I I I , I , ,, II - North Dakota State Librarylibrary.nd.gov/statedocs/NDSU/aer21020101213.pdfthe early 1980s, especially for cow-calf operators. Higher feed prices in Higher feed

Agricultural Economics Report No. 210

III I I , I , ,,

i

Comparing theProfitability of Beef

Production Enterprisesin North Dakota

Randall D. Little and David L. Watt

Department of Agricultural EconomicsAgricultural Experiment StationNorth Dakota State University

Fargo, North Dakota 58105

April 1986

Preface

Research for this report was conducted under North Dakota AgriculturalExperiment Station Research Project No. 1376. Insights gained in writing "TheChanging Profitability of Beef Production in North Dakota," AgriculturalEconomics Report No. 203, led to the development of this report, which hasimproved budgets and a more complete profitability analysis of cattleenterprises and retained ownership in North Dakota.

The authors would like to thank Timothy Petry and Brenda Ekstrom of theDepartment of Agricultural Economics and LaDon Johnson and Russell Danielsonof the Department of Animal and Range Sciences for their helpful suggestionsand comments throughout the development of this study. Special thanks are dueto Jackie Grossman and Jody Peper for typing the manuscript.

The response of people across North Dakota encouraged work on this newpublication. In particular, the authors greatly appreciated the informationprovided by Delbert Moore.

Table of Contents

Pag

List of Tables . . . ... ............ . ....... . ... iii

List of Figures ........ ........ . ........ iv

Highlights . ... .................. .. .. ... . v

Description of the Situation ......... .......... ... 1

The Cattle Cycle . . . . . ............ ......... . 4

Livestock Prices ................ . . . . . . . . . . . . . . . . . . . . . . . 6

Costs of Production . . . . . ............ ........ . 8Cow-Calf . . . . . . .............. .......... 9Backgrounding and Wintering . . . . . . . . . . . . . . . . .. 10Pasturing - 11Wintering and Pasturing . . . . . ................... 12

Profitability ............................. 12

Vertical Integration . . . . . . . . . . . . . . . . . .... . . . 15

Implications . . . . . . . . . . . . . . . . . . . . . . 25

Summary . . . . . . . . . ...... . . . . . . ......... . 28

Appendix A . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31

Appendix B . . . . . . . . . . . . . . . . . . . . . ..... . . 39

Appendix C . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 43

Appendix D . . . . . . . . . . . . . ............. . 47

References . . . . . . . ...... . . . . . . . . .. 59

List of Tables

No. Page

1. COW-CALF ENTERPRISE PRODUCTION COSTS, BREAK-EVEN PRICE, ADJUSTEDSELLING PRICE, AND ESTIMATED PROFITABILITY, 1959 TO 1984 ...... 10

2. ESTIMATED PROFITABILITY PER PRODUCTION UNIT OF SELECTED NORTH DAKOTABEEF CATTLE ENTERPRISES, 1959-1984 . . . . . . . . . . . ... . . 13

3. ESTIMATED PRODUCTION COSTS OF THE RETAINED OWNERSHIP ALTERNATIVES,1959-1984 ............................. .. 20

4. ESTIMATED PROFITABILITY PER COW OF A TYPICAL NORTH DAKOTA COW-CALFOPERATION AND THE RETAINED OWNERSHIP ALTERNATIVES, 1959-1984 . . . . 21

5. AVERAGE AND STANDARD DEVIATION OF ESTIMATED PROFIT OF NORTH DAKOTACATTLE ENTERPRISES AND RETAINED OWNERSHIP ALTERNATIVES, 1959-1971,1972-1984. ............. . . . . 26•~~~~~~~~~ • • o. o- • • • • ·• o. •' • .o

iii

List of Figures

No. Pag<

1. Inventories of Cattle and Calves and Beef Cows in North Dakota,1961-1985 . . . . . . . . . . . . . .. . . . . . . . . .. . . . . 2

2. Inventory of Cattle and Calves in the United States . ....... 3

3. Cash and Real (1977=100) Market Prices for 400-500 Lb. FeederSteers, 1957-1984 . . . . . . . . . . ... . . . . . . . . . . . 5

4. Cattle on Farms by Cycles, Total Inventory of 50 States .... . . 7

5. Estimated Profitability Per Cow on an Average North DakotaCow-Calf Operation (77 Cows), 1959-1984 . . . ......... . 14

6A. Estimated Profitability of Backgrounding Steers in North Dakota,1959-1984 . . . . . . . . . . . .......... . . . . . .. 16

6B. Estimated Profitability of Backgrounding Heifers in North Dakota,1959-1984 . . . . . . . ... .. .. . ... . . . . . 16

7A. Estimated Profitability of Wintering Steers in North Dakota,1959-1984 .......... . . . .. ....... . ... ... . 17

7B. Estimated Profitability of Wintering Heifers in North Dakota,1959-1984 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17

8A. Estimated Profitability of Pasturing Steers in North Dakota,1959-1984 .. . . . . . . . . . . . . . . . . . . . . . . . . . . . 18

8B. Estimated Profitability of Pasturing Heifers in North Dakota,1959-1984 . . . . . . . . . .. . ... . . . . . . . . . . . . . 18

9A. Estimated Profitability of Wintering and Pasturing Steers inNorth Dakota, 1959-1984 ......... ....... . . . . . 19

9B. Estimated Profitability of Wintering and Pasturing Heifers inNorth Dakota, 1959-1984 . .................. ... . 19

10. Estimated Profitability Per Cow on a Cow-Calf With BackgroundingOperation, 1959-1984 .. . . . . . . . . . . . . .......... 22

11. Estimated Profitability Per Cow on a Cow-Calf With WinteringOperation, 1959-1984 ..... ............ . . . . . . .. 23

12. Estimated Profitability Per Cow on a Cow-Calf With Winteringa-nd Pasturing Operation, 1959-1984 . ... . .. . . ........... 24

iv

Profitability in beef production is heavily influenced by factorsbeyond the control of individual producers. The impact of these factors onprofitability varies between beef enterprises. Cow-calf operations are shownto be especially vulnerable to the price fluctuations that characterize thecattle cycle.

Cost of production budgets were constructed at 1984 price levels forseveral beef production and feeding enterprises common to North Dakota.Budgets were developed for each year back to 1959 using indices of prices paidby farmers. Total production costs were divided by expected output toestimate break-even prices. Estimated profitability per production unit wasderived using the break-even price and market price.

The variation in profitability of beef production due to pricefluctuations in North Dakota has increased significantly since the early1970s. The cow-calf operation had one of the lowest average profit estimatesand the greatest variation of the enterprises examined.

Producers can usually increase the amount of profit generated per cowby keeping calves beyong weaning. There were several years, however, whenselling weaned calves was the most profitable marketing alternative.

v

COMPARING THE PROFITABILITY OF BEEF PRODUCTIONENTERPRISES IN NORTH DAKOTA

Randall D. Little and David L. Watt*

Cattle production is a volatile industry. Its profitability is largelydetermined by factors beyond the control of the individual producer becauseindividual production and marketing decisions exert little influence on whatoccurs in the marketplace. These factors include cumulative beef production,competition from other meat sources, and cost of inputs. The impact of thesefactors on profitability varies among beef enterprises. The objective of thisstudy is to estimate and compare the profitability of beef productionenterprises typical in North Dakota. Potential benefits of several verticalintegration alternatives in the production process will also be estimated.The alternatives examined involve extending ownership of calves beyond weaningin a cow-calf operation, then feeding and selling at a later date.

Description of the Situation

Beef production is a vital part of the agricultural industry in NorthDakota. The sale of cattle and calves is a major source of cash farmreceipts, second only to the sale of wheat in 1983. Receipts for the sale ofcattle and calves accounted for 17 percent of total cash receipts for all cropand livestock products and 69 percent of total cash receipts for all livestockproducts in 1983 (North Dakota Agricultural Statistics 1985).

Virtually all calves produced in North Dakota are either sold atweaning, backgrounded and sold the following spring, or wintered, pastured,and sold the following fall. The number of calves sold at weaning or heldfor further feeding is usually determined by feed availability. A greaterproportion of calves are retained beyond weaning in years of ample moisturewhen feed supplies are adequate and less expensive. But in years when feed isinadequate, more calves are sold at weaning in the fall. Feeder calves soldin North Dakota are generally shipped out of the state for finishing. Veryfew calves are fed to slaughter weight in North Dakota.

This research studies a time period from 1959 to the most recent dataavailable. The year 1958 was one of several generally profitable years in thecattle industry. This period followed an unprofitable stretch of years thatcoincided with the peak in cattle numbers that occurred in 1955. By the early1960s cattle inventories had again been built up, prices were again drivendown, and losses occurred near the middle of that decade.

The cyclical nature of cattle inventories is apparent when examiningchanges in the number of cattle in North Dakota over time (Figure 1). Thetrends in cattle inventories in the state have, in general, followed those ofcattle inventories in the United States (Figure 2). The exception is the

sharp increase from 1962 to 1965 and subsequent decrease from 1965 to 1969 in

*Little is Research Assistant, Watt is Assistant Professor, Department

of Agricultural Economics, North Dakota State University, Fargo.

-2-

THOUSAND HEAD2,800

2,600

2,400

2,200

2,000

1,800

1,600

1,400

1,200

1,000

800

AnnUUU

Figure 1. Inventories of Cattle and Calves and Beef Cows in North Dakota,1961-1985

SOURCE: North Dakota Agricultural Statistics.

