Pushing the Pencil on the Cow/Calf BusinessWritten by Dallas Mount
We all knew it was coming. It was mainly just a question of when and how fast the cattle market was going to fall. There is not much use in hand wringing over it now, but there certainly is use in planning for a near future with dramatically lower prices.
In making your plan for the coming year, running economic projections on each enterprise is a wise move. In this article I’m going to walk through some projections for 2016 on a cow/calf business to get you thinking about your own numbers.
For these projections, I will use a 250 cow and bred heifer ranch that also develops about 50 heifers a year. The ranch runs mostly on private land and feeds about two tons of hay per cow each winter.
Each year, they wean 238 calves weighing about 500 pounds. They also sell 30 head of cull cows and two cull bulls each year.
If we plan on calves worth $900 on average, cull cows worth $900, and cull bulls worth $1,500, then the total production value from the ranch is $244,200 or $976 per cow. That figure is calculated by multiplying 238 calves by $900, plus 30 cull cows by $900, plus two bulls by $1,500.
If a cow/calf month in the summer is worth $35, and we have a six-month grazing season, plus two additional months of fall grazing, also valued at $35 per month, then total value of the grazed feed is $35 times eight months for $280 per cow.
If a ton of hay is worth $125 per ton and it takes two tons per cow, then hay equals $250 per cow.
If we assume another $20 per cow for salt and mineral, then total feed costs equal $550 per cow.
Since we counted all of our heifer calves and the full value of the culls in our total production value, then we need to buy developed heifer calves back from our heifer development enterprise. If we sell 30 cull cows a year and two or three die, we will need to buy about 35 bred heifers to keep our numbers constant.
Let’s assume bred heifers are worth $1,700, for a total of $59,500 or $238 per cow.
For bull costs, we will use $75 per cow.
We will also account for vet costs of $20 per cow and fuel costs of $15 per cow. All other costs, including supplies, utilities, trucking and marketing, will be valued at $50 per cow.
If the average cow on this ranch is worth $2,000, then the inventory value of this ranch is around $500,000, being conservative and ignoring bulls. To be fair economically, we need to charge ourselves interest for use of our money, or if part of this was borrowed money and we are paying interest on it, then that will be a cash cost. Let’s use five percent. Opportunity interest of $500,000 times five percent is $25,000 or $100 per cow.
As a result, total livestock costs for the operation hit $498.
Most ranches have to support people and the houses and utilities they use, as well as, equipment and facilities to keep up. Rather than spend the time on how we figure overhead costs, I’m going to give some ball park estimates.
Regarding people, if this 250 cow ranch supports one full-time person, then we will use $60,000 to cover salary, benefits, housing and utilities for that person. That figure breaks down to $240 per cow.
The depreciation and repairs on both equipment and facilities totals $50 per cow.
All combined, total overhead equals $290 per cow.
A summary of total costs and expenses can be seen in the table to the left.
These numbers are pretty sobering. I don’t present these numbers to suggest your numbers are the same. I present these to give you an idea of how we run economic projections. You might put your numbers together and see a much different picture than I presented.
I will caution you to not ignore any of these economic costs I’ve built into this. For example, you might not want to charge your cows for summer grass. If your cows weren’t grazing that grass, could you sell it to someone else? If you ignore these costs, then the number you get from your economic projections will not be accurate.
So what do you do about this? The leverage to increase profit should start on the big ticket item from above.
Look for strategies to reduce feed cost without dramatically increasing production risk or dramatically decreasing performance.
Keep overhead costs low, find ways to use labor more efficiently and reduce reliance on machines.
Focus on profitability not productivity. It is tempting to focus efforts on increasing productivity. Rarely do we find this to be a strategy that also increases profit. Never in my years of doing economic analysis of ranches have the most productive ranches been the most profitable. However, often ranches with lower productivity are highly profitable.
Good grazing management maximizes carrying capacity while maintaining good to excellent range condition.
Use this time before calving season gets in full swing to spend some time working on economic projections for each enterprise on your ranch.