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Why the cow business is marginal

We are blessed to participate in this cow business, particularly at this time. My personal attraction to the beef business may come from my history and growing up with it, but the cow business is also one of the few businesses of which I am aware where the less work you do, the better money you can make.

In a regular business such as widget making, to make more money you are forced to make/sell more widgets. With cows you just have to figure out how to let them do more of the work.

Most of us are concerned with gross revenue or the total dollars we gain from our cow herd. This includes calf sales and sale of culls. This represents the total amount available to pay all the bills. In a case where debt load is high or there are a lot of bills, we have to generate a lot of gross income. A lot of folks rely heavily on this number as it is pretty easy to figure out. When you sell calves, you look at your cheque before deductions and that is basically gross income.

What’s left over after the bills are all paid is net income and it can be either negative or positive. Generally it stands to reason that positive net income is better than negative, although I appreciate for some outfits there are tax benefits to other enterprises from a negative net income. In situations that rely on negative net income the cow herd becomes a hobby or a tool to manage cash flow. A lot of the cattle-feeding industry is driven by these sort of tax decisions.

The expense side

The other side of the coin that creates net income from gross income is the expense side. Again, in general, lower expenses lead to higher net income as long as the expense is not an essential. For example, not vaccinating your calves will reduce your vaccine expense, but may come at the cost of sick or dead calves, reducing your gross income. There are a lot of things we can do as producers that do not impact the quality of life for the cow, and yet greatly reduce expenses. These are a win/win.

At our place what we really try to focus on is margin. This in essence is “net income” but it is focused on a per-unit basis such as “net income per cow” or “net income per acre.”

Margin results from maximizing gross income, while reducing expenses. Margin takes a bit more math to figure out as you need to know gross income and expenses. Margin is a powerful number and is extremely important for a variety of reasons. While production is part of margin, it is not the driving force behind it, and for this reason margin encompasses a variety of business structures across a wide range of resources.

For example, I am aware of operations with healthy margins that calve in the winter and sell large calves in the fall, and others that calve in the summer and background their calves, and still others that finish their calves right through. Margin is also relatively independent of size/scale.

Margin is a number that can indicate business strength and weaknesses. For example, many farms have expanded their cow herds to increase income and cover expenses. While 500 cows will generate more gross income than 200 (hopefully), if the cow herd is running negative margins, having 500 money-losing units can be much worse than having 200.

Margin numbers can also indicate things about business structure, such as high land payments being detrimental to profitability. This could suggest that moving to a rental or custom-grazing arrangement may be a better option.

Margin is probably one of the best signals for expansion. If something is profitable on a per-cow basis, then more cows makes some sense. The level of margin also gives some indication as to what we can afford to pay for that expansion.

Risk management

The level of margin is also important as a marketing and risk-management tool. If we look at a fictional example where costs per weaned calf are $500 and average selling price is $750, that leaves a $250 margin. On 100 calves that is a $25,000 net income. Is that enough income? Should the cow herd expand? Do I want to have more cows or give up an enjoyable off-farm career? These are business and life questions that can’t be answered until we understand the margin.

Conversely, understanding the expense side of the margin equation, we can then decide if a $750 offer on our calves is acceptable or not, and we can further decide if a new practice or technology is worthwhile.

For example, does bale grazing make sense? It may not increase gross revenue, but if it drops cost down by $50 without reducing income, our margin from the previous example is now $300 on those $750 calves. Will implementing a new cost such as in improved vaccination protocol provide a return greater than the cost?

In these times, margin is also vital in risk management. If we take a cow herd with an average $25 margin per head, that means there is $25 worth of risk that can be absorbed before the operation loses money. If the margin is $200, there is a lot more cushion for decision-making and marketing before money is lost. The level of margin may indicate something about how aggressive risk management strategies should be.

Margin is a great business indicator and provides flexibility in business and life. Higher available margins reduce pressure on marketing decisions, and often result in improved marketing decisions. Positive margins are a signal for expansion, but positive margins also provide the flexibility to have an income from the same or reduced cow numbers depending on what stage in life you are at.

The last reason I really like margin is that trying to generate more revenue while reducing costs really places the focus on adding value. While we are in generally happier times at the cow-calf level, I would encourage you to sit down and go over your margins at home this spring. †

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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