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Low-cost operations still most profitable

If you want to make more money, try looking at the eight most common problem expenses in modern beef operations.

1. hay and feed

2. labor, management and family living expenses

3. fertilizer and lime

4. repairs

5. gasoline, fuel and oil

6. interest expense

7. supplies

8. property taxes

This revelation comes from the Southwestern Standardized Performance Analysis database, the largest active group of ranching-specific data in existence. SPA never caught on in large scale with beef operations, possibly because it is perceived as too exhaustive, but also perhaps because (as some economic pundits have suggested) not everyone wants to know the results of their analyses.

Nonetheless, for ranches that participate, the SPA database is valuable because it is standardized and annually updated for changing factors. That means it can provide a real analysis of economic and profit differences in ranching operations. Moreover, it can provide a frame of relevance for comparisons and ultimately for real-world benchmarks that can be taken outside the database.

Still worthwhile

Thus, Texas AgriLife Extension economist Stan Bevers has continued working on SPA data with interested ranchers.

His latest analysis includes 104 herds in Texas, Oklahoma and New Mexico from 2004 through 2008. They vary from 31 to 5,560 head, but 92 out of 104 are herds of 100 or more. The average size of the herds is 527 breeding females.

Bevers has long divided these into four stratified profitability groups, which he denotes as “quartiles.” At the top are the most profitable operations. At the bottom are the least profitable. They are evenly divided into four groups of 26 herds each.

This year, Bevers ran a statistical “analysis of variance” to determine which production and financial measures separated the more profitable operations from the less profitable ones. This statistical tool identifies which variables are truly different across the quartiles. This task is important because the numbers can look very different and yet not be statistically different.

In this case, the analysis of variance showed the top two groups were basically the same, but different from the bottom two groups. Hence, the rest of the significant expense figures in this story in some cases show small differences between the profit groups and yet fairly large variability within.

To demonstrate this, the chart above shows which measurements across the quartiles are significantly different by labeling them with A, B or C. If two groups within one measurement are both labeled A, they are statistically the same.

It makes more sense to label the significant areas this way than to use the actual numbers, because often they won’t be compatible with the production and economic figures you, the reader, might have in your records.

Mostly the same

Further, it’s worth noting that the only production measurement significantly different in placing beef operations in the higher or lower profitability quartiles was “pounds of roughage fed” — a measure of how dependent operations are on hay feeding.

Within each of these measurements, the standard deviation from the average/mean was huge. This indicates, among other things, that some operations manage to be profitable with larger feed bills than others. Some manage to be unprofitable regardless.

Otherwise, production numbers such as weaning percentage or weaning weights were not significantly different between the quartiles.

“Now, that doesn’t mean, as [economist] Danny Klinefelter always says, that each individual operation can’t be more profitable by doing everything well,” Bevers cautions.

But it does tell us — as did Bevers’ analysis about this time last year — that the economic rewards from productivity are relatively even across all the measured operations.

“This isn’t going to make people very happy, but it tells me that everybody’s doing about the same from a production standpoint, especially when you place the environmental conditions for that year on the production performance,” Bevers says. “In other words, most ranchers are maxed out on production given the year’s rainfall amount, temperatures, etc. Furthermore, the prices received [or assigned, if the calves were retained] for the weaned calves produced were not significantly different across the quartiles.

“So we’re back to the low-cost production concept, and if we’re telling people to be a low-cost producer, then here are eight likely expenses you can look at,” he adds.

The larger lesson here is these eight measurements show how the more profitable operations do a better job at controlling their costs.

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This article published in the January, 2010 edition of BEEF PRODUCERS.

All rights reserved. Copyright Farm Progress Cos. 2010.