As market prices adjust post-BSE to an uncertain supply-demand equilibrium, ranchers will be unable to do much about their market prices. What they can do, however, is implement a business-oriented, damage-control program designed to focus on the cost structure of their ranch business. This is something over which they have almost full control.
Focusing management energies on the business side of the ranch is critical. Business-oriented, damage-control strategies will be absolutely necessary to meet the operation's cash-flow needs during this crisis.
A rancher's cost of producing a hundredweight (cwt.) of calf will become all-important. Ranchers with low costs of producing a cwt. of calf will best weather the post-BSE crisis. High-cost ranchers will suffer.
There are four steps to developing a business-oriented, damage-control program.
Assess your herd's economic performance for the last calf crop.
Construct a set of post-BSE planning prices for the next three years.
Project your cow herd's economic performance over the next three years.
Implement the business adjustments needed to meet your three-year, damage-control plan.
The data requirements for a total ranch business analysis can often overwhelm the typical rancher. So, I typically begin with a more simplified approach by conducting a cost-and-return analysis (CRA) of the beef cow profit center. This exercise is designed to answer three key questions about that beef cow herd.
What did the ranch family get paid from the production of last year's calves?
What did it cost the rancher to produce a cwt. of calves last year?
Is this rancher a low-cost or a high-cost producer?
Answering these three questions through a CRA forms the economic foundation for any business-oriented, damage-control program. In fact, how a rancher answers these questions greatly determines his damage-control options.
In order to conduct a CRA of the beef cow profit center, four data collection components need to be completed:
breeding herd inventory and valuation,
herd performance data,
feed consumption and costs, and
capital investment/debt structure of the beef breeding herd.
Now, let's discuss each data collection component.Component 1: Breeding Herd Inventory & Valuation
While ranchers all talk about profits from beef cows, few correctly measure their beef cow profits. To do this properly, inventory adjustments must be added to net operating income to properly calculate beef cow herd profits. In other words, you have to take an inventory to properly calculate profits. There's no short cut.
Ranchers participating in my CRA are asked for two sets of inventory numbers. The first represents the breeding herd on bull-turnout day of the previous breeding season. The second set represents the breeding herd as of Jan. 1.
On bull-turnout day, we're looking for the total number of females exposed to the bulls. The female number is broken down into mature females (defined as females that have had one or more calves) and virgin heifers being exposed.
We also need a bull count. The left side column of Figure 1 provides an example (column with the 199-head total at the bottom).
The second inventory number set needed is a breakdown of the Jan. 1 breeding herd by livestock class. The Jan. 1 inventory typically represents the breeding herd inventory at the beginning of the business year. Typically, this is the number of females being wintered for the next calving season.
Ideally, a ranch does a physical count of the breeding herd on Jan. 1. That data is listed in the second column of numbers in Figure 1 that has a total of 236 at the bottom. Note that we also have added the heifer calves being held for replacements. Next year's Jan. 1 inventory can be used for the Ending Inventory (Dec. 31) inventory numbers.
To calculate the inventory adjustment for the year, we need a dollar value on the beginning and ending inventories. The Dollar-Value-Per-Head column represents the Jan. 1 value of the breeding animals. A logical source for these numbers is the Jan. 1 financial statement you prepared for your banker.
In this example, two-year-old, bred heifers are included with the mature cows based on an overall $800 average inventory value for all bred females. How you handle these two-year-old, bred heifers is optional.
I recommend the dollar value of each class of cattle in the breeding herd be valued at one value for the both the beginning and ending inventories. This way, the inventory adjustment represents the change in physical cattle numbers and not the changing paper value of the cattle.
If you want to change the dollar value of your inventory, do it on “Dec. 32” — between years. Given the current North American BSE crisis, I fully expect U.S. and Canadian ranchers will adjust the inventory of their beef cow herd downward after Dec. 31, 2003.
In this example, the beginning inventory was valued at $163,695 and the ending inventory was valued at $167,440. That's an inventory adjustment during the year of a positive $3,745, and indicates that $3,745 of added production was generated by this beef cow herd during this production year even though this added production was not sold. This $3,745 needs to be added to the beef cow herd's income accounts when figuring profitability of the herd.
