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Financial Conditions Moderate for Cow-Calf Production

December 6, 2018

While corn and soybeans received much of the spotlight attention during the farm economy boom, during that time cow-calf producers also experienced record returns. In a similar manner, in recent years cow-calf producers have faced declining revenues and slow-to-adjust production expenses. This week’s post is a look at financial conditions for cow-calf production.

Contribution Margin

The data for this post comes from the Kansas Farm Management Association (KFMA). In figure 1, the annual average contribution margin, on a per-cow basis, is shown from 2001 to 2017. Remember, the contribution margin is the difference between total revenues and variable costs of production. This difference is used to cover fixed expenses and, if sufficient, generates profits.

A quick look at Figure 1 focuses your attention to 2014. Benefiting from strong cattle prices, the contribution margin reached an eye-popping $575 per cow that year. This was well above any other year observed. In fact, the contribution margin of that single year was equal to the sum total of previous eight years. 2014 was a phenomenal year, to say the least.

Returns fell to $53 per head in 2015. Conditions worsened in 2016 as the contribution margin turned negative, -$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.

In 2017 conditions improved as contribution margins reached $84 per head.

Since 2001, the average annual contribution margin 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.

cow-calf producers. contribution margin. ag economic insights. ag speakers financial conditionsFigure 1. Contribution Margins from Cow-Calf Production, 2001 to 2017. Data Source: Kansas Farm Management Association.

Digging Deeper

Figure 2 splits out the two primary components of figure 1, revenue and variable costs. Anytime revenue (in blue) exceeds total variable costs (in red), the contribution margin is positive. Figure 1 reports the gap between total revenue and total variable costs.

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

In 2016 variable costs turned lower, but not fast enough to offset rapidly declining revenues. This 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. In 2017, these collectively accounted for 67% of total variable expenses.
It’s worth pointing out that total revenue remains historically strong. 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.

cow-calf financial conditions. 2018. ag economics ag trends ag speakersFigure 2. Total Revenue and Variable Costs, per Cow. 2001 to 2017. Data Source: Kansas Farm Management Association.

Wrapping it up

Cow-calf producers did not miss the farm economy boom. Good-times peaked in 2014 when revenues and contribution margins reached levels well-above recent observations. For example, contribution margins in 2014 were more than double previously observed highs.

After 2014, revenues fell faster than variable costs could adjust. This led to negative contribution margins in 2016. In 2017, conditions improved on continued lower variable costs and higher revenue.

Producers looking for 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.

Source: Agricultural Economic Insights