Enterprise Budget Can Help Determine Breakeven Costs and Set Producers Up For Financial Success

By Whit Stewart 

“Thought provoking” is a phrase that would probably be further down the list when describing 2020.

The series of unforeseen circumstances affecting the U.S. lamb industry and highlighting the need for producers to look at their finances­ have made it clear few would leave 2020 unscathed. These impacts are real and hard felt. 

As Winston Churchill aptly stated, “In challenging times one must question the accepted reality, because things are going wrong, rapid answers are needed and the solution may well be found outside the usual compass,” which has relevance to the U.S. lamb and wool industries this year. 

Still, in a year where so much is out of individual sheep producers’ control, there is so much to look at on an enterprise level, “outside the usual compass.” 

Cost of production

Hoping for better feeder and fat lamb markets is an energy sink most years, whereas determining cost of production and break-even analysis is proactive. The American Sheep Industry Association (ASI) funded a study in 2015 looking at baseline costs of production in the U.S. sheep industry. 

This straightforward enterprise budget analysis surveyed producers in different regions of the country regarding their lamb and wool revenue in relation to their associated variable costs of production on a per-ewe basis. 

In the Intermountain West from 2010 to 2018, the highest-ranked variable costs included hired labor at $33.12 per ewe, pasture at $13.77 per ewe, operator and family labor at $12.83 per ewe, fuel, lube, repairs and utilities at $9.86 per ewe and hay at $6.90 per ewe. 

This is an average of $104.23 per ewe per year in variable costs. 

These costs vary by operation, especially with H-2A mandatory wage requirements, but the general theme of these costs cutting into a producer’s bottom line is the same regardless of operation. 

It’s helpful to know where our levels of production and associated costs stand in relation to others. Business benchmarking in the U.S. sheep industry isn’t too common, unfortunately, but will likely be the difference between success and failure in the future.

The more productive question is, what can be done to either reduce these costs or maximize the output on these specific expenditures? 

Breakeven anaylsis

Whether raising stud rams, marketing feeders or selling fat lambs, an enterprise budget can help determine breakeven costs and set producers up for financial success. 

The table below shows an example of break-even scenarios based on varying ewe costs, weaning percentages and average weaning weights. The formula appears simple, but the truth is, low annual ewe costs and high-weaning percentages is a deliberate process that requires deliberate action. 

The answer to these questions merits many more words than this column allows. 

Solutions may include, but are not limited to, technology to reduce and/or eliminate additional labor, continuing education for hired help to maximize lamb survival, prioritizing guard dog management, etc. 

But, unfortunately, for many of us the initial step of figuring out what the costs on our operation are is the hardest step. 

May 2020 grant us the silver lining of helping us “find solutions outside the normal compass,” as Churchill suggests.

Results from the ASI Cost of Production study and enterprise budget worksheets are available at bit.ly/ASI-costofproduction.

Whit Stewart is the University of Wyoming Extension sheep specialist. He can be reached at whit.stewart@uwyo.edu.