Since IRS allows cash accounting for agriculture, inventory adjustments (both positive or negative) in any one year can be significant. Don't be misled by the bottom line of your IRS Form 1040F. To properly measure profits, inventory adjustments have to be added to net operating income to properly calculate beef cow herd profits. IRS reporting doesn't take inventory change into account, and you must take an inventory to properly calculate profits. Again, there is no short cut.Figure 1. Inventory Changes
|Description of Cattle||Breeding 2002||Beg. 2003 Inventory||End 2003 Inventory||Dollar per Head||Beginning||Ending|
|1a. Mature Cows and Replacement Heifers||156||166||170||$800||132,800||136,000|
|2a. Two-Year-Old Heifers||35||31||26||$0||0||0|
|3a. Replacement Heifer Calves||31||32||$545||16,895||17,440|
|4a. Mature Bulls||8||8||8||$1,750||14,000||14,000|
|5a. Young Bulls (calc. bulls needed)||0||$0||0||0|
Herd performance data is usually easy to collect as much of this information is in a rancher's pocketbook. We begin with the date mature cows begin calving and the average calving date (see Figure 1). To identify the average calving date, I suggest ranchers go half way down their calving books and pick that date.
We collect dates the cows went on and came off grass in 2003. We also collect the days on aftermath (like corn stalks). These dates are used to calculate the herd's winter-feeding days (non-grass feeding days).
If creep is fed, we collect the number of days calves are creep fed. Actual creep rations are picked up later.
We complete this input form with the date calves were weaned in 2002 and if the replacement heifers are raised or purchased.
Figure 2 is for calf-production data. The numbers of steer, heifer and bull calves weaned are documented, as well as average weaning weights of these same three groups. The weaning date is collected, as is the weigh date.
Weaning date and weigh date are often the same, but some ranchers weigh calves at processing — 30-45 days before weaning. For a more accurate weaning weight, we project the pounds gained from weigh date to weaning date. Finally, the overall average weaning weight is also collected and compared to the average weaning weight reported to double-check the weaning weights collected.
|Date mature cows start calving||3/20/03|
|Average calving date||4/18/03|
|Grazing schedule:||Cows||Heifers||Dry Cows|
|Date to grass||5/15/03||XXXXX||XXXXX|
|Date off grass||10/15/03||XXXXX||XXXXX|
|Dates on aftermath||0||0||0|
|Months on pasture|
|Total days calves were creep fed||0|
|Date calves weaned last year||9/15/02|
|Raised or purchased replacement heifers (1 - raised, 2 - purchased)1|
|Average actual weaning weight||579 lbs.||548 lbs.||0 lb.|
|Average weaning weight||564 lbs.|
Total summer and winter feed costs typically account for 60-65% of the total economic costs of operating a beef cow herd. Therefore, accurate feed disappearance (consumption plus wastage) attributed to the beef cow herd is important.
Annual feed costs are made up of summer pasture costs and winter feeding costs. Let's look at each individually.Summer Pasture Costs
Figure 1 presents the pasture input data used in an Integrated Resource Management Financial and Reproductive Management System (IRM-FARMS) cost-and-return analysis (CRA). Pastures can consist of public lands and rented and deeded land. Regarding public lands, I collect just the total annual dollar lease payments made for public lands.
Rented-pasture costs consist of acres rented and the local rental rate per acre. If the renting rancher has to pay associated costs such as fencing, water development costs, etc., those costs are listed in the right-hand column reported on a per-acre basis.
For deeded/owned pastureland, I collect the total acres utilized by the cow herd (a ranch may also have yearlings on added acres), acres per cow, and market value per acre. If money is borrowed for pastureland, we collect the total remaining principal, annual interest rate and years remaining on the debt.
Operating costs associated with the deeded pastureland are listed under the “owned” column on the right. Pasture economic costs (opportunity costs) are based on the local going pasture-rental rate and not costs of owning the pasture. The associated pasture costs for this demonstration herd are presented in a sidebar associated with this article.Winter Feed Disappearance
Many ranchers don't have a good handle on the disappearance of farm-raised feeds. Yet, one must know feed disappearance to calculate accurate feed costs.
