Key performance indicators help identify more profitable areas for ranchers

Viewed as a report card for a cattle operation, key performance indicators, also known as KPIs, can assist beef producers in measuring factors crucial to an operation.

Stan Bevers, Texas A&M AgriLife Extension Service economist, Vernon, discussed KPIs at the 2016 Texas and Southwestern Cattle Raisers Convention in Fort Worth.

"KPIs provide a rancher with an analysis of the operation and detail whether the operation is fulfilling the goals of ownership," Bevers said.

These indicators are especially important in the current weakening cattle market, he said.

For example, Bevers said the development cost of a replacement heifer is a KPI. Hay production cost per ton is also a KPI.

"One of the big reasons for doing this, I was working with a big ranch in Montana," Bevers told attendees. "The members of the board were pretty big financial gurus. I shot all of this information about the ranching operation to them and they said it was like getting a drink out of a fire hose. They wanted 10 things in about five minutes. That's where KPIs came into play."

Bevers said when ranchers consider a bull purchase, they focus on expected progeny differences, also known as EPDs.

"The perfect bull in my mind would be one with an EPD number that is really high for weaning weights, but we can't focus on one number or one performance metric without sacrificing another," Bevers said. "It's the same thing with KPIs."

Other KPIs that Bevers suggests ranchers look at include:

  • Revenue per breeding female.
  • Nutrition base expense as a percent of total expenses.
  • Labor and management expense as a percent of total revenue.
  • Operating expense as a percentage of total revenue.
  • Net income ratio.
  • Cost per hundredweight of weaned calf.
  • Total investment per breeding female.
  • Debt per breeding female.
  • Equity-to-asset ratio or market basis.
  • Asset turnover ratio on cost basis.
  • Rate of return on assets on market basis.

Bevers said reproduction is the most influencing factor on ranch productivity.

"After all, we have to have cows to produce revenue," he said. "Once we identify an open cow, everything that follows is an expense with no revenue to go against it until she is bred again or sold. The nutrition of that female is paramount to getting her bred. Yet, feed is one of top three expenses on a ranch that also include labor and depreciation.

"Those costs tend to move around a bit. We hear all the time feed is the most expensive cost. But that's not necessarily true. It's labor and depreciation. A lot of times we don't even count or factor in our labor. Now, we are paying twice as much as what we used to for bulls. Depreciation has really jumped up in terms of costs."

With cattle prices already coming down from 2015 levels, Bevers said producers need to continue to watch prices and expenses.

"Expenses won't come down as fast as commodity prices," he said. "Cow-calf expenses won't come down as fast as cow-calf prices. 2016 will have lower calf prices but not to the extent it will affect these higher expenses. During 2017, expenses still will not be coming down, where calf prices will be in their second year of decline. That's what concerns me."

Bevers said if ranchers still need things done in an operation, such as putting in new corrals, new fences, paying down debt or buying a new vehicle, getting it done as quickly as possible is the best time.

"If there is something in the form of a capital asset, get it done quickly," Bevers said. "Going into 2017, cash flow could be an issue as calf prices are anticipated to continue to come down."