-3-

MILLION HEAD135

130

125

120

115

110

105

100

95 1

Figure 2. Inventory of Cattle and Calves in the United States

SOURCE: Livestock and Meat Statistics.

-4-

the number of cattle and calves in North Dakota. Inventories in the UnitedStates increased from 1961 to 1965, then stabilized until 1969. Trends incattle inventories at both state and national levels are similar after 1969.

The cattle industry was generally profitable throughout the late 1960sand early 1970s. This made the industry attractive. The combination of astrong economy, strong consumer demand for beef, and feedlot growth andexpansion increased the demand for feeder cattle, which is reflected by therapid price increases from 1968 to 1973 (Figure 3). The industry was alsorelatively stable during this time. Government programs helped minimizevariation in feed prices and interest rates fluctuated little. Many operatorsexpanded their enterprises while others started new ones during this period.

Beef cow inventories increased steadily from the early to mid-1970s.Total cattle inventories in North Dakota increased over 27 percent during thisfive-year period. Rapid expansion continued until 1975 when cattleinventories peaked. The time lag that exists in beef production is evidenthere; inventories continued to increase for several years after pricesbottomed out in 1974. Overabundant cattle supplies resulted in sharp pricedrops and, consequently, in reduced producers' profits. Although cash pricesincreased substantially during the late 1970s, the real prices (price adjustedfor inflation) have not again attained the 1973 level.

Although prices were recovering in 1976, cattle inventories fellsharply. The impact of inflation eliminated the profit potential of theseprice increases. The total number of cattle in North Dakota declined over 22percent, and the number of beef cows decreased almost 27 percent from 1976 to1981. Although there was a slight increase in cattle inventories in 1979, inresponse to the sharp price increases that occurred in 1978 and 1979,inventories fell again in 1980. North Dakota's beef cow herd increasedslightly from 1981 to 1983, then decreased in 1984. The inventory of allcattle and calves in North Dakota increased 13.5 percent from 1981 to 1984,then fell over 2 percent in 1985.

The cattle industry has been, for the most part, unprofitable duringthe early 1980s, especially for cow-calf operators. Higher feed prices in1981 resulting from a drought in 1980, higher interest rates, as well as anabundant supply of substitutable meats have contributed to the lossesexperienced throughout the early 1980s.

Cattle inventories and cattle prices in North Dakota have been quitevariable over time. The cyclical trends displayed by both inventories andprices have been similar to those displayed in the cattle industry as a whole,demonstrating vulnerability to the effects of the cattle cycle.

The Cattle Cycle

The beef cattle production-and-price cycle is a major concern of thecattle industry because it not only has significant influence on producers'incomes but also imposes a unique set of risks on livestock producers.Traditionally, a complete cattle cycle with increases and decreases in cattlenumbers lasts an average of about 10 years. Peaks in cattle numbers occurredin 1890, 1904, 1918, 1934, 1945, 1955, 1965, and 1975. The last four cycleshave peaked in the middle of each decade (Hasbargen et al. 1983).

$/ CWT1UU

90

80

70

60

50

40

30

20

10

Figure 3. Cash and Real (1977=100) Market Prices for 400-500 Lb. FeederSteers, 1957-1984

SOURCE: Livestock Division, Market News Service, Agricultural MarketingService, USDA, West Fargo, North Dakota.

-6-

Although no two have been identical, past cattle cycles can be dividedinto three phases: expansion, liquidation, and transition. During theexpansion phase, producers retain more replacement heifers and cull fewer cowsthan normal. As a result, cattle inventories increase while the number ofslaughter animals decreases, demand for beef is high relative to supply,prices are driven up, and returns to producers are high. An expansion phaselasts several years, then as supplies increase, prices begin to drop--firstfor slaughter, then for feeder animals. These price decreases are usuallysubstantial and result in large losses to some producers. Cow-calf producersnow begin culling more heavily to reduce herd size. This marks the end of theexpansion phase and the beginning of the liquidation phase (Craven andHasbargen 1984).

Cattle prices and producers' returns are low in the liquidation phase.Cattle inventories increase much less rapidly and are followed by a period ofinventory reductions in which slaughter is high relative to inventories.Large beef supplies, which keep prices depressed, stimulate producers to cullmore heavily and retain fewer heifers. After several years, beef suppliesdecrease, prices recover, and the transition phase begins (Craven andHasbargen 1984).

The cattle industry returns to normal during the transition phase.Inventories stabilize, then increase at a normal pace. Slaughter relative toinventories is normal, and cattle prices and returns are average. Eventuallyincreases in demand for beef will exceed increases in supply and will driveprices up. This, in turn, stimulates producers to increase herd size. Thus,the cycle is completed, and producers move again into the expansion phase(Craven and Hasbargen 1984).

The existence of the cattle cycle is based on several characteristicsof the beef industry. First is the profit motive, which prompts producers tomake production decisions based on the current market situation. Many ofthese decisions are ill-timed, because producers enter the industry or expandwhen the outlook is favorable and prices are high, making their survival evenmore difficult when prices drop (Hasbargen et al. 1983). Second, asubstantial period of time is required for the biological process of producingbeef. This results in a lag of several years before production decisionsaffect the quantity of animals slaughtered. Cattle numbers usually peak inthe cycle about two years after prices have peaked (Hasbargen et al. 1983).Third, the price of beef is determined in the marketplace, based on the supplyand demand for beef and the condition of the economy at any given time. Manyissues come into play here such as changes in the level of technology, priceof inputs, price of substitutes, or consumer preferences.

The current cattle cycle has differed from past cycles considerably(Figure 4). The expansion phase, when returns to producers are generallyhigh, lasted only three years. The liquidation phase has already extendedthrough four years. Inventory reductions began declining in early 1982, whichwas three years after prices peaked in 1979.

Livestock Prices

The market prices used in this study were compiled from 1958 to 1984(Appendix C). The prices used from 1963 to 1984 for steers and heifers are

MILLION HEADI* A A14U

130

120

110

100

90

80

70

60

50

Length of Cycle in Years

Figure 4. Cattle on Farms by Cycles, Total Inventory of 50 States

SOURCE: Tim Petry, Department of Agricultural Economics, North Dakota State University.

-8-

based on prices received at West Fargo for cattle and calves. West Fargoprices were unavailable prior to 1963 so prices received at Kansas City wereadjusted and used as proxies from 1957 to 1962. Regressions were run between10 years of prices from the two sources, with West Fargo prices as thedependent variable and Kansas City prices as the independent variable. Theregressions examined the relationship between the prices at the two locationsof 400-500 lb steers and heifers, 500-600 Ib steers and heifers, 600-700 lbsteers and heifers, and 700-800 lb steers and heifers. The equationsgenerated in the regressions as well as the coefficients of determination (R2)vaTues and T-values are included in Appendix C. It should be noted that theregression results yielded fairly high R2 and T-values, which demonstrate astrong relationship between the cattle prices from the two sources. Cowprices were based on the average prices received by farmers as reported inNorth Dakota Agricultural Statistics.

Spring and fall market prices used in this study are the averages ofthree months of prices in each season--March, April, and May in the spring andSeptember, October, and November in the fall. Prices for pastured calves arethe average of prices from August, September, and October. The weightcategories included in fall selling are 400-500 lb steers and heifers. Weightcategories for spring selling include 500-600 lb steers and heifers and600-700 Ib steers and heifers. Cull cow and heifer values were calculatedbased on annual price averages of cows and 700-800 lb heifers. It wasassumed that the feeder cattle were all No. 1 muscle thickness and mediumframe. The cow prices are averages over all grades.

Costs of Production

Budgets reflecting the casts of pro-duction of several beef cattleenterprises typical to North Dakota were constructed at 1984 price levels(Appendix A). The enterprises examined in this study include a cow-calfoperation, backgrounding steers and heifers, wintering steers and heifers,pasturing steers and heifers, and wintering and pasturing steers and heifers.The approach used to construct these budgets was based on the "opportunitycost" (returns foregone in the best alternative use) of the resource. Whenusing the opportunity cost method, inputs are valued using current marketprices rather than what may have actually been paid for those inputs.Examples of resources that are valued differently using the opportunity costmethod include feed, which may be cheaper when produced on the farm than ifpurchased; operator and family labor, which generally remains unpaid; pasturerent, which is unpaid for owned land; and interest expenses, which would notbe paid when inputs were paid for at the time of purchase. The profitabilityderived using this method is more complete because cash and noncash expensesare considered.

The production costs were adjusted back over time to 1959 using indicesof prices paid by farmers for certain goods (Appendix B). The estimatedproduction costs were then divided by the hundredweights (cwt) of expected

output per unit (e.g., cwt of calf sold per cow in a cow-calf operation) todetermine a break-even price. The break-even price in a given year wassubtracted from the corresponding market price (Appendix C) to yield anestimate of the enterprise's profit per cwt produced in that year. Finally,the profit per cwt was multiplied by the cwt of output per unit giving an

-9-

estimate of the enterprise's profit per production unit. No consideration isgiven in this study to the tax implications arising from the profitability orincome sheltering through capital gains of these cattle enterprises.

There is much variation in the level of production costs among producers.Differences occur due to production practices, managerial ability, and size andtype of machinery employed. This variability makes it difficult to derive anaverage production cost, which means that the costs individual producers incurmay vary considerably from an estimate of average costs. This method ofderiving production costs does not give as accurate results as actualproduction cost and profitability data, but the trends indicated should give ageneral idea of the profitability of the cattle enterprises in North Dakotaover time.

