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PR 106: Key Leverage Points for Profits
Dr. Barry Dunn, Texas A&M Univ. at Kingsville

Key Leverage Points for Profits

Don’t think that the cow business isn’t profitable. According to Texas A&M University professor Barry Dunn, it has been very profitable – for some producers.

During a Cattlemen’s College® session, Dunn explained how several years of study, involving the relative profitability of hundreds of Plains-area ranches, showed that some producers realize a return on assets of more than 18%. Regardless of size, and in the face of the same problems, environments and market conditions, some producers are able to make substantially more money than others. According to Dunn, most high-profit producers do it by holding down production costs and being savvy marketers.

“There are producers who can put a replacement female into production for $500, and people with per cow production costs of $250 per year,” Dunn stated. “There are producers who sell calves for over a dollar (per pound) with a cost of about 60 cents.”

Dunn urged his audience to consider application of important leverage points for profit. First, he said, they should know and manage their unit cost of production using a cost (financial) method of analyzing management efficiency. Through cost analysis, past decisions are evaluated in terms of their actual effect on present performance. He cautioned against using a market (economic) method of analysis, which does not offer a retrospective view of management decisions.

Second, producers should know and manage business investments on the basis of cost per hundredweight of calf sold. According to Dunn, figuring cost “per cow” or “per acre” won’t provide a sensitive measurement of financial efficiency.

Dunn said knowing the marginal cost of change in production or marketing will help producers control inputs for raised or purchased feed, health programs or labor. Determine where the smallest amount of change will create the largest impact on the production system, and spend appropriately.

Dunn also recommended matching the production system and marketing program to the producer’s environment and optimizing, rather than maximizing, the market value of sale animals. Most high-profit producers create a margin through better marketing.

— by Troy Smith