Market Advisor

Overhead Costs On The Ranch

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A key question for today’s ranchers is whether ranch cost structures are changing as we progress further into the biofuels era.

Last month, we examined the long-run direction of total direct costs (TDC) on Northern Plains beef cowherds. This month, we’ll examine the long-run direction of overhead costs (OC).

Figure 1 presents the detailed OC items allocated to the beef cow enterprise in this study. For example, utility cost presented here is the share of the farm utilities allocated just to the beef cowherd. For a 100% beef cow operation, that could be all the utilities; for a diversified farm/beef cow operation, it would be just the beef cow proportion.

One final allocation note is needed. There is no operator and family labor cost allocated in this study – just hired labor.

The last line in Figure 1 presents the total overhead and direct costs (TDC was summarized in last month’s column), which amounts to $466/cow in 2009 and $465 in 2010.

Figure 2 takes a long-run look at beef cow OC from 1993-2009. Average data for each year for all herds is represented by the bars, while the long-run trend is depicted in the trend line near the top of the bars. In general, OC per cow increased through the years, but was above trend from 2004 to 2007 and below trend in 2008 and 2009.

The statistical trend line indicates OC increased $1.25/year or $12.50 for any 10-year period. Compare this to the $87.22 increase in TDC reported last month for the 10-year period of 2000-2009.

Figure 3 projects OC for 2011-2015. Projected average OC per cow for the next five years is $74 in 2011, increasing to $79/cow for year 2015, with the five-year average being $76/cow.

I can identify no unique statistical pattern for OC specific to the biofuels era, which is in contrast to the increasing cost pattern identified last month for TDC.

Let’s now go the next step. Figure 4 combines TDC and OC. The bars in Figure 4 represent the long-run total production costs (TPC) for 1993-2009. It indicates that average TPC rose almost every year during this 17-year period, at the rate of $11.22/year. That amounts to $112.20 for any 10-year period.

Using the straight line trend to project average TPC for the study herds for 2011-2015, TPC is projected to average $463/cow in 2011 and increase to $503 in 2015. The five-year average is projected to be $483/cow. This is my “best case” scenario for the next five years.

Closer examination of 2006-2009 in Figure 4 suggests TPC rose even faster during the biofuels era. Statistically, I did confirm that TPC did, indeed, accelerate in the bio-fuels era.

I used that accelerated analysis to project TPC for the biofuels era from 2006 through 2015 (Figure 6). The statistical trend value is a $22.70/year increase, or $227 over that 10-year period. Projected average TPC ranges from $514/cow in 2011 to $619 in 2015. The projected five-year average for 2011-2015 came to $565/cow. Let’s label this my “worst case” scenario for the next five years.

In summary, I expect most ranchers will agree that the cost of running a beef cowherd has increased in the last two decades. My statistical conclusion is that average annual TPC has accelerated since the biofuels era began in 2006 and will continue to accelerate into year 2015.

In my best-case scenario, 2011 TPC is projected to average $463/cow and increase to $503 by 2015. In my worst-case scenario, TPC will average $514/cow in 2011 and increase to $619 by 2015.

So what does this mean for breakeven calf prices for these Northern Plains beef cowherds? With an 85% calf crop and a 12% bred cow replacement rate, a rancher who raises his own replacements will have no more than a 73% calf crop to sell. That means that TPC will have to be covered by selling a 73% calf crop.

The best-case projected breakeven selling price for 550-lb. weaned calves in 2011 is $115/cwt. ($463/.73/5.5) and $125/cwt. ($503/.73/5.5) for calves sold in year 2015. These breakeven prices are probably attainable.

In the worst-case scenario, breakeven selling price for 550-lb. weaned calves in 2011 is $128/cwt. ($514/.73/5.5) and $154/cwt. ($619/.73/5.5) for year 2015. These prices may not be quite as attainable.

Next month, I’ll take this last analysis apart and put it back together in a little more rigorous detail for you. Stay tuned.
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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