Cost of production: Producers determine their unit cost of production at ranch practicum
Lingle – Cutting overhead costs can be a strategic way to increase profitability of an operation. Overhead or fixed costs are those costs incurred whether a producer owns one cow or a thousand. During the High Plains Ranch Practicum in Lingle, producers learned what overhead costs are and ways to reduce these costs to increase ranch profitability.
According to University of Wyoming Extension Educator Dallas Mount, overhead costs can consist of machinery, buildings, depreciation and maintenance. Depending on the operation, land and labor can also be considered as a fixed cost, he said.
Cost of labor
Labor can be one of the biggest hidden costs in an operation. In addition to a salary, many ranch hands also receive housing, benefits, beef and a vehicle. When they start the job, many times, they bring a few horses, which have feed costs that are paid for by the ranch. In addition, the ranch also pays payroll taxes for the employee, maintenance costs of the house he lives in and utilities.
“Although the employee may be paid $24,000, the ranch may actually pay nearly $65,000 to $70,000 for that employee,” according to Aaron Berger, University of Nebraska Extension educator. “It is tough to make a 500 cow operation support two families these days with those kinds of costs.”
Variable or direct costs are items like feed, mineral, vaccines and medicines that change with the number of cattle. Mount said producers need to determine how many cattle they have to sell to meet the direct and overhead costs to establish a break-even point. Anything above the break-even point is considered profit.
“There are three ways to make money in a cattle operation,” Mount said. “Reduce overhead, reduce direct costs per unit, or increase return per unit or sell more units. The general way to make more money in the business is to decrease the overhead costs.”
During the Ranch Practicum, participants will learn how to determine their unit cost of production by figuring each segment of their ranch enterprise as a separate entity, such as cow/calf, yearling, hay and land.
“When figuring a unit cost of production, count everything once and nothing twice,” Mount advised producers.
In other words, costs need to be charged to only the segment of the business that utilizes those services. For example, a tractor may be used in the summer for haying and during the winter running the feeding equipment. If the tractor is used 50 percent of the time for the haying business, and 50 percent of the time for the cow/calf business, then each business is charged 50 percent of the tractor expense. On the other hand, if a producer decides to eliminate his haying business, then all the costs for the tractor would transfer to the cow/calf business where the tractor is then used 100 percent of the time.
Mount also explained how to sell products raised on the ranch from one entity to another. For instance, if a producer raises hay and plans to feed everything he produces to his cattle, he would sell the hay to the cow/calf entity at market value. Mount feels it is important to use fair market value because if that rancher didn’t have a cow/calf enterprise and sold that hay to another producer, fair market value is what the hay would be worth.
“The cow/calf operation needs to be charged for every AUM (animal unit month) they ingest,” Mount explained. “The cows need to be charged the same as what the producer would charge to run someone else’s cows.”
A look at land
Many producers fail to understand how land can be a separate entity within a ranching operation. Mount used an example of the hay business to help producers understand its value.
If a producer sold his forage standing in the field before it was swathed, it would have value. The hay business purchases the forage standing in the field from the land business. One of the entities, either the hay or land entity, must also pay for irrigating costs and fertilizer, he added. It is similar for a cow/calf entity, which must pay the land business fair market value for the grazing AUMs on the ranch.
Figuring unit cost of production is a method for producers to break down each entity on their operation and analyze which ones are making money and what could be done to improve the profitability of each entity.
“In today’s world, it is important to know your costs,” Berger said.
Mount also advised producers to carefully consider leasing arrangements for grazing, especially if there is a drought or other natural occurrence.
“Generally, flat cash leases are worth less than a month-to-month deal because you, as the lessee, are assuming more risk,” he explained.
As an example, a rancher decides to cash lease his entire ranch for $100,000 a year. If someone leases that land for cattle and hay, and there is a serious drought like this year, that producer may only get 10 percent of normal production, but will still have to pay $100,000 for the lease.
On the other hand, a producer that leases land month-to-month, may have to pay more for the lease, but if there is a drought or fire, he can take his cattle out of that pasture and is only responsible for paying for the lease that amount of time his cattle are utilizing the pasture.
Gayle Smith is a correspondent for the Wyoming Livestock Roundup. Send comments on this article to email@example.com.