(Laura McKenzie/Texas A&M AgriLife Marketing and Communications)
Building a profitable business is key to successfully ensuring an economically sustainable operation. Today Pancho Abello will review one of the best tools that ranchers have to improve profits and accurately analyze the production, financial, and economic performance of their operations.
Dates and Deadlines
2/23, 3/9/2022 – North Region Production Education Online
1/26/2022 – Organic Cotton and Peanut Production Seminar. Seminole, Tx.
1/27/2022 – Rolling Plains Chemical Conference. Dickens, Tx.
1/25, 1/26, 1/27, 2/9, 2/10, 2/23, 2/24, 3/9, 3/10/2021 – Amarillo Master Marketer, Amarillo
1/26 – North Region Beef Conference. Dumas, TX.
1/27 – Northwest Panhandle Ag Conference. Dalhart, TX.
1/28/2022 – High Plains Cotton Conference, Spearman
1/28, 2/16, 3/2* 2022 – Profitability Spreadsheet Conferences, Lubbock, TX., *Plainview, TX.
1/31/2022 – Livestock Forage Program (LFP) Application Deadline
1/31/2022 – Cattle Inventory Report
2/1-2/3/2022 – National Cattleman’s Beef Association National Meeting, Houston
What We’re Reading
High fertilizer prices, drought leave wheat outlook cloudy – AgriLife Today
Statewide estate survey underway among farmers, ranchers, rural landowners – AgriLife Today
Profitability spreadsheet workshops set in South Plains – AgriPulse
Only partial support for cattle market overhaul – Feedstuffs
Optimism, higher cattle prices to start 2022 – Southwest Farm Press
Building a Profitable Ranch Business
As ranchers, business people, and CEOs, we must ensure the economic sustainability of our companies for the future of our business and the next generations. Cow-calf producers have suffered multiple years of low margins due to market prices below the average total economic cost of production. Even today, with a better price outlook than a year ago, breakeven prices still rise for most cow-calf operations.
Especially during these last years, cattlemen were challenged to reduce production costs, be more competitive and increase the profitability of their herds. The most critical risk management strategies to successfully manage a profitable business are establishing and measuring production, economic, and financial performance objectives, determining the unit cost of production, and benchmarking with alternative production systems.
As Peter Drucker said: “You Can’t Manage What You Can’t Measure.” A profitable business must establish financial and production performance objectives. Those could be profit objectives, rate of return on assets and working capital, equity growth, crop and cattle unit cost of production, or grazing efficiency, among others.
Beef-Cattle Standard Performance Analysis
One of the best tools available to measure your ranch’s productivity, financial performance, cost of production, and profitability, is the Beef-Cattle Standard Performance Analysis (SPA). Ranchers have used this tool for many years. In 1992, the National Cattlemen’s Association adopted the Standardized Performance Analysis (SPA) system developed by NCBA producers, the National Integrated Resource Management Coordinating Committee, and Texas A&M AgriLife Extension Specialists.
The main objective of this system is to help producers reduce their cost of production and improve their efficiency. There are always opportunities to improve within your beef-cattle operation. The first step with SPA is to learn where you are standing and identify the areas of opportunities or weaknesses.
SPA is an analysis tool to help identify potential progress areas and measure individual improvement. The standardized analysis facilitates comparisons between production years, producers, production regions, and production systems. Producers can analyze trends and see the results of their management changes.
Historical Production Costs
Thanks to SPA, we have a unique historical integrated production and finance benchmark system for the beef cattle industry in our state. One of the most significantly correlated variables with ranch profitability was production costs per CWT weaned. The top 25% ranches with the highest net income were operations with lower total economic and financial costs per pound weaned (Graph 1).
Graph 1. Total Cost per CWT Weaned per Exposed Female
Historical production costs per CWT weaned per exposed cow increased by a higher rate than inflation in the US. Maintaining an efficient production system with low costs is one of the most important practices for a profitable and sustainable ranch. Using our resources more efficiently could help us reach those goals. An efficient grazing system, a cow-herd size that fits your environment, or an accurate stocking rate will allow us to reduce costs.
Financial vs. Economic Analysis
SPA’s goal is to deliver a complete and accurate analysis of your operation. For this reason, with SPA we will measure both your operation’s financial and economic performance indicators.
Financial expenses include cash operating expenses, interest for operating capital, and term debt. The financial analysis does not account for the economic opportunity cost of land, raised feed, or equity capital invested in the enterprise. Financing expenses also include the actual land mortgage, livestock, and machinery.
The economic analysis accounts for the opportunity cost of resources used and the expenses in the financial analysis. Land opportunity cost, for example, is the estimated rental rate for land under an equivalent production system. The opportunity cost of capital is the rate of return that one could expect to earn on that capital in an alternative investment with similar risks.
Implementing SPA in your ranch
At Texas A&M AgriLife Extension, we have prepared software and worksheets to help producers of any size use SPA at any time in their operations. These tools will help you organize your production, financial and economic information to do a complete analysis of your cow-calf herd. Participating producers will receive a report analysis showing how they rank with other producers in the database. Don’t hesitate to contact us for more information about SPA and how to use it in your operation (Pancho Abello, fjabello@tamu.edu, 940-647-3908).
Using a SPA is an annual process that will help cattlemen improve their ranch profitability by analyzing trends and seeing the results of decisions made. It is an excellent tool to accurately analyze production, financial, and economic performance to measure progress and goals. Integrating long-term management strategies and tools such as SPA will help ranchers maintain an efficient unit cost of production, improve production performance, and, most importantly, enhance profits.