Putting up hay: Cattle producers should evaluate hay profitability

Powell – In the cattle industry, record high prices don’t necessarily mean profitability.
    According to National Grazing Lands consultant Jim Gerrish, reducing costs is vitally important, as well, and he encourages producers to look at what they are spending on hay production to reduce expenses.
    Gerrish spoke at Northwest College’s Spring Roundup on Jan. 19 in Powell.
    “If producers can’t control costs, they will have a problem remaining profitable,” said Gerrish. “The basic ways to increase profit are to increase the unit of production and to reduce costs.”
    In his presentation, Gerrish added that, until producers can turn a profit on every animal that leaves the ranch, adding more animals, or units of production, is not a feasible option for increasing profits.
    “It always pays to reduce costs before adding one more cow,” he explained. “Cattle producers can always receive a higher price per unit by cutting costs.”
Profitability in cattle
    “Many outfits don’t recognize the total costs of being in business,” said Gerrish, adding that costs include both overhead and operating costs.
    “Overheads are costs that are incurred whether a producer runs one cow or 10,000 cows,” explained Gerrish, mentioning utilities, equipment, depreciation and taxes.
    Operating costs are the incidental costs that occur as a consequence of production and they include feed and veterinary costs.
    In herd data collected from Illinois, Gerrish noted that, of the top eight determinants of profitability in cattle operations, feed costs top the list, but more producers are concerned about factors like weaning weights.
    “In a typical group of cow-calf producers, most people can tell me what their weaning weight is within five pounds, but very few can tell me what it costs to produce a ton of hay, and that is far more important,” said Gerrish. “It is very critical that you know your cost of production.”
    “You can’t manage it if you can’t measure it,” he added.
    “Winter feed is the single largest cost for most livestock operations,” Gerrish noted, adding that the average number of days on feed for cattle in Minnesota, Missouri and Mississippi is 130 days.
    Gerrish also added that there are operations in each of those states that feed no hay during the year.  
    “We feed hay to the extent that we make hay,” said Gerrish. “The easier we can make it, the more we will make and the more we will feed.”
A new model of production
    With Vermeer’s “one-man hay system” entry to the market in the 1970s, Gerrish noted that making hay became much easier, and growing vast amounts of hay became possible
    He added that, in 1973, a Vermeer baler only cost around $4,200, and that same year fed cattle hit an all-time record price of $54 per hundredweight.
    “In 2011, all-time record high fed cattle prices were are $128 per hundredweight, almost 2.5 times higher than in ’73,” said Gerrish. “A new Vermeer baler costs $40,000 – a 10-fold increase.”
    Gerrish pointed out that, today, diesel costs have seen a 20-fold increase from only 17 cents per gallon in 1973, and labor costs have jumped 10-fold from $1.50 per hour. As compared with 1973, fertilizer costs have only increased four- or five-fold, but land has increased nearly 40-fold in many cases, he said.
    “We have, on average, input costs at 10 times higher than we had in the 1970s,” commented Gerrish. “We can’t live on a model of production based on cheap fuel, cheap feed and cheap land, because it doesn’t exist anymore.”
Hay production costs
    Hay production costs are diverse and must include factors that many do not consider, said Garrish. Expenses that are commonly accounted for include fertilizer, equipment, irrigation, fuel and labor, but producers tend to forget about harvest costs, equipment depreciation, stand depreciation and nutrient loss.
    Harvesting costs, or the cost of custom harvesting, are figured based on averages that Gerrish obtained from University Extension programs, and they add around $30 per ton to overall production costs.
    “Equipment depreciation is one of the biggest factors that sinks the profitability of farming ranches,” added Gerrish, who used tax methods to estimate equipment depreciation.
Stand depreciation
    “We hardly ever think of stand depreciations, but producers have to think of the costs associated with that,” Gerrish mentioned. “It’s not cheap to replace an alfalfa stand.”
    The total cost of the replacing the stand may amount to $200 per ton or more.
    While stand depreciation is a large factor, Gerrish also described soil losses in the form of nutrients as a problem, noting that when you grow hay and then feed in another area, producers are essentially mining nutrients from one piece of ground to put on another.
    “Producers are moving a tremendous amount of nutrients from the hay field to the feeding area,” said Gerrish.
Opportunity costs
    Gerrish also describes the cost of a producer’s time, or the opportunity cost, as important, though it is difficult to concretely define.
    “What else could we be doing if we weren’t making hay?” asks Gerrish. “We could be building fence to more effectively manage grazing resources, developing stock water, monitoring irrigated pastures, marketing livestock or even taking time off.”
    “Just think about how much time ranchers put into making and feeding hay,” encouraged Gerrish, emphasizing that before deciding to make hay, producers should carefully look at their costs.
    “When the full cost of production is accounted for, hay generally costs between $80 and $110 per ton to produce, and that price often goes higher,” said Gerrish. “If you have $110 production costs and are selling for $90 a ton, the business is not sustainable.”
    In today’s hay markets, however, Gerrish admitted that production is more profitable.
    When determining whether to grow hay, purchase hay or even shift the operation away from hay use, Gerrish urged producers to consider all options, their costs and benefits.
    At the end of the day, Gerrish said, “Ranching is a business. When we have record high prices, we are willing to spend a little more money, but it’s a margin game. Producers have to control costs and keep them below income levels.”
    Saige Albert is editor of the Wyoming Livestock Roundup and can be reached at saige@wylr.net.