boggs, Don and Hamilton, Eddie, "Cow/Calf Analysis: Key Indicators of Profitability" (1997). Range Beef 
Cow Symposium. 167. 
https://digitalcommons.unl.edu/rangebeefcowsymp/167 
This Article is brought to you for free and open access by the Animal Science Department at 
DigitalCommons@University of Nebraska - Lincoln. It has been accepted for inclusion in Range Beef Cow Symposium 
by an authorized administrator of DigitalCommons@University of Nebraska - Lincoln. 
Proceedings, The Range Beef Cow Symposium XV
December 9, 10 and 11, 1997, Rapid City, South Dakota
Cow/Calf Analysis: Key Indicators of Profitability
Don Boggs and Eddie Hamilton, DVM
South Dakota State University
INTRODUCTION
Which of the following herds is more profitable: herd A that weans a 90% calf crop of 450
lb. calves that go on to grade 60% Choice or herd B that weans a 95% calf crop of 600 lb. calves
that go on to grade 80% Choice?  Obviously the question can not be answered with the
information at hand.  We have only the output side of the profitability equation and none of the
inputs.  It is likely that herd B will generate more revenue, but without knowing the costs of
producing that revenue we can never know which herd is more profitable.  Unfortunately,
measuring costs to track true profitability in cow herds has been a difficult task.  Therefore,
identifying production factors that are correlated to profitability could possibly help producers
make management changes to improve the financial standing of their cow-calf enterprise. 
RELATIVE ECONOMIC IMPORTANCE OF TRAITS
Since our first introductory animal science course we have all been instructed that
production traits have twice the relative economic importance of carcass traits and reproductive
traits have ten times the relative economic importance of carcass traits.  These relationships were
established some time ago when costs were low and the concept of value based marketing had yet
to be introduced.  More recently, Melton (1995) used a bioeconomic model to compare the
relative economic importance of traits for a commercial cow-calf producer versus an integrated
beef firm that owns the product from conception through marketing to the consumer.  For the
commercial cow-calf producer, with consumption (carcass and palatability) traits set at a value of
1.0, production traits had a relative economic value of 2.87 and reproduction traits had a relative
economic value of 3.24.  In other words, a one standard deviation change in reproduction traits
would have 3.24 times the economic impact as a one standard deviation change in consumption
traits.  For the integrated firm, the bioeconomic model set reproduction traits at 1.0 and showed
the relative economic importance of production and consumption traits to be 9.79 and 13.52,
respectively.  In the integrated firm, a one standard deviation change in consumption traits had
13.52 times the economic impact of a one standard deviation change in reproduction.  In the
model for the integrated firm, the demand for beef was assumed to be static, thus increases in
reproduction resulted in increased supply and decreased the market price.  In addition,
improvements in the product could be captured in improved sales at the consumer level.  In
Melton's model, two very important points are drawn out.  First, the integrated firm had the
capability of capturing three times the amount of economic benefit from genetic change as did the
commercial cow-calf producer.  Second, marketing time is critical to determining which traits
should be included in a cow-calf producer's selection criteria.  Producers who own cattle through
the feedlot and onto the rail require a different set of selection criteria than those who sell at
weaning.  In Melton's model, the cow-calf producer that puts selection pressure on post-weaning
traits, yet sells the calves at weaning will have a difficult time recouping the cost of the genetic
improvement.
FACTORS AFFECTING HERD PROFITABILLTY
McGrann and co-workers (l992) related various production factors to the profitability
(measured as percent return on assets) of 88 cow herds in an early IRM-SPA data set.  In this
study, pregnancy percentage and weaning percentage had positive relationships with percent
return on assets.  As reproductive performance among these herds increased so did the likelihood
that they were profitable.  On the other hand, average weaning weight had no relationship with
percent return on assets.  Herds weaning 400-, 500-, or 600-lb. calves had the same likelihood of
having a positive (or negative) return on assets.  This does not suggest that high weaning weights
are necessarily bad, but it would indicate that efforts to maximize outputs without regard to inputs
are misdirected.
Iowa researchers (1996) found that the highest profit one-third of producers in their Beef
Cow Business Record program were able to wean heavier calves while reducing production costs. 
In a thirteen year summary of these records, reduced costs accounted for 55% of the $233
difference in net profit between the top-third and the bottom-third of the herds.  Hughes (1995)
found a similar trend in his evaluation of North Dakota herds in 1994.  In this evaluation the low
cost one-third of the herds also had the highest weaning weights.  These data would suggest that
the targeting and timing of inputs to the areas in the herd where they will have the most impact is
the key to economically improving herd output.
A summary of the current IRM-SPA data set for small (less than 200 cows), medium
(200-499 cows) and large herds (500 or more cows) is shown in tables 1 through 4.  This
summary represents over 300,000 cows from 388 herds in 15 states.  As seen in Table 1, net
income is closely related to cost of production.  In all herd size groups, net income increased as
cow costs decreased.  There is also a tendency for the larger herds to have higher net income per
cow; however this is much more exaggerated in the higher cost quartiles reflecting the wider
variation in cow costs among the herd size groups in these higher cost quartiles (Table 2).  This
increased variability in cow costs among smaller herds is also clearly shown in the standard
deviation for costs per cow being approximately two and one-half times higher for the smaller
herds.  It is important to note that there is tremendous variation in cow costs within all herd size
groups which indicates an opportunity for producers of all sizes to make improvements in
reducing production costs.
In these herds, production traits were not highly related to net income.  Neither increases
in weaning percentage (Table 3) nor weaning weight (Table 4) were associated with increased net
income per cow.  In fact there was more of a tendency for cow costs to increase and net income
per cow to decrease as the herd outputs increased.  Both weaning percentage and weaning
weights tended to be highest in the highest cost herds with the lowest net incomes.

