In my July column, which kicked off this series analyzing how beef cow costs are changing in the biofuels era, we discussed the 17-year trend in total direct costs (TDC) associated with Northern Plains beef cowherds. Last month, we analyzed the overhead costs (OC). This month, we’ll look at long-run annual capital costs of maintaining the beef cow breeding herd.
Among the largest expenditures in a beef cowherd is the cost of the capital invested in the breeding herd. Not only is this a large capital investment, but beef cows are a multi-year capital asset with a multi-year productive life. Depreciation is the typical approach used to annualize the cost of most multi-year capital assets.
While beef cowherd depreciation is needed for income tax purposes, tax depreciation – due to its inaccuracies in predicting true annual capital costs – isn’t very useful for annual economic analyses. For example, raised cows are on the depreciation schedule with a zero value. Somehow, the capital cost of purchased and raised replacement females needs to be spread out annually over the productive life of each beef cow.
North Dakota’s Farm Business Management (FBM) program has taken a gross margin approach in calculating the annual cost of beef cowherd investment. This approach is based on first identifying all livestock sales associated with the cowherd. Then, all replacement livestock costs associated with maintaining the cowherd, such as purchasing replacement females (and bulls), are subtracted from the gross income. Also subtracted is the cost of transferring in farm-raised bred replacement heifers. Finally, overall changes in the beef cowherd inventory are taken into account.
The on-farm development of replacement heifers is a separate enterprise where the weaned heifer calf is transferred from the beef cow enterprise at weaning-time market value into a heifer-development enterprise. Finally, the market value of a final bred heifer is transferred back into the beef cow enterprise priced at a fair market value.
Gross income approach
The gross-margin approach used by North Dakota’s FBM program is summarized in Figure 1. This procedure calculates the total gross income of the beef cow enterprise ($810) for 2010, and subtracts the cost of all replacement animals ($119 + $113) brought back into that herd. An inventory adjustment of $72/cow was added in, generating a gross margin of $578/cow.
I prefer a gross-income approach that removes the capital cost of maintaining the beef cowherd from the gross-margin account and moves it into the cost account (right side in Figure 1). Note that the impact on net returns for the beef cow enterprise account is the same. In both accounting procedures, the average 2010 net returns for these Northern Plains herds was $113/cow.
I prefer this gross income accounting approach because it emphasizes the beef cowherd’s replacement costs (BCHRC). Replacement costs are so high today, that I want every rancher to focus some management attention on the herd’s replacement costs.
With BCHRC explained, let’s discuss my long-run analysis of replacement costs. Figure 2 identifies the annual BCHRC for the Northern Plains study herds for 1993-2009. The bars represent annual BCHRC and the line at the top of the bars is the statistical trend value over this 17-year period. The long-run statistical trend value is a positive $9.97/year.
Figure 2 clearly depicts the high volatility of BCHRC from one year to the next. BCHRC costs are really composed of two primary costs.
These percentages change from year to year depending primarily on the weaned market value of the replacement heifer calf. Heifer-development costs generally don’t vary as much from year to year.
Statistically, the average cost of a perpetual herd is trending upward at the rate of $9.97/cow/year, which adds another $99/cow in costs every 10 years. I used this statistical trend to predict BCHRC for 2011 through 2015 (Figure 3). The predicted BCHRC for 2011 is $159/cow and for 2015 is $172/cow; the five-year average is $166/cow.
Costs accelerating in biofuels era
It’s worth noting that four of the five highest BCHRC years are in the biofuels era. Casual observation would suggest that, given the impact of the biofuels era, these straight-line projections are low.
A second statistical analysis suggests BCHRC may be accelerating in the biofuels era (Figure 4). BCHRC is projected to average $214/cow in 2011 and increase to $269 by 2015, a five-year 2011-2105 average of $235. The statistical trend is $13.54/year, or $135 over 10 years. If these projections come true, this will be a record-high capital cost of owning a beef cowherd.
Now, let’s combine all production costs for these Northern Plains herds and analyze the total cost-of-production structure for the last 17 years. Figure 5 combines TDC, TOC and BCHRC into total costs with replacement costs (TCWRC) for these Northern Plains beef cowherds. The trend value for TCWRC is $13.12/year or a $131 total increase over 10 years.
Figure 6 projects the total production cost, including all replacement costs, through 2015 utilizing the trend value. This projects 2011 total costs at $622/cow and 2015 total costs at $675/cow. The five-year average (2011-2015) total cost comes to $649/cow.
Going one step further, let’s calculate a breakeven selling price based on total costs including BCHRC. Weaning 550-lb. steer calves and after replacements heifers are taken into account, a typical beef cow producer sells a 73% calf crop. This figures out to a breakeven weaned-calf price of $154/cwt. ($622/0.73/5.5) for year 2011, and $168/cwt. ($679/0.73/5.5) for year 2015.
I think this provides a clue as to why interest lags in expanding the nation’s beef cowherds in today’s biofuels era.
Harlan Hughes is a North Dakota State University professor emeritus. He lives in Laramie, WY. Reach him at 701-238-9607 or firstname.lastname@example.org.