Which side of the custom work equation are you on? Are you relying on custom work and expecting it to be done right, on time and affordably? Or are you a custom operator working hard to keep equipment running, get as many acres or hours logged as possible, keep customers happy, all while watching costs hoping to net a dollar at the end of the day? Either one can be frustrating or rewarding at times. Here is one story that we recently encountered:
Ray Roundmup runs a beef operation with of 500 head of commercial cow-calf, 1,000 head of custom grass cattle, and a 500-head backgrounding enterprise. With Ray’s land base, he is able to produce his own feed grain without renting any additional land. On 500 acres, he grows corn silage, feed grains and canola. Ray contacted us to discuss growing feed versus purchasing feed. Ray’s passion lies with the cattle operation and although he relies on two hired men, they also prefer the cattle as opposed to a long day of sitting on the tractor. Ray calves for two months, starting April 1. He receives his custom grass cattle starting May 20. In that same period, he has to find time to get an aging line of cropping equipment ready and into the field.
Ray and his bank manager, Hans Inmapocket, were both growing frustrated with the operating line that was no longer revolving the way either one of them had intented. The erosion of the working capital position was not due to high living expenses or capital purchases, but rather the lack of profitability within the business.
At first glance, Ray looked at the productive performance of the cattle. He found the rates of gain and feed conversion efficiencies to be in line with targets. Ray next looked at his cost of feed grains and rations. Feed grain costs were calculated using production costs divided by Ray’s long-term average yields. The cost of Ray’s rations were high because of two reasons: One, the cost of growing his own feed grain was higher than the market price. And two, Ray was missing the opportunity to include straw in his dry cow rations. With harvest, corn silaging and processing backgrounder cattle all happening in the fall, Ray does not have time to haul straw home until almost Christmas most years.
Cows calving in April can easily have their energy requirements met with a significant portion of straw in the ration along with supplemental corn silage and alfalfa hay to balance energy, protein, and calcium shortfalls. But straw cannot be fed if it isn’t hauled home.
Through reviewing Ray’s historical production insurance data, it became evident that his production was typically only about 73 per cent of the area average. Further discussion indicated that his fertility program was adequate, crop protection was up to snuff but the crop was never seeded until second week of June or so when calving finally started to slow. The crop flowered through the July heat, was often overwhelmed with rust and other late season disease, and was sometimes hit by frost, given the later maturity. Corn silage yields were also reduced because of later than desirable seeding dates. Ray felt that the production potential of his land was excellent. Clearly, he had a decision to make about his feed source. Here are the question he needed to answer: What is the cheapest source of feed grain for him? How can he decrease the cost of his rations?
Ray considered the following options:
Sell the aging seeding equipment, rent out the crop land and buy the feed grains.
Hire another person dedicated to seeding and crop production.
Move calving to a time earlier in the season.
Use custom work to allow for timely seeding and timely bale removal.
If Ray rents out the land, he is concerned about not being able to source straw. In losing control over the land, Ray is also worried about not having the opportunity to graze animals on crop stubble following harvest. Not having control over the land also poses a threat to availability of land for manure disposal and Ray would not be reaping the benefits from the manure. Ray is in an isolated area with very little grain production around him. Sourcing consistent local feed grains and arranging for trucking is also a concern.
Ray would consider hiring another person however, his isolation does not allow him to hire someone part time. With only 500 acres, the cost per acre for a full-time person is too high. There is also limited cropping experience in his area and with the older equipment, the employee would need not only good crop production experience but extensive mechanical skills as well.
Given that Ray’s goal is to achieve cheaper rations, moving the calving season earlier in the year would prove to be counterproductive. This increases the energy demands in the ration earlier in the winter and would all but eliminate the opportunity to use significant volumes of straw in the rations. The facilities required to calve 500 cows in colder temperatures are not in place and significant investment would be necessary.
Ray has a neighbour who does custom seeding at a cost of $12.50 per acre. Assuming a market price of $2.50 per bushel for barley, Ray only needs to increase his yield by five bushels to recover the cost of the seeding. Given the production potential of Ray’s land, if yield could be increased to production insurance area averages, the yield would increase by 18 bushels. This would bring Ray’s cost per bushel well under the market price.
Additional benefits include an earlier harvest, allowing Ray the time to haul straw into the yard before silage. Including straw in the ration could save Ray 35 per head per day for the first 100 days, adding an additional $17,500 to the bottom line. Custom seeding also allows Ray to concentrate all efforts on the cattle enterprise without the distraction from the crop in the spring. The custom seeding also gives Ray access to newer equipment with more precise seed placement and seed treatment capabilities.
The morale of the story is that with very narrow profit margins, achieving production potential in an efficient manner is critical. Custom work should be considered cost effective if it allows the farm to complete critical tasks on time and affordably.
Andrew DeRuyck and Mark Sloane manage two farming operations in Southern Manitoba and are partners in Right Choice Management Consulting. With over 25 years of cumulative experience, they offer support in farm management, financial management, strategic planning, and mediation services. They can be reached at [email protected]and [email protected]or 204-825-7392 or 204-825-8443.