Tim Steffens discusses how to determine the correct stocking rate and how this can make or break cattle profitability
February 23, 2012
When Tim Steffens first became interested in analyzing stocking rates on grazing land, he lived by the assumption that a person could never go broke being under stocked. Since then, Steffens, who is the United States Department of Agriculture-Natural Resources and Conservation Services multi-county, rangeland management specialist for southeastern Colorado, has learned differently.
While talking to an area rancher, he voiced his assumption, only to be told the rancher himself had it happen by inheriting not only the ranch, but the inheritance taxes and expenses that go along with being a rancher and owning land. That rancher’s statement spurred Steffens into researching and developing a way to determine the optimum economic stocking rate based on the ratio of variable costs, and how the value of production is independent of overhead costs.
“What you paid for your pickup and land has nothing to do with how many cattle you should run,” Steffens stated. “It is important to look at the biological relationships between stocking rate and productivity per acre,” he continued. “Look at the factors that affect profitability of a grazing operation, and how to use gross margin analysis to evaluate stocking rate decisions.”
Producers should look at the affect of stocking rate on performance of their cattle. If a producer chooses to run too many cows per acre, performance per animal will be decreased.
“Every animal we add increases production,” Steffens explained. “But optimum performance is matching the number of animals with the resources available.”
“Is maximum productivity per acre the most profitable?” he questioned. “In an ideal world – yes, but we don’t live in an ideal world. We have expenses to run the cow, and environmental factors like drought to contend with.”
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Overhead or fixed costs, and variable costs increase with the amount of production. Fixed costs like land and labor don’t vary with the number of cows. However, variable costs like feed, health, marketing costs, and interest on the cattle will increase with every additional head. “The difference in variable cost and value of production is gross margin, and the difference between gross margin and overhead is profit,” he explained.
When determining a maximum stocking rate, Steffens encouraged producers to look at the historical ratio of variable costs in relation to their production. “When variable costs increase, reduce numbers,” he said. “When value of production increases, increase numbers. If both go up, you need to look at the ratio to determine what to do.”
Steffens said producers should also look for ways to increase the long term capacity of their ranches. “By changing the stocking rate, you can increase performance,” he said. “Many people think all you need to know about grazing management is to stock moderately. There is more to managing grazing land than stocking moderately,” he added.
“Maximum livestock production occurs at half the number where net productivity equals zero,” he continued. “The rate of decrease of individual performance with each animal affects the amount of risk associated with the increase in numbers, and the sensitivity of profit to change in stocking rate. If you are in a very resilient environment where forage quality is high and relatively predictable, crowd the top of the curve,” he recommended. “However, if you’re in an environment where diet quality decreases rapidly, or if its very erratic, don’t crowd the top of the curve.”
“The most profitable stocking rate is directly proportional to the ratio of variable costs to value of production, and it’s the same where gross margin is maximized,” he explained. “In the end, it makes it easier to not have to worry about overhead costs. You need a positive gross margin on those additional units in order to run more cattle to spread those overhead costs over more units,” he said.
Fixed costs have no bearing on the most profitable stocking rates, but they will impact the amount of profit. “How many people do you know who pay too much for a grazing lease, and have to stock it too heavy just to get their money back from it?” he asked. “First of all, look at what your total gross margin will be that you can get from that place, and determine how much of that you want to be profit. That will determine how much you can afford to pay for a grazing lease. If each additional cow you run is losing you money, it isn’t worth it. However, if the gross margin per animal is positive, then expanding the business with more land and animals may be profitable. It could make more use of the land, equipment and labor,” he explained. “However, if you are on a fixed land base and trying to take care of fixed costs by running more animals, every additional animal is losing you money,” he cautioned.