Lincoln, Neb. —When beef producers look at annual cow costs and doing an economic analysis, three categories tend to make up the largest percentage of total costs: feed, labor/equipment and cow depreciation. Other expenses, such as breeding expense and veterinary costs, tend to be significantly less than the “Big Three.”
To conduct an economic analysis of a ranch, first break the ranch into enterprises to understand where value is being created and costs are occurring. Land ownership, hay production, cow-calf and replacement heifer development are four of the major enterprises on many ranches.
Including both grazed feed and harvested feed, 40-70 percent of annual cow costs fall into this category. If the ranch is owned, the cash cost for feed may be less; however, when conducting an economic analysis, grazed and harvested feed from owned land should be valued at market price. In other words, the cow-calf enterprise is asked to pay fair market value for the grass that is grazed and the hay that is fed. If the land is owned, the market value of the grass is counted as a return to land ownership.
The same goes for hay raised on the ranch. What is the market value for the same quality of hay if you were to sell it off the ranch? The cow-calf enterprise should be asked to pay that value to the hay enterprise. If the market value of the grass that cows graze or the hay they are fed is not being accurately accounted for, then it’s possible the cow-calf enterprise is being subsidized by other enterprises on the ranch.
When categorizing costs to the cowherd, labor and equipment can be lumped together as a single category because they often go hand-in-hand. Equipment is often purchased to reduce labor, and labor is needed to operate equipment. These two things together are also often identified as a fixed, or overhead, cost. Overhead costs are expenses that don’t change very much based on the number of cows in the herd. For example, if a rancher has 200 cows and leases a neighbor’s place and is now able to run an addition 100 cows, they probably are not going to buy another pickup, trailer, tractor, or ATV just because they added another 100 cows. The equipment they had to care for 200 cows is likely adequate to care for 300 cows.
Overhead costs related to labor/equipment tend to be the second-largest expense for the cow herd after feed. When a rancher is serious about trying to address annual cow costs, overhead expenses per cow unit is an area where there is often opportunity to improve. Increasing the number of cows per person/equipment or aggressively finding ways to reduce the labor/equipment needed to care for cows are two ways to address this expense.
Cow depreciation is an economic cost that is often overlooked on many ranches. The costs associated with getting a bred heifer into the cowherd are often hidden because many ranchers raise their own replacement heifers. In an economic analysis, the heifer calf’s market value at weaning is identified and then all additional costs from weaning until she enters the herd as a bred female are accounted for.
A market value is placed on the heifer at weaning because that was value generated by the cow-calf enterprise. A market value is also placed on the bred heifer at the time she enters the cowherd because that value minus her weaning value was value generated from the replacement heifer development enterprise. The heifer calf could have been sold at weaning or she could have been sold after being developed as a bred heifer.
Knowing the economic cost of developing a replacement heifer can give insight into understanding where value is being created and where costs are occurring on the ranch. If the market value of a bred replacement heifer is less than what it costs the ranch to develop her, buying replacements may be a better option.
Cow depreciation expenses can be addressed three ways for a cow-calf enterprise.
1. Reduce the cost to get a cow into the herd.
2. Create and capture more value from a cow when she leaves the herd.
3. Find ways to increase the number of years that a cow is productive in the herd.
For many ranchers, creatively finding ways to reduce or even eliminate cow depreciation can be a significant way to reduce annual cow costs.
A quick and dirty way to calculate the cost of depreciation to a cow herd inventory that basically remains constant is to annually compare the market price of bred females entering the herd to the revenue being generated by cows leaving the herd. Don’t forget to include death loss when counting the cows that leave the herd! If bred heifers have a market value of $1,500 and cull cows leaving the herd have a value of $700, this is $800 of depreciation. If a cow is in the herd for an average of four years, this is a cost of $200 per year for cow depreciation.
As we close the year on 2020 and start 2021, now is a great time to evaluate all of the costs associated with the cow-calf enterprise. In particular, take a look at “The Big Three” of feed, labor/equipment and cow depreciation. Consider where there are opportunities to make changes that could improve profitability in the upcoming year and develop a plan to implement them.
If you would like to further develop your skill set in calculating cost of production for your own operation, we invite you to attend a two-day Unit Cost of Production Workshop on February 3 and 4 in Valentine. In this hands-on workshop, participants will work through a ranch scenario and calculate unit cost of production for land, cow-calf, heifer development and hay enterprises on a ranch. Participants will receive access to Excel® spreadsheet templates that can help analyze cost of production for their own operation. Nebraska Extension Educators will be available for follow-up after the workshops.
For more about this workshop, check beef.unl.edu: https://beef.unl.edu/beefwatch/2021/unit-cost-production-workshop-valentine-nebraska-february-3-and-4