Managing cow costs
August 6, 2013
I had the opportunity last week to attend a Risk Management Seminar that was hosted by CattleFax in Denver. It was an intense, 2-day meeting, and a very worthwhile experience. I am not a marketing specialist, so I went into the meeting with a perspective that I had a lot of room to learn. I came away with a new appreciation that the gurus of cattle marketing have a lot of tools to assist cattle producers make better marketing decisions, whether it be weaned calves, backgrounded yearlings, or finished cattle. I would suggest that most producers could benefit from a learning opportunity like this, whether it is the seminar I just attended or any other chance to learn from marketing specialists.
They discussed a wide variety of risk management topics. A key element that came out early, however, was that a producer must know their cost of production and be able to calculate a breakeven price as a starting point to manage market risk. The point was that a person can't manage the risk associated with potential to make a profit if they don't know the baseline that they are managing from.
A breakeven price, by definition, for a cow-calf producer is the price per pound that they need to receive when they sell their calves to cover the cost of producing the calf. The arithmetic to calculate a breakeven is pretty simple, it is the total cost of production per cow divided by the pounds weaned per cow, with the units of measure being price per pound of weaned calf.
The bottom half of the equation is the easier part to calculate if weaning weight and weaning percentage is known. Calculating cost of production per cow is the challenging part that most producers struggle with. Some of the costs are fairly straightforward, such as feed costs and veterinary costs, but others can be more difficult. For example, farm and ranch equipment gets used for a lot of things other than just the cow herd. How do you decide how much of the depreciation on pickups to attribute to the cows vs. other uses? The same would be true for a loader tractor, and the list goes on. In reality, many of these costs end up being your best guesstimates. Once you make yourself calculate these costs the first time, it will get easier in the future, and the numbers you use will get more accurate as you refine them through the years.
Cost control is extremely important in this high feed cost environment that we are currently living with. Marketing tools like calculating costs of production and breakeven prices can serve as aids in making the hard decisions about what alternatives need to be considered and can provide producers with some assurance that they have taken adequate measures at cost management.
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Although we are seeing record calf prices, everybody that's paying attention knows that this isn't automatically translating into record profits because we are also seeing record costs. Knowing the cost of production and calculating the breakeven can be useful tools to manage costs. It provides a baseline to know what the goal for cost control is. In other words, if you calculate a breakeven, and it is 15 cents a lb. higher than you are comfortable with compared to current or expected calf prices, then you know how much you need to trim costs.
Quick and simplistic example: We all know feed and pasture costs are extremely high. On the extreme end this spring in western South Dakota, I heard of grass-alfalfa hay selling as high as $235 per ton and pastures renting on the high end for $55 per pair per month. If we assume 8 months on pasture and 4 months eating hay, it would cost somewhere in the $900 to $1000 per cow range just to put forage in front of her for a year. And then add all the other production costs on top of that. My numbers may not be perfect, but they are in the ballpark on the high cost end. Innovative producers are finding cheaper alternatives that allow them to control cow costs and reach breakevens that are reasonable.
To wrap this up and try to bring these random thoughts to a conclusion, the point I am trying to make is that cost control is extremely important in this high feed cost environment that we are currently living with. Marketing tools like calculating costs of production and breakeven prices can serve as aids in making the hard decisions about what alternatives need to be considered and can provide producers with some assurance that they have taken adequate measures at cost management. F