Cow-Calf

The cow-calf production costs were based on an average-sized springcalving operation. Per cow cost estimates at 1984 levels include feed expense,$106.66; pasture rent, $56.00; labor, $33.60; other operating expenses (e.g.,veterinarian services, medicines, supplies, fuel, and repairs), $29.50;marketing expenses (including transportation), $15.00; interest on operatingexpenses, $11.57; livestock interest, $43.58; and ownership costs, $21.35. Theestimated total cost of production per cow was $317.26 in 1984.

It was assumed that cow-calf operators replace 16 percent of their cowsannually. To allow for this, producers retain 18 percent of their calves (allheifers) from which the replacement animals are chosen. Cull cow returns werecalculated by multiplying the replacement rate adjusted for death loss (16percent minus 1 percent) by the cow's market value. Cull heifer returns werecalculated by subtracting the replacement rate from the retention rate (18percent minus 16 percent) and multiplying the difference by the heifer's marketvalue. Cull cows and heifers were assumed to be sold at 1,000 and 750 Ibs,respectively. The cull cow return was $54.30/cow and the cull heifer return$8.47/cow in 1984. A final adjustment to reflect a change in the value of thecow was made to the total production costs. This was done by adding orsubtracting the difference between the cow's value in the previous year and itsvalue in the current year from the total production costs. When cow pricesdrop, the cow depreciates and increases production costs. Conversely, whenprices rise, the cow appreciates and reduces production costs. The cow's valuedecreased from 1983 to 1984, so the adjustment to the production costs was anadditional $6.00. The adjusted total cost of production per cow was $260.49 in1984 (Table 1). Adjusting for changes in the cow's value was the cause of thesharp changes in the level of adjusted production costs.

A break-even price for the cow-calf operation was calculated by dividingthe adjusted production costs by the cwt of calf sold per cow. The cwt of calfsold per cow is the sum of the expected weaning weight of steers (4.25 cwt)times the percentage of steers (45 percent, half of the 90 percent calf crop),plus the expected weaning weight of heifers (4.00 cwt) times the percentage ofheifers (27 percent, half of the 90 percent calf crop less the 18 percentretention rate).

- 10 -

TABLE 1.SELLING

COW-CALF ENTERPRISE PRODUCTION COSTS, BREAK-EVEN PRICE, ADJUSTEDPRICE, AND ESTIMATED PROFITABILITY, 1959 TO 1984

Adjusted AdjustedProduction Break-Even Selling Estimated

Year Costs Price Price Profitability

ow - -~ - -^ -̂ -

- r- - - - $ wt - - -~ - - - ~~

1959 73.57 24.58 29.16 4.571960 83.70 27.97 25.04 - 2.931961 60.70 20.28 26.81 6.521962 66.27 22.15 28.99 6.841963 77.44 25.88 26.18 0.301964 90.64 30.29 20.97 - 9.321965 64.72 21.63 23.66 2.031966 38.65 12.91 28.04 15.131967 74.23 24.81 28.44 3.631968 68.80 22.99 28.25 5.261969 55.41 18.52 31.93 13.411970 76.71 25.64 35.02 9.391971 81.74 27.32 39.16 11.841972 44.47 14.86 47.46 32.601973 43.53 14.55 58.73 44.191974 217.59 72.71 28.35 -44.361975 212.20 70.91 32.58 -38.331976 116.55 38.95 36.44 - 2.501977 163.31 54.57 43.47 -11.101978 69.67 23.28 70.59 47.311979 82.83 27.68 91.21 63.531980 272.75 91.14 78.77 -12.371981 305.23 102.00 63.10 -38.891982 298,01 99.58 63.25 -36.341983 255.53 85.39 58.93 -26.461984 260.49 87.05 62.72 -24.33

The market price, from which the break-even price was subtracted todetermine profitability, is a combination of prices for both 400-500 lb steersand heifers. At weaning, 63 percent of the calves sold are steers and 37percent are heifers. The market price is the sum of the steer price times 63percent plus the heifer price times 37 percent.

Backgrounding and Wintering

Two winter calf-feeding programs common in North Dakota are included inthe study. The first is a backgrounding program which emphasizes a higher rateof gain and requires feeding a higher protein and energy ration. The second isa wintering program which involves lower gains and a less expensive highroughage diet. Although the total production costs of the wintering programmay be less, the cost per pound of gain in the backgrounding program should be

- 11 -

lower. Average daily gains used in this study are 1.7 and 1.0 Ibs for steersand 1.5 and 0.9 Ibs for heifers in the backgrounding and wintering programs,respectively. Steer and heifer calves are purchased after weaning in the fallat 425 and 400 Ibs, respectively. Backgrounded steers and heifers are sold thefollowing spring at 675 lbs and 625 Ibs, respectively, and wintered steers andheifers are sold the following spring at 575 and 535 Ibs, respectively.

The production costs of these two winter feeding programs are assumed tobe identical, with the exception of the feed expense and the interest onoperating expenses. Steer feed expense was $76.94/hd and the interest onoperating expenses $2.83/hd in the backgrounding program, compared to $40.65/hdand $1.93/hd, respectively, in the wintering program (1984 levels). Other persteer production costs at 1984 levels include feeder cost, $280.63; otheroperating expenses, $20.72; labor, $16.80; marketing expenses, $10.00; intereston calves, $13.89; death loss, $2.81; and overhead, $10.00. The estimatedtotal costs of production of backgrounding and wintering steers in 1984 were$434.62 and $397.43, respectively.

Heifer feed expense in 1984 was $72.64 in the backgrounding program and$38.38 in the wintering program. Interest on operating expenses was $2.73 forbackgrounded heifers and $1.88 for wintered heifers. Other per heiferproduction costs at 1984 levels include feeder cost,.$228.32; other operatingexpenses, $20.72; labor, $16.80; marketing expenses, $10.00; interest oncalves, $11.03; death loss, $2.28; and overhead, $10.00. The estimated totalcosts of production of backgrounding and wintering heifers in 1984 were$374.79/hd and $339.68/hd, respectively.

Break-even prices for these two feeding programs were calculated bydividing the total production cost by the expected selling weights.Backgrounded steers and heifers are sold at 675 and 625 Ibs, respectively.Wintered steers and heifers are sold at 575 and 535 Ibs, respectively.Profitability of the backgrounding and wintering programs is calculated bysubtracting the break-even price in a given year from the selling price in thespring of the following year. The estimated production costs, break-evenprices, market prices, and profitability per cwt from 1959 to 1984 arepresented for backgrounding steers and heifers in Appendix Tables D1 and D2 andfor wintering steers and heifers in Appendix Tables D3 and D4.

Pasturing

Beef cattle producers often pasture calves during years of amplemoisture when abundant forage is available. Steers and heifers that enter apasturing program in this study are assumed to weigh 575 and 535 Ibs,respectively, when purchased in the spring and 800 and 740 Ibs, respectively,when sold in the fall after a 120-day grazing season. In this study theaverage daily gain is 1.9 Ibs for pastured steers and 1.7 Ibs for heifers.

The total production costs, break-even prices, market prices, andprofitability per cwt estimated from 1959 to 1984 for the wintering steers andheifers are presented in Appendix Tables D5 and D6. The costs of pasturingsteers and heifers at 1984 levels include feeder costs, $380.48/steer and$305.16/heifer; pasture rent, $40.00/hd; feed expense, $10.89/steer and$10.43/heifer; other operating expenses, $19.68/hd; labor, $10.50/hd; marketing

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expenses, $10.00/hd; interest on operating expenses, $1.60/hd; interest oncalves, $15.06/steer and $12.08/heifer; death loss, $3.80/steer and$3.05/heifer; and overhead, $5.00/hd. The total production costs in 1984 were$497.01/steer and $417.50/heifer. A break-even price for pasturing calves isderived by dividing the total production costs by the expected selling weight,800 Ibs for steers and 740 lbs for heifers.

Wintering and Pasturing

Producers who winter calves commonly pasture those calves following thewintering program. Compensatory gain is greater for wintered calves than forbackgrounded calves, so their capacity for growth in a pasturing program isgreater. Total production costs in a wintering and pasturing program in thisstudy are equal to the total production costs of pasturing in a given year plusthe total production costs of wintering in the preceding year. The totalproduction costs of wintering and pasturing steers and heifers in 1984 were$484.32 and $423.95, respectively. The estimated total production costs,break-even prices, market prices, and profitability per cwt for pasturing andwintering steers and heifers from 1959 to 1984 are presented in Appendix TablesD7 and D8.

Profitability

According to Ikerd (1979), the real key to understanding the cattlecycle is understanding the cyclical nature of profits. Profits more thananything else spur expansion and liquidation within the cattle industry. Thisis especially true with cow-calf operators, who represent the starting point inthe production process.

The estimated profitability per production unit of each cattleenterprise examined is presented in Table 2. These estimates of profitabilityar. reflections of the opportunity costs of each given enterprise, with noconsideration given to tax implications or treatment. The trends in theprofitability of each enterprise follow the cattle cycle closely. As might beexpected, profits were greatest during the years following cattle inventoryreductions--1966, 1972, 1973, 1978, and 1979. Likewise, losses were greatestin the bust years when the supply of cattle was the greatest--1964, 1974, 1975,1981, 1982, 1983, and 1984.