UNIT COST OF PRODUCTION
Unit cost of production (the costs required to produce a hundred pounds of weaned calf)
has been identified as a critical factor in herd profitability (Hughes, 1995).  As unit cost of
production (UCOP) decreased, percent return on assets and profitability increased (McGrann et.
al., 1992).  Unit cost of production is a critical factor because it considers both the inputs and
outputs of the cow-calf enterprise.  Unit cost of production is sensitive to production parameters
as well as costs.  Neither low costs nor high performance ensure a low UCOP.  A herd that weans
400 lb. calves with costs of $280/cow has the same $70/cwt.  UCOP as a herd that weans 600 lb.
calves but has costs of $420/cow.
In the current IRM-SPA summary, unit cost of production, calculated as the total financial
cow costs divided by the pounds of calf weaned per cow exposed, is also highly associated with
increased profitability.  In all herd size groups, the cost quartile groups with the lowest cow costs
had the lowest unit cost of production and the highest net income per cow (Table 5).
These data would all suggest that producers should develop strategies to lower unit cost
of production.  These strategies could entail lowering costs without sacrificing performance,
reallocating expenses to increase productivity without increasing costs, or in some situations even
increasing costs to improve a substantially below average area of performance.  This situation is
most likely to occur if reproductive performance is well below average and an economical
solution can be found.  Whatever the strategy, it appears imperative for cow-calf producers to
KNOW and REDUCE their UNIT COST OF PRODUCTION in order to improve the
profitability of their herds.
IMPACT OF POST-WEANING PERFORMANCE
There is currently a great deal of interest and emphasis on measuring the feedlot
performance and carcass merit of individual cattle and tracing this information back to their
mother cows.  This is outstanding information that can certainly help improve the quality and
efficiency of beef production.  However, care must be taken when this data is used as the sole
criteria for making culling decisions in the cow herd.  In integrated beef enterprises, feedlot
profitability represents only a portion of the overall profitability of the enterprise.  Colorado
researchers (Lankister et. al., 1997), evaluated the critical points in determining profitability of 
ten ranches that retained ownership and marketed fed cattle in 1995.  On eight of the ten ranches,
the cow-calf phase of production had a greater impact on overall profitability than the feedlot
phase.  Since 1995 was a year of high feed grain prices and low fed cattle prices the researchers
reanalyzed the herds using average feed and market prices for the region.  Under these conditions
more of the herds made an overall profit, yet in nine of the ten herds profitability was still more
highly influenced by the cow-calf phase than by the feedlot phase.
Producers should also be aware that feedlot performance of individual cattle in a herd is
often inversely related to their preweaning performance.  Lighter weight calves at weaning, that
likely have a higher unit cost of production within the herd, often compensate with higher feedlot
performance.  In an unpublished data summary, carcass weight was determined to be highly
related to feedlot profitability; however, carcass weight is also correlated with larger cow size
which would result in higher maintenance costs in the cow herd.  Both pre- and post-weaning
performance of offspring as well as several input or cost factors need to be considered when
culling the cow herd.
SUMMARY
No production or reproduction traits show a consistent relationship to profitability in cow
herds.  Data would indicate a threshold for outputs from a cow herd.  If outputs are below that
threshold, management changes to increase productivity will have a good chance of increasing
profitability.  However, if outputs already exceed the threshold, increased inputs to attempt to
raise outputs will likely not be cost effective.  Unit cost of production, or the cost per
hundredweight of beef produced, considers both the inputs and outputs of a cow herd and has
consistently been related to cow herd profitability in numerous studies.  Producers who are
interested in improving the profitability of their cow herds need to have an accurate measurement
of the costs per hundredweight of beef produced in their herds as well as an understanding of the
input and output components of the unit production costs.  These producers can then implement
management strategies that are appropriately targeted at either the cost or production side of the
equation to lower the unit cost of production for their herds.
REFERENCES
McGrann, J., J. Parker, L. Falconer, G. Clary, S. Neibergs and P. Gutierrez. 1992.  Standardized
Performance Analysis (SPA) shows low profit, effects of economy of size and
opportunities for change in the cow-calf sector. Texas Ag Ext Ser, Texas A&M
University. College Station, TX.
Hughes, H. 1995. "Financial & Reproductive Management Systems FARMS Workshop III
Summary For Demo Herd", IRM Cooperator Workshop. North Dakota State Univ.
Lankister, W., R. Green, N. Dalsted and R. Taylor. 1997. Identification of critical control points
in the cow-calf enterprise for achieving and maintaining consistency and low cost of
production: summary of overall economic results. 1997 Beef Program Rep., Colorado
State University, Ft. Collins, CO.
Strohbehn, D. 1996. A 13-year summary of the ISU Beef Cow Business Record. 1996 Beef 
Research Rep., Iowa State Univ., Ames, IA.


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Cow/Calf Analysis: Key Indicators of Profitability

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