The Second Biggest Cost to Keeping a Cow
What is the second biggest cost to keeping a cow? Most of your neighbors don’t even know it exists!
Well, perhaps before we start discussing that, let’s talk about the biggest cost – feed cost, of course. But this is probably only true if you consider the “opportunity cost” of your own pasture as feed cost. Let’s assume a cow grazes out nine months a year, worth $25 per month, and she is on hay worth $200 per ton for three months. This brings her feed cost to $495 per year, not counting any other supplemental protein or mineral.
So what is the second biggest cost? Cow depreciation! We are not talking cow depreciation for tax purposes but rather the “economic” cost of cow depreciation. Even though you don’t write a check for it – it is a real cost!
What is cow depreciation, and what can you do to manage it?
I’m guessing your neighbor spends quite a bit of effort trying to manage their feed cost, but if they don’t even know cow depreciation is a cost then how can they spend any time at all managing this cost?
The truth is most producers don’t spend much effort at all managing cow deprecation. It is my opinion that all producers would be well served to spend some management time focusing on this major cost to keeping cows.
Let’s think about how we would calculate annual deprecation on a pickup. If you thought about it a bit, you would probably tell me this formula:
(Purchase price – Salvage Value)/Years of Use
We can use this same formula to calculate annual cow deprecation. What is a young cow worth? What is a cull animal worth? How many years of service do we get from her?
Let’s assume a young cow is worth $2,000, and a cull cow is worth $1,000 to make the math easy. The average cow in North America produces less than three calves in her lifetime. You might make an argument that your cows stay in the herd longer, but I’m guessing if you actually took the time to figure it out, you would be surprised. We all remember the cow that stayed in the herd till she was 13, but what about all those that fell out after only one or two calves? Let’s give you the benefit of the doubt and say four. Our formula would look like this:
$2,000 - $1,000/4 = $250
If we used three years for the average years of service for a cow, then the math would look like this:
$2,000 - $1,000/3 = $333
For most ranches, cow depreciation runs between $250 and $350 per cow per year, making it the second biggest cost to keeping cows next to feed cost.
Since cow deprecation isn’t a cash cost, we don’t think about it very much.
How do most ranchers pay for cow depreciation? They keep heifer calves and develop their own heifers.
If we hold back a heifer calf worth $900, run her for another 1.5 years and get calves from 70 percent of them, then we have at least $1,500 in each developed heifer. If we are replacing 14 percent of our herd a year, then we are right back around that same cost in annual cow depreciation shown above. Either way, cow deprecation is a big deal.
So how do we manage cow depreciation?
The answer lies in the formula. There are three things we can do, and they relate to the three items in the formula.
We can, one, reduce the purchase price of development costs, two, increase salvage value or, three, increase years of service.
Of these I would encourage you to focus on the first two items before you focus on the last. I believe most ranches reading this are already productive and the managerial leverage you have to affect item three is limited. Also, all the alternatives to affecting item three likely cost significant money.
If you raise your own replacements, are there ways you can reduce development costs and still meet your needs? Many ranches have found that treating heifers as stockers with a short breeding season results in well-adapted heifers, and they can market the opens for a profit.
Can you increase the value of your culls by strategically marketing these into a better seasonal market or add value through other creative ways? For most cow/calf operations, a large portion of the gross income comes from cull cows. Give them the attention they deserve in your marketing program.
Managing cow depreciation is one of the keys to being a profitable ranch. Spend some managerial time figuring out what your ranch’s annual cow deprecation costs are and then get some people around the table and tackle the three strategies mentioned above to try and reduce cow depreciation and increase profit.
I hope moisture finds your grass this spring.