The cow-calf operation in this study had an average profitability of$2.26 per cow from 1959 to 1984. Considerable variability was also displayed(Figure 5). This is evident in the large standard deviation and the wide rangebetween the maximum and minimum profit values. Although the cow-calf operationstarting point in the production process, it is the last to feel the effect ofprice changes within the industry. This demonstrates the vulnerability ofcow-calf operators to the boom-and-bust periods that characterize the cattlecycle. Slaughter plant and feedlot operators are capable, to some extent, ofpassing some of their losses along in the system. Their decisions to buy andat what price are based on anticipated market conditions at the expected timeof sale. For example, if a feedlot operator expects difficult times ahead,then his bid price when purchasing feeders will be correspondingly adjusteddown to reflect that. Feeders also have the option to operate at less than

TABLE 2. ESTIMATED PROFITABILITY PER PRODUCTION UNIT OF SELECTED NORTH DAKOTA BEEF CATTLE ENTERPRISES, 1959-1984

Wintering Winteringand and

Backgrounding Wintering Pasturing Pasturing Backgrounding Wintering Pasturing PasturingYear Cow-Calf Steers Steers Steers Steers Heifers Heifers Heifers Heifers

($/cow) - - - - - - - - - - - - - - - - - - - -- -(/head)- - - - - - - - -- - -- - --------

19591960196119621963196419651966196719681969197019711972197319741975197619771978197919801981198219831984

AverageStandardDeviation

MaximumMinimum

13.69- 8.78

19.5220.480.89

- 27.906.0745.2710.8715.7340.1428.0935.4497.55132.23

-132.76-114.70- 7.49- 33.23141.57190.12

- 37.02-116.39-108.74- 79.18- 72.81

2.26

78.75190.12-132.76

23.1715.9820.1413.24

- 6.55- 19.33

8.0624.120.415.69

26.9535.0711.6431.7880.16

- 64.34- 13.42

38.59- 0.46

73.43156.63

- 58.33- 57.26- 3.24

15.1017.69

14.42

43.66156.63

- 64.34

4.910.896.800.03

- 18.47- 26.66- 0.01

10.96- 11.10- 7.29

10.2414.77

- 6.9619.8560.63

- 62.09- 15.47

33.90- 1.30

63.37124.80

- 72.19- 69.23- 18.74- 1.28

2.96

1.67

39.71124.80

- 72.19

16.71- 3.2917.9338.0525.679.0636.8710.5215.208.0324.96

- 5.0029.0243.1556.77

-75.6243.30

-31.778.5277.705.77

22.11-11.4621.58-53.194.35

12.88

31.3277.70-75.62

24.220.2427.3840.759.91

- 14.8439.6424.327.053.7738.3113.0325.4366.56

121.18-133.36

32.767.56

13.02147.17137.15

- 42.58- 72.27

11.99- 44.90

17.07

19.25

57.63147.17

-133.36

17.087.11

16.639.05

- 7.76- 21.20- 6.21

26.19- 6.08

0.2916.9921.765.90

13.0161.89

- 58.95- 32.02

18.60- 11.46

60.26119.46

- 69.09- 56.15- 25.33- 2.82- 7.83

3.43

38.22119.46

- 69.09

2.27- 6.37

3.38- 4.19-15.78-26.01-10.25

15.63-13.68- 8.32

5.308.75

- 7.6911.0447.40

-60.13-33.68

15.25-11.12

50.4998.84

-75.62-68.09-41.18-17.05-16.18

- 6.04

35.7498.84

-75.62

22.6520.8319.9619.9811.06

- 1.4125.3419.0020.0415.1722.699.0537.1614.9635.20

-72.1727.44-31.76

4.0341.48-46.0215.12

-21.9614.15

-54.155.26

6.66

28.0741.48-72.17

27.5317.1026.0018.46

- 2.01- 24.66

17.8737.479.339.87

31.1021.0632.8529.5786.37

-127.95- 1.30- 11.07- 1.29

98.0659.41

- 53.00- 81.63- 17.89- 61.63- 1.17

5.33

47.1998.06

-127.95

CA

I

- -- --

- 14 -

$/cowf% r% fZuu

180

160

140

120

100

80

60

40

20

0

-20

-40

-60

-80

-100

-120

-140

Figure 5. Estimated Profitability Per Cow on an Average North DakotaCow-Calf Operation (77 Cows), 1959-1984

- 15 -

full capacity. Cow-calf operators often have little choice but to accept thelower price. Thus, cow-calf operators receive a culmination of losses thatoccur as lower slaughter and feeder cattle prices and feeding losses are passedthrough the marketing system (Hasbargen et al. 1983).

Because the backgrounding and wintering programs are so similar innature, they have similar trends in profitability (Figures 6A, 6B, 7A, and 78).The backgrounding program was shown, on the average, to be considerably moreprofitable than the wintering program, especially when feeding steers.However, the profitability of backgrounding both steers and heifers displayedmore variability than its counterpart. Both the standard deviation and thedifference between the maximum and minimum profit per head were larger in thebackgrounding programs.

The summer pasturing program had an average profitability of$12.88/steer and $6.66/heifer. The variability in this program was lowrelative to the other cattle feeding enterprises, but so were potential returns(Figures 8A and 8B).

Producers could have increased their average profitability per headconsiderably by pasturing calves following a wintering program (Figures 9A and9B). Profitability per steer would have jumped from $1.67 to $19.25, whileprofitability per heifer would have increased from -$6.04 to $5.33. However,variation in profitability would also have increased substantially, as isevidenced by the larger standard deviations for wintering and pasturing steersand heifers.

Vertical Integration

It has been demonstrated thus far in this study that substantialfinancial risk is involved in operating a cow-calf enterprise. The purpose ofthis section is to estimate any benefits a producer might have received byvertically integrating during the study period. Vertical integration is thecombination of successive steps in the production and marketing process withinone firm. In this case, cow-calf operators keep and feed their calves afterweaning. If a producer has the flexibility, this can be a viable strategy fordealing with bust phases of the cattle cycle. Three options of retainedownership following weaning are considered: (1) background the calf and sellin the spring, (2) winter the calf and sell in the spring, and (3) winter andpasture the calf and sell in the fall.

Total production costs of these extended enterprises were calculated bycombining the production costs of the respective enterprises included (Table3). (Purchase price of the calves was not included.) The specified productioncoefficients did not change. It was assumed that sufficient pasture wasavailable for rent so no adjustments in the size of the cow herd were requiredin Option 3. Because the wintering and pasturing option requires more than oneyear, the cow-calf and wintering production costs in a given year were added tothe pasturing production costs in the following year to ensure continuitythrough time. Break-even prices and estimated profit per cwt produced for theabove alternatives were calculated in the same manner as for the cow-calfenterprise and are presented in Appendix Tables D9 and D10.

- 16 -

$/HEAD1 jcnrIOU

140

120

100

80

60

40

20

0

-20

-40

-60

-80

Figure 6A. Estimated Profitability of Backgrounding Steers inNorth Dakota, 1959-1984

$/HEAD120

100

80

60

40

20

0

-20

-40

-60

-80

Figure 6B. Estimated Profitability of Backgrounding Heifers inNorth Dakota, 1959-1984

- 17 -

$/HEAD4 A 014U

120

100

80

60

40

20

0

-20

-40

-60

-80

Figure 7A. Estimated Profitability of Wintering Steers in NorthDakota, 1959-1984

$/HEAD100

80

60

40

20

0

-20

-40

-60

-80

Figure 7B. Estimated Profitability of Wintering Heifers in NorthDakota, 1959-1984

- 18 -

$/HEAD80

60

40

20

0

-20

-40

-60

-80

Figure 8A. Estimated Profitability of Pasturing Steers in NorthDakota, 1959-1984

$/HEAD5U

40

30

20

10

0

-10

-20

-30

-40

-50

-60

-70

-80

Figure 8B. Estimated Profitability of Pasturing Heifers in NorthDakota, 1959-1984

- 19 -

$/HEAD

Figure 9A. Estimated Profitability of Wintering and Pasturing Steersin North Dakota, 1959-1984

$/HEAD100

80

60

40

20

0

-20

-40

-60

-80

-100

-120

-140

Figure 9B. Estimated Profitability of Wintering and Pasturing Heifersin North Dakota, 1959-1984

- 20 -

TABLE 3. ESTIMATED PRODUCTION COSTS OF THE RETAINED OWNERSHIP ALTERNATIVES,1959-1984

Cow-Calf,Cow-Calf Cow-Calf Wintering

and and andYear Backgrounding Wintering Pasturing

- - - - - -- - - - - - - -($/cow)-- - - - - - - -- ----

1959 104.41 94.88 52.761960 113.65 104.36 116.411961 91.05 81.66 125.721962 97.11 87.63 103.161963 109.05 99.13 109.211964 121.61 111.79 120.271965 96.54 86.61 133.431966 72.51 62.14 109.781967 108.11 97.88 85.471968 102.01 92.39 122.261969 90.69 80.85 118.891970 113.86 103.45 108.291971 119.90 109.15 131.411972 84.21 73.37 139.361973 100.32 83.81 112.321974 280.86 260.81 128.521975 275.36 256.10 305.621976 181.52 161.88 303.741977 229.36 210.19 211.351978 142.30 123.42 267.161979 170.81 149.53 196.331980 368.49 344.42 226.171981 405.95 379.74 425.251982 392.12 368.39 457.321983 349.69 323.88 443.301984 357.33 331.12 399.63

The estimated profitability per cow of the vertical integrationalternatives is presented in Table 4 and illustrated in Figures 10, 11, and 12.The estimated profitability of the cow-calf operation is included forcomparison. No profitability is listed for the retained ownership options in1958, the first year of the study. This is because calves from the first yearof the study had not entered the feeding program at that time. Because calvesfrom the 1958 calf crop entered the feeding programs that year, the first yearin which profitability could be calculated is 1959.