To assist ranchers in compiling feed disappearance, I've developed a comprehensive data-collection system designed around daily breeding herd rations adjusted for a cow's second trimester, third trimester and lactating period. I utilize it to compile feed disappearance for the total breeding herd. This ration-based system provides considerable feeding diagnostic capability while compiling the feed disappearance and feed costs.
The winter-feeding table (Figure 2) covers the 212 days the breeding herd was not on pasture (drought reduced the number of pasture days this year). In this demonstration herd, the breeding herd consumed an average of 23.17 lbs. of dry matter/cow/day, or a total annual consumption of 2.7 tons of hay equivalent per cow.
The purchase and farm-raised feed values listed on the right of Figure 2 are all valued at fair market value (opportunity costs) and not cost of production.Farm-Raised Feeds
In the cash-flow analysis, farm-raised feeds are valued at the cash costs of production associated with the respective feeds. Generally, the cash cost of producing farm-raised feeds varies by ranch even more than the economic feed costs/cow.
The cash costs of production for this demonstration herd are summarized in Figure 3. The relative high cash farming costs of production were definitely influenced by the 2002-2003 droughts.
The winter-feed cash costs of this herd were $277/cow (bloated by drought). The combined summer- and winter-feed cash costs for the demonstration herd was $298/cow or $57/cwt. of calf produced.
Five years of this kind of analyses is needed to answer the question “Should I raise or buy my winter feed?” The answer to this question comes from the CRA of your own beef cow herd, not from a generalized answer from me. Indeed, that is what IRM is all about — generating ranch-specific answers to your own ranch situation.
|Annual Public Land Costs||$0||Owned||Rented|
|Rented Pasture||Total Cash Pasture Costs|
|Acres||0 A||Total (per acre)||$ —||XXXXX|
|Rent per acre||$10/A|
|Acres||1,200 A||Fuel||$0||$ —|
|Acres per cow||10 A/cow||Seed||$0||$ —|
|Market value per acre||$125/A||Fertilizer||$0||$ —|
|Pasture Loan||Chemicals||$0||$ —|
|(principal remaining)||$75,000||Real estate taxes||$1,32||$ —|
|Interest rate||10%||Fencing/repairs||$0.49||$ —|
|years in loan (remaining)||25 Yrs.||Water development||$0||$ —|
|Aftermath Grazing||Other fence labor||$0.51||$ —|
|Daily cost per cow||$10/cow|
|Feed quantities fed to beef cow herd||No. Cows: 166|
|Feed name||Unit Weight||Amount Fed||Unit Price|
|Grain 1&2||1. Barley||48 Lbs./Bu.||399||$1.40|
|Protein 1&2||2. Protein Sup||2000||3.31||$250|
|Forage 1&2||3. Grass hay||2000||316||$75|
|Forage 3&4||4. Alfalfa hay||2000||82||$90|
|Forage 5&6||5. Straw||2000||155||$25|
|Min/salt 1&2||6. Min & salt||2000||5.75||$320|
|To be used instead of inputting daily cow and heifer rations.|
|Cash costs of providing an AUM (cow month) of pasture||$11.95/AUM|
|Cash cost of farm-raised feed grain barley||$2.78/Bu.|
|Cash cost of farm-raised grass hay||$97/Ton|
|Cash cost of farm-raised alfalfa||$77/Ton|
|Cash cost of farm-raised straw||$36/Ton|
|Feed cost per cwt. of calf produced||$57/Cwt.|
Capital investments have a direct impact on profitability of a beef cow profit center. Investments in the beef cow herd and in the pasture land have already been collected. This input form is designed to collect the capital investment in buildings, equipment and machinery used by the beef cow herd.
Data for each investment category can either be reported as a single number (as in this example) or itemized in the middle section. Most ranchers itemize big items.
The key concept here is that only investments directly associated with the beef cow profit center are listed. Farmland and farming machinery aren't considered part of the beef cow profit center.
For example, the baler used to put up hay for the cows is not part of the beef cow profit center investment. It's part of the farming profit center. As such, the hay fed to the cows is sold from the hay profit center at fair market value. The hay profit center is also credited with the hay sold to the beef cows.
