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The importance of unit costs for livestock

Ranch Management: All expenses can be looked at in terms of cost per head or cost per pound

It is relatively easy to find product offerings that promise to increase production. As a somewhat skeptical consumer, these technologies/solutions always need to be examined carefully before deciding whether or not they are worth using. That said, all of these products tend to reinforce one simple point: production matters.

The less simple aspect of this is that any boost in production must come in reference to its cost. In other words, margin matters more. Every pound of calf tends to come at a reduced price. One needs only look at the Canfax report on different classes of cattle to see that each 100-pound weight break is generally sold at fewer dollars per pound than the break before. In other words, every pound in a 500-pound calf is worth slightly more than the pound in a 600-pound calf. This means we need a sharp pencil.

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Know your costs

What is really important and what most of us struggle with is our per-unit cost, or cost per pound. Knowing this helps us to figure out if a technology is worth deploying.

A lot of folks will think about per-unit costs as the cost of feed or vaccinations and this is fair, but we can’t forget about capital costs as well. Let’s consider a cow herd with a vaccination protocol that costs $30 per calf. This might include a prebreeding vaccination on the cow, and two rounds of vaccination for the calf. If we wean a 500-pound calf, that is a cost of $6 per hundredweight. If calves average 600 pounds we have automatically reduced that to $5. By increasing production, we have dropped our per-unit cost. Vaccines are a good example where the dose does not change based on calf size, so the gains are fairly straightforward. If we can create an additional live calf for sale, our per-unit cost also drops.

Fertilizing pastures

Things are a bit more complex if we look at technologies with a diminishing rate of return. A good example might be deciding to fertilize a pasture. How much added production does the pasture produce based on our fertilizer investment? Can we capture this added production as pounds for sale? Does the result yield more than the expense?

For example, let’s use an investment of $80 per acre in fertilizer. How many extra grazing days will that produce? If we gain 20 grazing days per acre and our calves are gaining two pounds per day, the ranch has gained 40 pounds of production per acre. The cost of that gain is $2 per pound. There are obviously other considerations here, such as if all the benefit will be used up in the first year, actual production boost may be higher and other factors, but in this example the fertility treatment might be a marginal decision. Perhaps investing only $40 per acre will get us 15 days per acre, at a much lower cost per pound.

Are you overcapitalized?

Another overlooked area is that of capital investment. The simplest way to think about a capital investment is that if it is big and made of metal it is probably a capital investment. Most of us are “overcapitalized.” We often look at these big cost behemoths as not being a unit cost. But even a $150,000 loader tractor has a unit cost.

If we use that tractor to feed 150 cows and it depreciates by 10 per cent per year, the cost is $15,000 or $100 per cow. If we wean 500-pound calves the cost is $20 per hundredweight. This does not include the cost of operating the tractor, just the capital cost. If we wean 60-pound calves the cost drops to $16.67 per hundred. But if we can use that same tractor on 300 cows, our cost drops to $50 per cow or $10 per hundredweight on 500-pound calves.

Conversely, doing the job with a $75,000 tractor also accomplishes the same unit cost outcome in our 150-cow herd.

Further complicating the matter with a lot of capital assets is the fact that some investments may be used in more than one enterprise — for example a tractor used in feeding operations may also be part of a grain operation. The key is to be fair with which portion of the investment is used by each enterprise.

What about land

Land is another good example that may be the main driver of unit costs. If you are paying pasture rent on a cow/day basis then bigger cows and calves make a lot of sense, since every pound you add reduces your cost per pound. Pasture productivity does not directly factor into your unit cost.

If your pasture is valued on a dollar per acre rent or you hold a mortgage, then grass productivity directly drives your unit costs. If you can double or triple production on a pasture with a low investment then you can create more pounds per acre and reduce your cost per pound.

At the end of the day profit is more than just cash. In triple-bottom line accounting, profit is assessed financially, socially and environmentally, and these are all aspects worthy of consideration. Some investments, such as part of that new tractor, may simply be for comfort or enjoyment of the operator.

In other words, not every investment is strictly profit driven in the classical sense, but generally speaking investments that create more revenue than they cost are usually a good idea. Production really does matter, but only in the context of unit cost. As unit cost rises, or margin decreases the risk associated with that production increase, increases as well. For each increase in unit cost, we must make sure we can market product above that cost.

Production matters in its tremendous power to reduce unit cost, but production is not free. Keeping this in mind will help to make better decisions that increase profit.

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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