All three forms of retained ownership have greater variability than thecow-calf operation. There is, however, greater potential payoff in retainingownership, as evidenced by the significantly larger maximum profitabilityvalues. All three retained ownership alternatives improved the profitabilityof the cow-calf operation. The average profitability per cow of the cow-calf

- 21 -

TABLE 4. ESTIMATED PROFITABILITY PER COW OF A TYPICAL NORTH DAKOTA COW-CALFOPERATION AND THE RETAINED OWNERSHIP ALTERNATIVES, 1959-1984


and and andYear Cow-Calf Backgrounding Wintering Pasturing

-------------- ------ ($/cow) - ------------ -

195819591960196119621963196419651966196719681969-197019711972197319741975197619771978197919801981198219831984

AverageStandardDeviation

MaximumMinimum

87.1813.69

- 8.7819.5220.480.89

- 27.906.07

45.2710.8715.7340.1428.0935.4497.55132.23

-132.76-114.70- 7.49- 33.23141.57190.12

- 37.02-116.39-108.74- 79.18- 72.81

2.26

78.75190.12

-132.76

105.2925.887.93

31.0918.67

- 10.24- 22.75

27.4047.3017.0836.0965.6038.9257.37154.7292.55

-141.70- 85.99- 3.98

23.31251.96154.02

- 67.91-113.94- 91.39- 61.89

21.36

86.18251.96

-141.70

--an

93.1015.46

- 1.6521.5711.17

- 14.82- 27.43

18.6540.108.9525.4553.0126.9251.56

142.0793.23

-143.06- 88.98- 4.23

16.14232.16146.09

- 76.52-125.19-102.58- 70.70

13.09

84.29232.16

-143.06

--

108.6921.7413.7645.8727.55

- 9.21- 2.08

30.6654.5518.9345.0655.7052.5677.34

179.6742.83

-112.73-107.96

4.8466.42

226.59165.48

- 81.64-105.12-134.26- 60.27

24.04

87.61226.59

-134.26

and backgrounding option was $21.36; the wintering option, $13.09; and thecow-calf wintering and pasturing option, $24.04. The cow-calf operationgenerated a positive profitability in 16 of the 27 years examined. Retainingownership in a wintering and pasturing program resulted in 18 of 26 years ofpositive profitability; the backgrounding program, 17 years; and the winteringprogram, 16 years.

- 22 -

$/cow3UU

250

200

150

100

50

0

-50

-100

-150

Figure 10. Estimated Profitability Per Cow on a Cow-Calf With BackgroundingOperation, 1959-1984

- 23 -

$/cow250

200

150

100

50

0

-50

-100

-150

Figure 11. Estimated Profitability Per Cow on a Cow-Calf With WinteringOperation, 1959-1984

- 24 -

$/COW250

200

150

100

50

0

-50

-100

-150

Figure 12. Estimated Profitability Per Cow on a Cow-Calf With Winteringand Pasturing Operation, 1959-1984

- 25 -

The best method of evaluating the cow-calf operation and the retainedownership alternatives is by comparing profitabilities when calves from a givencalf crop are sold. Calves in a cow-calf operation are sold after weaning inthe fall. Producers who retain ownership beyond weaning sell calves thefollowing year. It is possible to determine which production choice would havebeen optimal by comparing the profitability of a cow-calf operation in a givenyear with the profitability of the retained ownership alternatives in thefollowing year.

The cow-calf, wintering, and pasturing option improved the profitabilityper cow over the cow-calf option in 20 of the 26 years studied; the cow-calfand backgrounding option, 20 years; and the cow-calf and wintering option in 17years. Producers could have realized greatest benefits by retaining ownershipof their calves in 1958, 1960, 1965, 1968, 1969, 1971, 1972, 1977, and 1978.The cow-calf producer would have been better off selling his calves at weaningin the remaining years. The profitability per cow was reduced the most byretaining ownership in 1963, 1973, 1974, 1979, and 1980.

Implications

The purpose of this project was to determine the profitability ofseveral North Dakota beef production enterprises over time. The resultssupport the generally held view that there is considerable financial risk inproducing beef, especially in cow-calf operations. Variability in profits hasbeen increasing over time (Table 5). The standard deviation of theprofitability of each enterprise from 1972 to 1984 was significantly higherthan that from 1959 to 1971. The average profit of feeding steers increased inthe backgrounding and wintering programs but decreased in the pasturingprogram, while the average profit of feeding heifers decreased in all threefeeding programs. The average profit in the cow-calf operation dropped over$55.00/cow. The average profit per cow in the operations that retainedownership also dropped from the first period to the second, but not to theextent of the cow-calf operation. Variability, as measured by the standarddeviation, increased more in the cow-calf operation than in the operations thatretained ownership. These results demonstrate clearly that the risks involvedin cattle production have been increasing rapidly since 1972.

What does this imply for North Dakota cattle producers? Producers andlenders must develop a working knowledge of the beef cattle cycle, its causesand effects, and indicators that give clues to the current stage of the cattlecycle. Operators cannot simply produce and expect to survive withoutconsidering the market situation. A 1974 survey of Oklahoma ranchers concludedthat most cow-calf operators were not well-informed about inventory changes ornew developments in the industry on a national scale. The study also concludedthat most cow-calf operators were reluctant to acknowledge that the collectiveimpact of individual decisions to increase production is the major cause of thecyclically lower prices. They instead blamed the condition of the industry onthe government, the weather, imports, etc. (Keith and Purcell 1976).

In these days of rising production costs and increasing pricevariability (and consequently profit variability), knowledge of the cattlecycle and how to use it can assist in the survival of many operations.Hasbargen et al. (1983) list seven indicators which, when used together, can

TABLE 5. AVERAGE AND STANDARD DEVIATION OF ESTIMATED PROFIT OF NORTH DAKOTA CATTLE ENTERPRISES ANDRETAINED OWNERSHIP ALTERNATIVES, 1959-1971, 1972-1984

Winteringand

Backgrounding Wintering Pasturing Pasturingteers Heifers Steers Heifers Steers HeHefers Steers Heifers

1959-1971Average ($/head) 12.20 6.13 - 1.68 - 4.38 17.21 18.58 18.40 17.07Standard Deviation 14.21 13.24 11.62 10.81 13.02 8.75 16.23 15.90

1972-1984Average ($/head) 16.64 0.74 5.02 - 7.69 8.56 - 5.26 20.10 - 6.42Standard Deviation 60.00 52.27 54.73 49.32 41.89 34.86 79.86 62.65

Cow-Calf Cow-Calf Cow-Calf,and and Wintering, and

Cow-Calf Backgrounding Wintering Pasturing

1959-1971Average ($/cow) 15.35 29.87 20.81 35.67Standard Deviation 19.39 31.08 29.17 29.16

1972-1984Average ($/cow) - 10.83 12.86 5.38 12.40Standard Deviation 108.10 117.23 115.06 119.29

I

cr»

- 27 -

enable a producer to track progress of the cattle cycle. Even though no twocycles are identical, the basic trends are similar and these indicators reflectthose trends. The indicators are as follows: (1) year of cattle cycle, (2)percentage of annual expansion in all cattle numbers, (3) percentage of annualexpansion in all cow numbers, (4) ratio of annual cattle and calf slaughter toJanuary 1 inventory, (5) ratio of annual cattle and calf slaughter to previousyear's calf crop, (6) ratio of annual cow slaughter to January 1 inventory ofall cows, and (7) ratio of cow and heifer slaughter to steer slaughter. Theuse of indicators, as explained by Hasbargen et al., is discussed below.

The year of the cattle cycle merely tracks the years from one low pointin cattle numbers to the next. Cattle numbers in every cycle thus far in thetwentieth century have taken from six to eight years to go from the low pointto the high point. Large price breaks can usually be expected during the fifthto the seventh year of expansion because cattle prices drop one to two yearsbefore inventories begin to decrease.

The percentage of annual expansion in all cattle numbers reflects growthin the industry as a whole. Historically, beef demand has increased about 2percent per year as a result of increased per capita income and populationgrowth. Therefore, when expansion in the cattle industry was below 2 percent,higher prices could be expected. Conversely, when the growth rate exceeded 2percent, an excessive supply depressed prices during the following years. Theannual increase in demand of 2 percent is not a hard and fast figure. It issubject to change based on the condition of the general economy, rate ofpopulation growth, and changes in consumer preferences.

The percentage of annual expansion in all cow numbers is a reflectionof the production capacity of the nation's cow herd. If herd growth exceeds2 percent annually for several years, inventories will increase faster thandemand and overproduction will occur.

The ratio of annual cattle and calf slaughter numbers to the January 1cattle and calf inventory numbers provides a measure of how rapidly thenation's cattle herd is changing in size. The normal rate of kill should beabout 37 percent of inventory. If the ratio is less than 37 percent, thecattle herd is increasing too fast.

The ratio of annual cattle and calf slaughter numbers to the size of theprevious year's calf crop is another measure of changing herd size. A ratiobelow 88 percent indicates the cattle herd is building too rapidly, and a ratiogreater than 88 percent indicates reductions in herd size.

