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An appreciation for cow herd depreciation

Generally, one of the largest costs in any average cow-calf operation is cow herd depreciation, although it is often overlooked. Depreciation means the value of an asset goes down as you use it. In other words, as something wears out it has less potential future use. A good example is a baler. I see lots of balers for sale for about $20,000 less than new price once they have about 10,000 bales on them. The cost of that depreciation is about $2 per bale. This does not include operating costs or repairs. Depreciation is sometimes called the cost of ownership.

Accountants and tax rules often get involved in depreciation, making things slightly less straightforward, but basically as you use something, it becomes worth less.

Cows are complex

Cow depreciation is actually more complex than our baler example and that may be part of the reason many of us don’t fully appreciate the importance of it to our operations. One of the confounding factors is that a cow herd consists of numerous cows all at varying stages of depreciation (as opposed to one or a few balers). Another confounding factor is that cows don’t all depreciate at the same rate. A third factor is that unlike our baler, the cost of depreciation for a cow can change rapidly and on a regular basis.

The average age of the cow herd defines an average depreciation rate, but we know certain ages of cattle are much more likely to fall out of the herd than others. For example, first-calf heifers that are breeding back have a big job since they are still growing, raising their first calf and must get bred in a timely fashion. As well, older cows may struggle to keep up in production with younger cows in the herd.

Cows depreciate at varying rates. A first-calver that meets an unfortunate accident may be fully depreciated with $0 salvage value at age two. A 14-year-old cow, sold for cull price, becomes fully depreciated to the operation but her sale value today may actually be higher than her purchase value back in 2003. This creates a real conundrum for mathematicians.

A good working definition I like is: “Annual cow herd depreciation equals the cost of replacement females, minus the value of cull animals.”

This value works pretty well as long as the herd size remains fairly constant and if you are raising your own replacements you are aware of your costs.

From the Canadian Cattlemen website: Grain, cattle prices boost 2012 net farm income: StatsCan

Depreciation management

I view depreciation as an insidious cost since it is not a cash cost and can easily remain hidden. There are a few things we can do to reduce the cost of depreciation to an operation.

1. Increase cow longevity
2. Reduce early replacements

3. Reduce replacement costs
4. Increase cull price
5. Invest in appreciating assets

Increasing cow longevity is an obvious way to reduce depreciation. If an average cow makes it to age five and we can move that to age six, then we have one more year to spread our costs over. There are many factors that play into this but a couple of the big ones are having cows with productivity that fits their environment and properly managing body condition scores.

Closely related to this is managing our high-fallout groups (first- and second calvers) a bit more carefully. This could include management tools such as using calving ease sires on young cows to reduce post-partum intervals and give more opportunity for breed back.

Since depreciation is a function of cost versus salvage value, another useful tool is to reduce the cost of replacements. This one requires knowing your costs and determining if it is cheaper to buy replacements or to raise them. Another often overlooked option is to purchase second- or third- calving cows, rather than replacement heifers. In many cases these cows can be purchased at a discount to replacement heifers and may have a significantly lower fallout rate in the cow herd.

The ability to increase cull prices also plays into reducing depreciation costs. There are many different ways to do this, such as using seasonal marketing trends, but other solutions include selling cull cows as hamburger or other value-added products. This is an avenue we have taken with our first-calf heifers with good results.

In combination, reducing replacement cost and increasing cull price can work very well, particularly if your operation is set up with excess forage and can handle somewhat rapid changes in inventory. There have been too many times over the last few years where bred cows could be purchased at a price lower (sometimes much lower) than the cull price six months or a year later. There are opportunities if you are positioned to take advantage of them, and work within a somewhat cyclical industry.

Cows can appreciate

One final and perhaps extreme possibility is to invest in livestock whose value is appreciating. One of the big differences between cows and that baler is that cows have a period in their life where they appreciate in value and then start to depreciate. Every cow starts as a calf and subsequently a feeder aged animal. These animals will increase in value over time as they gain weight. This is very different than our baler that only declines in value once in our possession. Some operations choose to shift the mix towards more appreciating cattle types (stockers, grassers) and away from cows, which are depreciating.

There are many factors to consider when assessing depreciation in a cow herd, but it is worth keeping your eye on it as it is one of the biggest hidden costs in the business. †

About the author

Contributor

Sean McGrath is a rancher and consultant from Vermilion, Alta. He can be reached at [email protected] or (780) 853- 9673. For additional information visit www.ranchingsystems.com.

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