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Veteran cattle producers often reminisce about the past when profits were abundant. In 1979, cow-calf returns over variable costs reached a remarkable $503 per cow in today's dollars, the highest return in the previous three cattle cycles. Profitability in the cattle industry relies on calculating revenue minus expenses, but determining which expenses to include can be challenging.

There are different ways to measure profit in the cattle business. One approach is to consider the money left over after all costs have been paid. This calculation is crucial when making investment or expansion decisions as the enterprise must cover all expenses to ensure long-term economic sustainability.

Another perspective on profit is the return above variable costs, which helps guide short-term production decisions. Economic theory suggests maintaining full production as long as expected revenue can cover variable costs. Any returns above variable costs can be allocated towards fixed costs. On the other hand, a revenue shortfall between total costs and variable costs indicates the need for additional cash from other sources to cover overhead expenses and living costs.

Cattle production returns can fluctuate significantly from year to year. In the current cattle cycle, annual returns over variable costs in the United States have averaged $124 per cow, with highs of $391 per cow in 2014 and lows of $12 per cow in 2022. These short-term swings can be extreme, causing challenges for producers.

To manage market risks, producers have access to various risk management tools. Futures and options contracts have been used for decades to mitigate price risk. Federally supported livestock insurance, such as Livestock Risk Protection (LRP) and Livestock Gross Margin (LGM), also provide protection against price decreases. Assessing risk tolerance is essential when deciding whether to utilize these risk management tools.

Looking ahead, cow-calf returns are projected to experience an upward trend in the coming years. However, costs have not moderated, which may limit margins. It is crucial for producers to balance investment for expansion with preserving enough cash to withstand difficult times.

Expanding an existing cow-calf operation carries its own set of risks. Financing additional cows, facilities, and operating expenses increases risk exposure. Producers need to carefully evaluate the financial implications and cash flow requirements before embarking on expansions that require capital expenditures.

Keeping accurate records is essential for managing profitability. Financial statements, such as balance sheets, income statements, and cash flow statements, provide valuable information for analyzing the financial position of the operation. Monitoring key financial benchmarks and production performance indicators can guide decision-making and help identify areas for improvement.

Debt management is also crucial in the cyclical nature of agriculture. Trimming debt during prosperous times strengthens the business's ability to withstand leaner periods and provides equity for future borrowing.

Caution should be exercised when reinvesting profits back into the business during periods of high profitability. Investments should align with the long-term business plan and focus on areas with high expected payoffs, such as improving genetics, enhancing the forage base, and investing in productive assets or technology that improves productivity and efficiency.

Ultimately, the decisions made during good times are often more critical than those made during tough times. It is important to resist unnecessary expenditures and justify each transaction based on the business's goals. Whether the goal is growth, long-term profitability, or personal income, careful planning and wise investments can lead to success even in challenging market conditions.