How about the $25,000 loader tractor used to feed the cows and pull the hay windrower? If 60% of its use is for the beef cows, the $25,000 is listed in the machinery column but with a 60% allocation to the beef cows.
Cash flow costs associated with the farming operation are collected so that the cash costs of farming associated with the farm-raised feeds fed to the beef cow herd can be properly allocated. The direct farming costs associated with farm-raised feeds fed to the breeding herd are allocated to the feed fed.
Meanwhile, the overhead cash costs of farming are allocated evenly over all crop acres farmed. Land debt service and machinery debt service are part of the overhead cash farming costs.
As a result, the cash cost associated with a ton of hay includes the cash operating costs of raising the hay, plus the allocated overhead and debt service cash costs. The cash flow concept employed is that if a cow eats the production from an acre of farmland, the cow has to pay the cash farming costs associated with raising that feed.
Figure 2 is used to collect the overhead cost associated with farming. Current farmland debt, annual interest rate and years remaining on that debt are collected.
To get ranchers to think about where they generate their family living draw against the ranch, I ask ranchers to allocate family living draw between their farmland and their beef cow herd. For example, this demonstration herd has a $30,000 family living draw. He allocated $15,000 family living draw to the 1,200 acres of farmland ($12.50/acre) and $15,000 to the 166-head beef cow herd ($90/cow).
Finally, miscellaneous allocated overhead such as accounting is also allocated to each farmland acre. Again, if the cow eats the feed produced by a farmland acre, the cow has to pay all the cash costs associated with that acre.
|Remaining land debt||$120,000||$0.00|
|Years left in loan||15||—|
|Remaining machinery debt||$20,000||$0.00|
|Years left in loan||5||—|
|Total acres farmed||2,000||1,200|
|Per acre family living draw||$12.50/acre|
|Buildings Used||Equipment Used||Machinery Used|
|For Cows||For Cows||For Cows|
|Total market value/cow herd share||$20,000/100%||$10,000/100%||$5,000/100%|
|or Include items/value/cow herd share|
|Loans - Remaining principal balance||$5,000||$2,500||$0.00|
|Remaining years||15 Years||10 Years||— Years|
In general, I have found it hard to collect accurate inventory numbers from ranchers. Because we need to know some details about the buying and selling of the beef breeding herd through the year, I take my clients through a slight modification of the above procedure.
We need to know about breeding herd death loss, number of cows culled, breeding herd purchases and breeding herd sales during the year. With this information, we can calculate an ending inventory.
These calculated inventory numbers can be compared to the rancher's year-end financial statement to verify accuracy of the exit/entry numbers. I also have a check equation that serves as another verification of the total inventory numbers (Chart 1).
I will walk through this simplified inventory process based on my 2003 demonstration herd's inventory numbers presented in Figure 1.
This herd had 156 mature females and 35 virgin heifers exposed to the bull in 2002. After preg-checking in fall 2002, the Jan. 1, 2003, breeding herd inventory was reduced to 135 mature cows, 31 first-calf bred heifers and 31 replacement heifer calves held back for breeding in summer 2003. No fall 2002 cull cows were fed and held over for marketing after the first of the year.
During the 2003 calving season, this rancher experienced one aborted calf, three born dead, and four that died shortly after birth for a total calf loss of eight calves. At fall preg-check time, three mature cows and four bred heifers were found open. Two mature cows died during the year.
Twenty-one mature cows and four open heifers were culled and sold. No bred cows or heifers were purchased during the year. On Dec. 31, 2003, 32 heifer calves were held back for use as replacements.
I used this inventory data and the herd exits/entries to calculate the Dec. 31 inventory, which consisted of 170 total breeding females — 144 mature cows and 26 bred heifers. In addition, 32 heifer calves were held over for replacement breeding in 2004.
The check equation that can be used to verify inventory data is:
Beg Inv + Trans In + Purchases - Trans out - sold -died = reported ending inventory
Applying this check equation to this example herd:
166 + 31 + 0 - 0 - 25 - 2 = 170
170=170Figure 1. Inventory Simulation Sheet for IRM-FARMS
|Year: 2003||Goal: Mature Cows||Bred Heifers||Virgin Heifers|