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The economists are right

Knowing your cost of production really does make a difference

As I write this article we are amid coronavirus and a limit-down cattle market for several days in a row. For the record, I am not admitting the economists were right about this event. But as I am redoing our yearly plan, reassessing our risk strategies and adjusting costs on the fly, I have to admit that they are pretty accurate when they say we have to know our unit cost of production. Knowing and managing our costs is one of the most important risk-management strategies we can employ on a cattle operation.

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Driving down cost

There are a couple of answers to that and it depends a bit on how we view our operation. We could look at a unit on a per-acre cost or a per-calf cost. In the cow-calf sector, our forage harvest is usually marketed as weaned calves, so cost per pound of weaned calf is a good choice for most operations. For a stocker operation, an equivalent would be cost per pound of gain. Generally, we market our forage through a cow, so pounds of weaned calf is roughly equivalent to cost per bushel in a grain analogy.

If the price per pound of calf is low, then we need to make sure we drive down our cost per pound of weaned calf below the price level to be profitable.

Assessing unit cost can be a big job, especially on a mixed farm with more than one enterprise. For a ranch that is strictly a cow-calf operation with no haying or feed-making enterprise, it’s as simple as adding all the costs together and dividing by the pounds of weaned calf. For mixed enterprises, there are more nuances. How much tractor depreciation is used on the grain side vs. the cow side? How much labour is spent on stockers vs. cows vs. haying?

That said, the fastest way to make big gains is to focus on big costs. A five per cent improvement in your largest cost will have a much more significant impact than a 10 per cent improvement on a cost that is among your lowest.

Depreciation

I like to use the adage that “stuff” kills cow-calf outfits. It’s not necessarily the purchase of stuff like tractors, haybines and trucks — it’s the maintenance and replacement cost. That replacement cost — the inevitable need to update/upgrade — is depreciation. A good way to consider depreciation is “what is the price difference to replace this item, and how soon do I need to replace it?”

There are a couple of ways to drive down the cost of “stuff.” The first and most obvious is to have less. The other way is to use more of the stuff you have. Note I did not say “more effectively” although that is also important, but the more units or the more enterprises you can spread that stuff over, the lower the cost per unit.

Here is an example. Let’s assume we have a $50,000 tractor that depreciates at $5,000 per year. If we wean 100 calves that average 500 pounds, then the depreciation cost is $0.10/pound. If we could use that same tractor to run 200 cows, that depreciation cost immediately drops to $0.05/pound. On a mixed farm, we may use that tractor 50 per cent of the time for grain operations. In that case, we have also dropped the depreciation cost to $0.05/pound, as we can spread the cost over another enterprise.

Another way to improve depreciation is to make assets last longer. If we get 10 years instead of five out of a truck, we can spread that loss in value over twice as many years of production, reducing the overall cost per pound of weaned calf.

Feed

Feed is a huge cost in a cattle operation, and maybe more importantly, feeding can be a huge cost. Cows have to eat, that is pretty much a given. However, I am continually amazed by the number of cows that are not fed using a feed test and a formulated ration. This does not necessarily mean that you must have a mixer wagon and feed every day. But a feed test does help prevent over-feeding cattle and also identifies any potential nutrition gaps with the lowest-cost options we can come up with. This balanced ration can also increase performance, thus reducing feed use and potentially increasing saleable product.

Yardage

Aside from feed testing and feeding the right amounts of the right feeds, there are also tremendous opportunities to lower unit cost of production by allowing cows to feed themselves. Most of us do not appreciate the costs associated with yardage and feeding of cattle. Depreciation is one of these costs, but we also need to look at labour, fuel, repairs, facilities, corral cleaning, electricity and other costs. There is still a yardage cost no matter how we feed cattle, but it can often be greatly reduced by allowing cattle to feed themselves. This is part of why we see systems such as corn-, swath- or bale-grazing gaining traction for winter feeding of beef cattle.

Yield

If you talk to a grain farmer, it’s not all about yield, but it’s a big part. In a cattle operation, we use weaned calves to sell forage. In other words, we need to be concerned about forage yield. Forage quality also affects performance and is important as well. If we can increase our forage yield, several exciting opportunities can be opened up for us to lower our unit cost of production. We can run more cows producing more calves and thus more weight, lowering our unit cost. Or we may be able to graze our cow herd longer, reducing our feeding and yardage costs, thus reducing our unit cost of production. Or we may be able to graze our calves longer or put more weight on them using the same land base, thus lowering our unit cost of production. Lack of yield in forage systems is probably one of the biggest costs to the industry.

These are obviously not the only cost-reducing opportunities available, but for most of us they are big ones. They also demonstrate how knowing our unit cost allows us to make better risk-management decisions. It also helps us to identify and understand areas in our operation that can be improved.

In the next articles I will touch on a couple of ideas to boost forage yields and to assess costs and opportunities on our income and expense statements.

I like to say that economics is the science of justifying what you were going to do anyway, but the reality is by knowing your costs and managing forward, the economists are actually right!

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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