The ratio of annual cow slaughter numbers to the January 1 inventory ofall cows is an excellent measure of changing herd size. During the past twocycles, a ratio below 14 percent indicated expansion and a ratio below 13percent indicated overexpansion because too many cows were being kept inproduction. The danger level of this indicator has been moving lower as theproportion of beef cows in the total cow herd increases.

Finally, the ratio of cow and heifer slaughter to steer slaughterprovides another measure of changing herd size. A ratio of 90 percent or lessindicates that too many heifers are being retained in the herd for expansion.

- 28 -

The use of these indicators enables producers to make timely productionand marketing decisions. The numbers necessary for the computation of theseratios are available in publications from the USDA Statistical ReportingService and Economic Research Service, some of these are; Livestock and MeatStatistics; Meat Animals Production, Disposition, and Income; LivestockSlaughter; Livestock and Poultry Outlook and Situation Report, and the Cattleon Feed Report. It should be noted that the development of these indicatorswas based on performance in past cattle cycles. While they should reflecttrends occurring in the current cattle cycle, the accuracy of these indicatorsmay be affected by unforeseen developments that influence the industry. Forexample, the whole herd dairy buy-out program will increase the supply of beefand change the constitution of the total cow herd drastically, which maydistort the information provided by the indicators. In addition, Hilker et al.(1985) indicate that the demand for beef has declined significantly in recentyears. This may affect the relevant values of these indicators.

Maintaining flexibility in an operation is an important method ofreducing variability caused by cattle cycles. Production flexibility isespecially beneficial in the bust years by enabling producers to at leastreduce losses to some extent. It was shown that cow-calf operators could havepotentially benefited in most years by vertically integrating in the form ofextended ownership of their calves. Cow-calf operations generally remainunprofitable for several years after a price break while feeder operationsrebound more quickly in the early expansion phases of the cattle cycle. Therewere other years, however, when selling calves at weaning was the mostprofitable alternative.

One possible option available to producers with sufficient flexibilityis adjustment in the constitution of the cow herd based on future expectationsof market performance. During periods of low prices, producers could cull andsell a larger number of cows and hold a larger number of replacement heifers.The difference between cow and heifer prices would be minimal in a depressedmarket, so more income would be generated by selling cows. By retaining morereplacement heifers, the producer rebuilds a younger cow herd and is preparedto capitalize on price improvements.

Summary

The profitability of several beef cattle enterprises typical to NorthDakota was estimated from 1959 to 1984 using cost of production budgetsconstructed to reflect the opportunity costs of the inputs used. Theenterprises examined include cow-calf, backgrounding, wintering, and winteringand pasturing operations. Benefits of retaining ownership of calves bycow-calf operators were also considered as a means of increasing profitabilityper cow. The retained ownership alternatives included cow-calf andbackgrounding; cow-calf and wintering; and cow-calf, wintering, and pasturing.

The beef cattle cycle, complete with the risks it imposes on raisingcattle, is very much a part of livestock production. The results of thisstudy support this fact. They have indicated that beef production in NorthDakota has been very risky, especially in recent years. The cow-calfoperation has the greatest amount of risk due to its position in theproduction and marketing process. It receives a culmination of losses that

- 29 -

are passed through the marketing system during bad years. However, by

maintaining production and marketing flexibility, cow-calf producers have the

potential of reducing risk and improving the profitability of their

operations.

APPENDIX A

- 33 -

COW-CALF BUDGET (1984)

Feed Expense

Pasture Rent 7 AUM @ $8/AUM

Labor 8 hrs @ $4.20/hr

Other Operating Expenses

Marketing Expenses

Interest on Operating Expenses1

Livestock Interest 2

Ownership Costs3

Total Production Costs

AdjustmentsCull Cow Return 4

Cull Heifer Return5

±A in Value of Cow6

Adjusted Production Costs

Break-Even Price: 4.25 cwt x .45 = 1.91254.00 cwt x .27 = 1.0800

2.9925

(Per Cow)$106.66

56.00

33.60

29.50

15.00

11.57

43.58

21.35

$317.26

$-54.30- 8.47

-(-6.00)

$260.49

$260.49 =2.9925 cwt

$ 87.05/cwt

1Interest on operating expenses = (feed expense + pasture rent + otheroperating expenses) x interest rate x .5

2 Livestock interest = (cow value x interest rate)

3Excluding livestock interest

4Cull cow return = (replacement rate - death rate) x cow value

5Cull heifer return = (retention rate - replacement rate) x heifer value

6 Change in cow's value = Vt - Vt-. where t = current year

- 34 -

COW-CALF PRODUCTION COEFFICIENTS

a. Weaned steers weigh 425 Ibs

Weaned heifers weigh 400 Ibs

Cull heifers weigh 750 Ibs

Cull cows weigh 1,000 Ibs

b. 16% cow replacement rate

18% heifer retention rate

c. 90% calf crop (45% steers + 45% heifers)

d. 63% calves sold steers (45 steers/72 hd sold)

100% calves sold heifers (27 heifers/72 hd sold)

e. 299.25 Ibs calf wt sold per cow per year

425 1bs steer x .45 = 191.25400 Ibs heifer x .27 = 108.00

299.25

- 35 -

BACKGROUNDING (1984)

Steers Heifers(Per Head) (Per Head)

Feeder Cost $280.63 $228.32

Feed Expense 76.94 72.64

Other Operating Expenses 20.72 20.72

Labor 16.80 16.80

Marketing Expenses 10.00 10.00

Interest on Operating Expenses' 2.83 2.73

Interest on Calves2 13.89 11.30

Death Loss 3 2.81 2.28

Overhead 10.00 10.00

Total Production Costs $434.62 $374.79

Breakeven Price: Steers $434.62 = $64.39/cwt Heifers $374.79 = $59.97/cwt6.75 cwt 6.25 cwt

1(Feed expense + operating expense + labor) x (interest rate x .5) x % ofyear on feed.

2Feeder cost x interest rate x % of year on feed.

3Feeder cost x .01.

Production CoefficientsSteers Heifers

a. Purchase weight in Ibs 4425 400Selling weight in Ibs 675 625

b. Average daily gain in Ibs 1.7 1.5

c. Feeding period in days 150 150

d. Death loss in percent 1 1

- 36 -

WINTERING (1984)


Feeder Cost $280.63 $228.32



Labor 16.80 16.80


Interest on Operating Expensesi 1.93 1.88

Interest on CalvesI 13.89 11.30

Death Lossl 2.81 2.28

Overhead 10.00 10.00


Breakeven Price: Steers $397.43 = $69.12/cwt Heifers $339.68 = $63.49/cwt- 5.7T cwt 35 cwt

1Refer to Custom Backgrounding Budget.

Production Coefficients

a. Purchase weight in IbsSelling weight in Ibs

b. Average daily gain in Ibs

c. Feeding period in days

d. Death loss in percent

Steers425575

1.0

150

Heifers400535

.9

150

1 1

- 37 -

PASTURING (1984)


Feeder Cost $380.48 $305.16

Pasture Rent 40.00 40.00



Labor 10.50 10.50


Interest on Operating Expenses1 1.60 1.60

Interest on Calves2 15.06 12.08

Death Loss2 3.80 3.05

Overhead 5.00 5.00


Breakeven Price: Steers $497.01 = $62.13/cwt Heifers $417.50 = $56.42/cwt8.0 cwt 7.40 cwt

'(Pasture rent + feeder expense + other operating expenses + labor) x .5 xinterest rate x percent of year on feed.

2Refer to Custom Backgrounding Budget.

Production Coefficients

a. Purchase weight in IbsSelling weight in Ibs

b. Average daily gain in Ibs

c. Feeding period in days

d. Death loss in percent

Steers-575-800

1.9

120

Heifers535740

1.7

120

11

APPENDIX B

- 41 -

APPENDIX B. INDEX OF PRICES PAID BY FARMERS (ADJUSTED TO 1984)

ProductionFeed Labor Item Land Transportation Marketing Interest

Year Index Index Index Index Index Index Rate

1957195819591960196119621963196419651966196719681969197019711972197319741975197619771978197919801981198219831984

37.2936.7336.9235.9936.3636.7338.4038.0338.4040.0739.5237.1137.8540.0741.5641.9363.4576.8174.0375.7073.8472.3680.8991.0998.7089.8098.70

100.00

19.5020.1021.2821.8722.4623.0523.6424.2325.3827.3729.5332.0435.2537.7639.7142.0245.8252.5156.7362.1066.7771.5878.1784.4191.6096.2398.88100.00

28.9329.8729.8529.8729.8530.2130.5330.2130.9232.2532.3732.3733.7134.9336.6139.1747.3253.6858.9362.3964.6270.0980.3689.0695.4296.5498.55100.00

30.0430.2030.8230.8230.6730.5930.5130.4330.6731.2531.7633.7335.8435.9238.5141.5746.5957.4965.4968.3172.7878.5186.2092.9497.3398.35

100.47100.00

26.7227.5928.7528.7529.0729.6829.8430.2530.7731.1832.0833.1134.3936.1638.0538.4739.7244.1848.3253.1056.8559.5168.0180.1189.8393.5295.73

100.00

25.4026.0226.3726.5526.7327.1727.6127.7028.4129.5630.2731.0932.6033.8135.6237.7343.4749.3954.2757.9360.9865.8575.0084.1591.4695.7397.56100.00

