Market Advisor

Costs & returns: Part IV

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Given the current economic pressure on the beef-cow sector, it's imperative that ranchers prepare a detailed production and economic projection for their 2009 calves. This isn't a year for business as usual.

This five-part series is designed to help ranchers make their own 2009 economic projections. But should your projection be less than favorable, ample time remains to make needed management changes to positively impact the final economic outcome for your 2009 calves.

This month's column will focus on projecting the 2009 non-feed costs of operating my demonstration beef cowherd. Non-feed costs in my Integrated Resource Management ez (IRMez) model fall into two categories livestock costs and overhead costs.

  • Livestock costs

    The projected livestock costs used for my 2009 demo herd are in Table 1. You can develop these numbers by using your accounting summary data for 2008 (reported on your IRS 1040F form) as proxies for the costs of those same cost items in 2009.

    Calculate the 2008 data on a per-cow basis, based on the number of cows in the Jan. 1, 2008, inventory, then multiply that per-cow number by the cows in the Jan. 1, 2009, inventory. It's also logical to make some subjective changes to the 2008 data to tailor your projections to 2009.

    North Dakota research in the 1990s estimated the cost of developing a replacement heifer (weaning through preg-check) at about $200, which doesn't include the market value of a weaned heifer. I recommend ranchers now use $250-$300 as the projected development cost in 2009. In Table 1, I used $275 in the 2009 demo herd.

    Table 2 presents the livestock cost summary from the IRMez model. Notice the total and per-cow columns. Projected total livestock cost is $31,914 or $192.25/cow, which figures to $38.13/cwt. of calf produced.

    The demo herd's projected “returns above feed and livestock cost” total $24.31/cwt. of calf produced. The table suggests this rancher needs a $123.59 steer calf price just to cover feed and livestock costs. (Obviously, these two cost categories are a bottleneck to projected profits in 2009.)

    In lieu of annual beef cowherd depreciation, this demo herd grows its own replacements and maintains a perpetual herd. The last line of Table 2 summarizes the herd's projected cost of replacement heifers. Given the projected $275 cash cost of developing replacement heifers and my fall 2009 projected $526 market price for 526-lb. 2009 weaned heifers, this figures out to $801 ($275 + $526)/replacement heifer.

    If this $801 is multiplied by the 31 replacement heifers needed to maintain a perpetual herd on this ranch, annual economic costs for developing replacement heifers is $24,831 ($801 × 31) for this herd. If this rancher divides $24,831 by the 166 cows in his Jan. 1, 2009, inventory, the projected replacement heifer cost is $150/cow (summarized in the lower left-hand side of Table 2 ).

    This is in line with North Dakota's farm business management records, which found an average replacement cost of $147/cow in 2007. Cash accounting never identifies this number for a ranch manager.

  • Overhead costs

    Table 3 presents the overhead input numbers used in the 2009 demo herd projections. The top three lines summarize the current market value of the beef cow breeding herd; and beef cow building, facilities and equipment investment, all expressed as the beef cows' share only. Farmland, pastureland and haying equipment aren't included in these numbers.

    The bottom half of Table 3 presents the beef cowherd's debt structure. A $22,500 equipment debt is projected to be financed for nine years at 7% interest; the pastureland debt is projected to be financed for $75,000 with 20 years remaining also at 7% interest.

  • The DIRTI-5

    Typically, a beef cowherd's overhead costs are low. To simplify the IRMez model, overhead costs are based on a long-established farm management principle the DIRTI-5 thumb rule depreciation, insurance, repairs, taxes and interest.

    Table 4 presents some suggested DIRTI-5 percentages for the different beef cow asset investment groups for each DIRTI-5 factor. (Use these DIRTI-5 factors as a quick way to calculate the overhead costs for any ranch investment you're considering.)

    The IRMez model takes advantage of these DIRTI-5 factors and uses them to automatically project overhead costs for the beef cowherd and its building, facilities and equipment. This substantially reduces the input numbers needed to calculate overhead costs. Since actual interest paid is already reported earlier in the overhead form, the bottom line in Table 4 (with interest removed) is what's used in the IRMez model.

    Thus, total overhead costs are projected at $27.64/cow or $5.48/cwt. of calf produced. The total capital invested in this demo beef cowherd is $228,850 or $1,379/cow (Remember, this does not include pastureland, farmland, or farming machinery investment).

  • Final economic projections

    Space prevents me from detailing this 2009 demo herd's final economic projections. That will be the focus of my May issue column.

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But Table 5 lists the projected critical success factors for this demo herd, which project this herd won't generate a favorable outcome in 2009. Clearly, this manager needs to devote considerable management attention to changing the projected economic outcome of his herd!

Harlan Hughes is a North Dakota State University professor emeritus. He lives in Laramie, WY. Reach him at 701-238-9607 or harlan.hughes@gte.net.

What's Market Advisor?

Harlan Hughes has spent a professional lifetime helping U.S. beef producers better manage the business end of their beef cow operations.

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Harlan Hughes

Harlan Hughes is a North Dakota State University professor emeritus and author of the monthly "Market Advisor" column that appears in BEEF magazine. He also consults and lectures widely,...

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