Economist: Financial conditions moderate for cow/calf producers

Producers seeking to improve cost structure will need to pay close attention to feed and pasture.

While corn and soybeans received much of the spotlight during the farm economy boom, cow/calf producers also experienced record returns during that period. Since then, however, cow/calf producers have faced declining revenues and slow-to-adjust production expenses, according to agricultural economist David Widmar.

While benefiting from strong cattle prices, Widmar pointed out that the contribution margin — the difference between total revenues and variable costs of production — in 2014 reached an eye-popping $575 per cow. This was well above any other year observed and equal to the sum total of previous eight years.

Widmar added, “2014 was a phenomenal year, to say the least.”

From there, returns fell to $53 per head in 2015, and conditions worsened in 2016 as the contribution margin turned negative to a loss of $5 per head.

“Only two other years, 2008 and 2009, have reported negative contribution margins. When contribution margins are negative, none of the fixed costs are covered, and there are no profits generated,” Widmar explained.

The tide turned in 2017, when conditions improved as contribution margins reached $84 per head. However, Widmar said the average annual contribution margin since 2001 has been $112 per head. “This includes the record-setting 2014. The median observation is $89 per head. This is to say that 50% of the observed data were above $89 per head, and half were less than $89,” he said.

Digging deeper

According to Widmar, revenue per cow in 2014 nearly reached $1,400, well above observations seen prior or since. Leading up to 2014, revenues rapidly exceeded slow-to-adjust variable costs, which Widmar said created historical returns. In 2015, revenues fell as variable costs continued to move higher.

Variable costs in 2016 turned lower, but not fast enough to offset rapidly declining revenues, Widmar explained. This, he said, led to the negative contribution margins. By 2017, revenues turned higher as variable costs continued lower, both positively helping producer financial conditions.

“For context, feed and pasture represent a significant share of variable costs for cow/calf producers," he said. "In 2017, these collectively accounted for 67% of total variable expenses.”

Today, total revenue remains historically strong, Widmar noted.

“Even after significant declines since 2014, total revenue has remained above $600 per head. Before 2009, revenues only occasionally reached $600 per head.  This is similar for total variable costs. Even after turning lower since 2015, variable costs remain above levels observed before 2012.”

Improving cost structure

While cow/calf producers did not miss the farm economy boom, Widmar said revenues since the peak in 2014 have fallen faster than variable costs could adjust. This, he said, led to negative contribution margins in 2016. In 2017, however, conditions improved on continued lower variable costs and higher revenue.

Looking ahead, Widmar said producers seeking ways to improve their cost structure will need to pay close attention to feed and pasture. “In 2017, these two categories accounted for two-thirds of variable costs,” he said.

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