4.503.834.754.504.504.504.504.505.005.755.716.387.677.305.675.328.239.998.276.817.139.7813.7815.9218.5016.0810.8312.04

-- i - I

APPENDIX C

- 45 -

APPENDIX TABLE Cl. WEST FARGO CATTLE PRICES

Steers Heifers Steers Heifers Steers Heifers Steers Heifers400-500# 400-500# 500-600# 500-600# 600-700# 600-700# 700-800# 700-800#

Year Fall Fall Spring Spring Spring Spring Fall Fall

1957195819591960196119621963196419651966196719681969197019711972197319741975197619771978197919801981198219831984

25.4533.7330.3826.3727.8630.4926.9321.6525.8429.1329.8629.5933.1236.5440.6949.4661.3229.6634.8438.9645.8973.1095.4182.3865.8565.9262.2266.03

21.1030.1327.0722.7725.0126.4324.8919.8019.9326.2026.0225.9629.9032.4436.5644.0454.3226.1028.7432.1639.3466.3284.0672.6358.4358.7053.3357.08

22.3029.7531.7028.6226.5226.5325.3721.3922.0027.2426.2327.5030.3634.2533.3641.3055.3145.7431.2944.0341.4058.2490.8876.6869.0466.4768.6466.17

26.9629.0425.2323.6824.0323.0320.0919.1024.1823.8724.7927.3031.4130.5937.4150.2340.7925.6437.0635.1852.5583.6167.6062.0357.4561.3157.04

22.3029.7531.7028.6226.5226.5325.3721.3922.0027.2426.2327.5030.3634.2533.3639.2152.2942.1031.1842.2539.5255.1386.1071.8465.6464.4365.8863.98

27.3629.2625.8024.3824.7023.0320.0919.1024.5223.8724.7927.3031.0730.5934.6447.6438.6426.5136.3834.2650.6578.9163.4760.1657.3359.8455.69

23.3429.5829.0624.2725.3827.9-225.5620.5524.5625.3125.2125.4229.9829.2232.9340.8254.1931.8336.3936.7240.2362.3579.7472.3763.5165.3357.0562.67

26.7728.4725.3824.1224.4022.5018.6321.6024.7024.6724.8728.1029.4232.7535.1248.7128.5331.1631.9935.8754.8968.4265.8657.7658.8152.0657.13

I -

- 46 -

APPENDIX TABLE C2. EQUATIONS USED TO ADJUST KANSAS CITY PRICES TOWEST FARGO PRICES

Regression Equations

400-500# SteersWest Fargo Price = -1.8201946 + (1.0343523

R2 = .978T-Value = 35.155

x Kansas City Price)

400-500# HeifersWest Fargo Price =

500-600# SteersWest Fargo

-3.2100313 + (1.1254112 x Kansas City Price)R2 = .972T-Value = 31.107

Price = -1.7479408 + (1.0194804 x Kansas City Price)R2 = .988T-Value = 48.229

500-600# HeifersWest Fargo Price

600-700# SteersWest Fargo Price

600-700# HiefersWest Fargo Price

700-800# SteersWest Fargo Price

= -1.0131856 + (1.03754 xR2 = .990T-Value = 61.98

= -2.1280667 + (1.0340014R2 = .984T-Value = 41.624

Kansas City Price)

x Kansas City Price)

= 1.9244081 + (.9436183 x Kansas City Price)R2 = .773T-Value = 11.68

= -.5434368 + (.981R2 = .987T-Value = 45.332

81594 x Kansas City Price)

700-800# HeifersWest Fargo Price = 4 1015440 + (.8410749 x Kansas City Price)

R2 = .766T-Value = 11.31

700-800# Heifers (Annual Average)West Fargo Price = .5080279 + (.9720322 x Kansas City Price)

R2 = .994T-Value = 35.844

APPENDIX D

- 49 -

APPENDIX TABLE Dl. STEER BACKGROUNDING ENTERPRISE PRODUCTION COSTS,BREAK-EVEN PRICE, SELLING PRICE, AND ESTIMATED PROFITABILITY, 1959-1984

TotalProduction Break-Even Selling Estimated


($/head) ---- - - -- -($/cwt)- - - - - - - -

19591960196119621963196419651966196719681969197019711972197319741975197619771978197919801981198219831984

177.18158.89165.82177.80163.74140.42159.73176.64179.91177.95196.14213.54232.86272.80348.49223.86246.60267.22298.70424.56543.27500.33438.14429.61414.15434.62

26.2523.5424.5726.3424.2620.8023.6626.1726.6526.3629.0631.6434.5040.4251.6333.1636.5339.5944.2562.9080.4874.1264.9163.6561.3664.39

31.7028.6226.5226.5325.3721.3922.0027.2426.2327.5030.3634.2533.3639.2152.2942.1031.1842.2539.5255.1386.1071.8465.6464.4365.8863.98

3.432.372.981.96

- 0.97- 2.86

1.193.570.060.843.995.201.724.7111.87

- 9.53- 1.99

5.72- 0.0710.8823.21

- 8.64- 8.48- 0.482.242.62

- 50 -

APPENDIX TABLE D2. HEIFER BACKGROUNDING ENTERPRISE PRODUCTION COSTS,BREAK-EVEN PRICE, SELLING PRICE, AND ESTIMATED PROFITABILITY, 1959-1984



($/head) - - - - --- - ($/cwt)- - --

19591960196119621963196419651966196719681969197019711972197319741975197619771978197919801981198219831984

154.14135.77145.32151.67146.77125.56127.04155.27154.63153.66172.45185.27203.49235.84300.48197.73208.79225.61256.32373.75465.80432.18383.62376.82355.90374.79

24.6621.7223.2524.2723.4820.0920.3324.8424.7424.5827.5929.6432.5637.7348.0831.6433.4136.1041.0159.8074.5369.1561.3860.2956.9459.97

29.2625.8024.3824.7023.0320.0919.1024.5223.8724.7927.3031.0730.5934.6447.6438.6426.5136.3834.2650.6578.9163.4760.1657.3359.8455.69

2.731.142.661.45

- 1.24- 3.39- 0.994.19

- 0.970.052.723.480.942.089.90

- 9.43- 5.12

2.98- 1.83

9.6419.11

-11.05- 8.98- 4.05- 0.45- 1.25

__

- 51 -

APPENDIX TABLE D3. STEER WINTERING ENTERPRISE PRODUCTION COSTS, BREAK-EVENPRICE, SELLING PRICE, AND ESTIMATED PROFITABILITY, 1959-1984



($/head)--- ------- -- ($/cwt)-----------

19591960196119621963196419651966196719681969197019711972197319741975197619771978197919801981198219831984

163.66145.71152.50164.35149.67126.49145.65161.93165.40164.31182.19198.78217.60257.42325.08195.41219.27239.37271.51397.78513.08466.19400.96395.94377.54397.43

28.4625.3426.5228.5826.0322.0025.3328.1628.7628.5831.6834.5737.8444.7756.5433.9838.1341.6347.2269.1889.2381.0869.7368.8665.6669.12

31.7028.6226.5226.5325.3721.3922.0027.2426.2327.5030.3634.2533.3641.3055.3145.7431.2944.0341.4058.2490.8876.6869.0466.4768.6466.17

0.850.151.180.00

- 3.21- 4.64

0.001.91

- 1.93- 1.27

1.782.57

- 1.213.4510.54

-10.80- 2.69

5.90- 0.2311.0221.70

-12.56-12.04- 3.26- 0.22

0.51- . · · ·

- 52 -

APPENDIX TABLE D4. HEIFER WINTERING ENTERPRISE PRODUCTION COSTS, BREAK-EVENPRICE, SELLING PRICE, AND ESTIMATED PROFITABILITY, 1959-1984



($/head) - - - --- -- -($/cwt)- --- -----

1959 141.37 26.42 29.04 0.421960 123.32 23.05 25.23 - 1.19

1961 132.75 24.81 23.68 0.63

1962 138.97 25.98 24.03 - 0.78

1963 133.49 24.95 23.03 - 2.95

1964 112.41 21.01 20.09 - 4.86

1965 113.75 21.26 19.10 - 1.92

1966 141.38 26.43 24.18 2.92

1967 140.93 26.34 23.87 - 2.56

1968 140.77 26.31 24.79 - 1.56

1969 159.28 29.77 27.30 0.99

1970 171.33 32.02 31.41 1.641971 189.08 35.34 I 30.59 - 1.44

1972 221.31 41.37 37.41 2.06

1973 278.37 52.03 50.23 8.86

1974 170.87 31.94 40.79 -11.241975 183.00 34.21 25.64 - 6.30

1976 199.31 37.25 37.06 2.85

1977 230.66 43.11 35.18 - 2.08

1978 348.46 65.13 52.55 9.44

1979 437.30 81.74 83.61 18.47

1980 399.95 74.76 67.60 -14.14

1981 348.52 65.14 62.03 -12.73

1982 345.04 64.49 57.45 - 7.70

1983 321.33 60.06 61.31 - 3.19

1984 339.68 63.49 57.04 - 3.03

- 53 -

APPENDIX TABLE D5. STEER PASTURING ENTERPRISE PRODUCTION COSTS, BREAK-EVENPRICE, SELLING PRICE, AND ESTIMATED PROFITABILITY, 1959-1984



($/head) ------- --- - - - - -($/cwt)- -- - ------

19591960196119621963196419651966196719681969197019711972197319741975197619771978197919801981198219831984

215.77197.42185.14185.34178.84155.34159.61191.99186.50195.35214.91238.76234.40283.44376.72330.28247.85325.56313.32421.07632.13556.85519.54501.03509.59497.01

26.9724.6823.1423.1722.3619.4219.9524.0023.3124.4226.8629.8429.3035.4347.0941.2930.9840.6939.1652.6379.0269.6164.9462.6363.7062.13

29.0624.2725.3827.9225.5620.5524.5625.3125.2125.4229.9829.2232.9340.8254.1931.8336.3936.7240.2362.3579.7472.3763.5165.3357.0562.67

2.09- 0.412.244.763.211.134.611.311.901.003.12

- 0.623.635.397.10

- 9.455.41

- 3.971.079.710.722.76

- 1.432.70

- 6.650.54

- 54 -

APPENDIX TABLE D6. HEIFER PASTURING ENTERPRISE PRODUCTION COSTS, BREAK-EVENPRICE, SELLING PRICE, AND ESTIMATED PROFITABILITY, 1959-1984



($/head) - --------------- ($/cwt)- ---------

19591960196119621963196419651966196719681969197019711972197319741975197619771978197919801981198219831984

188.00166.98158.53160.61155.42139.25134.47163.78162.54168.89185.25208.65205.22244.89325.26283.27203.17268.51261.43364.73552.30472.27449.36421.02439.42417.50

25.4122.5621.4221.7021.0018.8218.1722.1321.9622.8225.0328.2027.7333.0943.9538.2827.4536.2835.3349.2974.6363.8260.7256.8959.3856.42

28.4725.3824.1224.4022.5018.6321.6024.7024.6724.8728.1029.4232.7535.1248.7128.5331.1631.9935.8754.8968.4265.8657.7658.8152.0657.13

3.062.822.702.701.49

- 0.193.422.572.712.053.071.225.022.024.76

- 9.753.71

- 4.290.545.60

- 6.222.04

- 2.971.91

- 7.320.71

- 55 -

APPENDIX TABLE D7. STEER WINTERING AND PASTURING ENTERPRISE PRODUCTIONCOSTS, BREAK-EVEN PRICE, SELLING PRICE, AND ESTIMATED PROFITABILITY,1959-1984



($/head) - -------- ($/cwt)-- --------

19591960196119621963196419651966196719681969197019711972197319741975197619771978197919801981198219831984

208.26193.90175.68182.64194.59179.24156.84178.18194.65199.62201.56220.73237.98260.03312.32388.03258.38286.23308.82351.61500.74621.54580.35510.62501.30484.32

26.0324.2421.9622.8324.3222.4019.6122.2724.3324.9525.1927.5929.7532.5039.0448.5032.3035.7838.6043.9562.5977.6972.5463.8362.6660.54

29.0624.2725.3827.9225.5620.5524.5625.3125.2125.4229.9829.2232.9340.8254.1931.8336.3936.7240.2362.3579.7472.3763.5165.3357.0562.67

3.030.033.425.091.24

- 1.854.953.040.880.474.791.633.188.32

15.15-16.67

4.100.941.63

18.4017.14

- 5.32- 9.03

1.50- 5.61

2.13

- 56 -

APPENDIX TABLE 08. HEIFERCOSTS, BREAK-EVEN PRICE,1959-1984

WINTERING AND PASTURING ENTERPRISE PRODUCTIONSELLING PRICE, AND ESTIMATED PROFITABILITY,



($/head) --- -------- -($/cwt)- - - ------

19591960196119621963196419651966196719681969197019711972197319741975197619771978197919801981198219831984

183.13170.71152.49162.13168.48162.49141.95145.31173.26174.19176.84196.64209.53230.29274.08339.05231.91247.82266.75308.15446.87540.39509.03453.05446.89423.91

24.7523.0720.6121.9122.7721.9619.1819.6423.4123.5423.9026.5728.3131.1237.0445.8231.3433.4936.0541.6460.3973.0368.7961.2260.3957.29

28.4725.3824.1224.4022.5018.6321.6024.7024.6724.8728.1029.4232.7535.1248.7128.5331.1631.9935.8754.8968.4265.8657.7658.8152.0657.13

3.722.313.512.49

- 0.27- 3.33

2.415.061.261.334.202.854.444.0011.67

-17.29- 0.18- 1.50- 0.1713.258.03

- 7.16-11.03- 2.42- 8.33- 0.16

I -

- 57 -

APPENDIX TABLE D9. BREAK-EVEN PRICES FOR THE RETAINED OWNERSHIPALTERNATIVES, 1959-1984


and and andYear Backgrounding Wintering Pasturing

-- ----- - ------ - -- - --$/cwt)- - - - - --

19591960196119621963196419651966196719681969197019711972197319741975197619771978197919801981198219831984

22.1024.0519.2720.5523.0825.7420.4315.3522.8821.5919.1924.1025.3817.8221.2359.4458.2838.4248.5430.1236.1577.9985.9282.9974.0175.63

23.5325.8820.2521.7324.5927.7321.4815.4124.2822.9120.0525.6627.0718.2020.7964.6863.5240.1552.1330.6137.0985.4294.1891.3780.3382.12

9.4320.7922.4618.4319.5121.4823.8319.6115.2721.8421.2419.3423.4724.8920.0622.9654.6054.2637.7547.7235.0740.4075.9681.6979.1971.39

-- I ---

- 58 -

APPENDIX TABLE D10. ESTIMATED PROFITABILITY FOR THE RETAINED OWNERSHIPALTERNATIVES, 1958-1984


and and andYear Cow-Calf Backgrounding Wintering Pasturing

------------------------ -($/cwt)- --. -- - - - - - -

195819591960196119621963196419651966196719681969197019711972197319741975197619771978197919801981198219831984

29.134.57

- 2.936.526.840.30

- 9.322.0315.133.635.26

13.419.39

11.8432.6044.19

-44.36-38.33- 2.50-11.1047.3163.53

-12.37-38.89-36.34-26.46-24.33

22.285.481.686.583.95

- 2.17- 4.81

5.8010.013.617.64

13.888.24

12.1432.7519.59

-29.99-18.20- 0.84

4.9353.3332.60

-14.37-24.11-19.34-13.10

23.093.83

- 0.415.352.77

- 3.68- 6.804.639.952.226.31

13.156.68

12.7935.2323.12

-35.48-22.07- 1.05

4.0057.5836.23

-18.98-31.05-25.44-17.53

19.423.882.468.194.92

- 1.65- 0.37

5.489.753.388.059.959.39

13.8232.107.65

-20.14-19.29

0.8611.8740.4829.56

-14.58-18.78-23.98-10.77

I - - -' - ------

- 59 -

References

Board of Governors of the Federal Reserve System. 1985. Federal ReserveBulletin. Vol. 71, No. 5. Washington, D.C.

Craven, Robert H. and Paul R. Hasbargen. 1984. Production/MarketingAlternatives for Northern Minnesota Cow-Calf Producers. Item No.AD-SB-2208, Agr. Exp. Station, University of Minnesota, St. Paul.

Hasbargen, Paul R., Tommy Beale, John E. Ikerd, Douglas E. Murfield, andDavid C. Petritz. 1983. Cattle Cycles: How to Profit From Them.Misc. Publication No. 1430, Extension ServiTE, U.S. Dept. ofAgriculture, Washington, D.C.

Hilker, J.H., J.R. Black, and M.D. Ingco. 1985. "Beef Demand Outlook:1985-1995." Monograph, Dept. of Agr. Econ., Michigan State University,East Lansing.

Ikerd, John E. 1979. Integrated Risk Management for Beef Cattle Producers.Oklahoma State University, Agr. Econ. paper given at theExtension-Industry Long-Run Beef Outlook Seminar, Kansas City.

Johnson, Roger G., Mir B. Ali, David M. Saxowsky, and Randall D. Little.1986. Cost of Producing Farm Commodities in North Dakota. Agr. Econ.Misc. Rpt. No. 90, Dept. of Agr. Econ., NDSU, Fargo.

Keith, Kendall and Wayne D. Purcell. 1976. The Beef Cattle Cycle of the1970s. Bulletin B-721, Agr. Exp. Station, Oklahoma State University,Stillwater.

Little, Randall D. and David L. Watt. 1985. The Changing Profitability ofBeef Production in North Dakota. Agr. Econ. Rpt. No. 203, Dept. ofAgr. Econ., NDSU, Fargo.

Mann, Glenn G. (editor) Encyclopedia of Banking and Finance. 8th ed. BankersPublishing Co. Boston.

Toman, Norman and Wallace Eide. 1983. "Break-Even Prices for BackgroundingCalves." Bulletin EC-783, Cooperative Extension Service, NDSU, Fargo.

Toman, Norm, Tim Petry, and Billy Rice. 1985. Enterprise Analysis: The CowHerd. Bulletin EC-872. Cooperative Extension Service, NDSU, Fargo.

U.S. Department of Agriculture, Crop Reporting Board. Agricultural Prices.Selected issues, Washington, D.C.

U.S. Department of Agriculture, Economic Research Service. Livestockand Meat Statistics. Selected bulletins, Washington, D.C.

U.S. Department of Agriculture, Statistical Reporting Service. North DakotaAgricultural Statistics. Selected issues, Fargo.

Documents

I I I , I , ,, II - North Dakota State Librarylibrary.nd.gov/statedocs/NDSU/aer21020101213.pdfthe early 1980s, especially for cow-calf operators. Higher feed prices in Higher feed