The New Economic Reality of the Cow/Calf Business
By Dallas Mount, UW Extension Educator
We are certainly in unprecedented times as far as markets go.
This era of ultra-high value animals has created a new “economic reality” for cow/calf producers that many in the business are completely unware of, and therefore, many are not managing these “hidden” economic costs. These economic costs are likely around $650 per cow per year and are now likely the greatest cost to running a cow – exceeding feed costs for the first time in my memory!
These costs are related to cow depreciation and the opportunity cost of the money invested in the cowherd.
Most ranchers don’t think much about cow depreciation. They appreciate it come tax season because the accountant uses it to avoid income tax, but cow depreciation is a real cost to your business. This year, it may be the greatest cost to running a cow. If you retain heifer calves and develop your own heifers, you pay for cow deprecation in the cash given up by not selling those heifer calves and the development costs of making those heifers cows.
Simple, straight-line cow deprecation is calculated by this formula: purchase price minus salvage value, all divided by years of service.
If the value of a bred animal is around $3,000, salvage value is around $1,500 and average calves raised per cow is about three, then cow depreciation is around $500 per cow per year.
You may argue that your cows raise more than three calves on average, but if you sit down and figure it out, a very productive herd may get to four. The average is much closer to three.
A great article on managing cow depreciation can be found at beef.unl.edu/cow-depreciation-for-cow-calf-producers.
Value of the money
Most would agree that money has a time value.
If you choose to invest money in a cowherd then shouldn’t that money provide a fair return on investment? If you were to use someone else’s money, what would they expect you to pay as a return on their money invested? I think it is healthy to use the cost of borrowed money as it will give you a signal if you can expand the operation using borrowed money.
How much do you have invested in the average breeding animal on your operation? If we include the value of the bulls, it is easy to get this number over $3,000 this year. Six percent of $3,000 is $180 that your cows should be returning for the opportunity cost of the money invested in them.
If average cow depreciation is now $500 per cow per year and the opportunity cost of the money is $180, then together these cost are $680 per cow per year.
This is the first time to my knowledge that the cost of owning cows has exceeded the annual feed cost per cow when pasture value is included.
So what does this mean to you and your business?
For one it means that management of cow depreciation is more important than ever.
Secondly – bear with me as this next one might cause some of you discomfort – it means that you should consider turning some of your cows into cash and reinvesting that money into something that may provide a more competitive return on investment. For some of you, this won’t fit your long-term vision for your ranch. If so, that is fine.
However I think if a ranch management team is not considering all the options, they are not fulfilling their fiduciary responsibility to ownership. The value of the cowherd has doubled in the last year and a half. Value of pasture has increased, as well. There are certainly options that need to be put on the table and discussed by responsible mangers and not let our love of breeding animals blind us to the economic realities.
My job is to challenge your way of thinking. I bet I accomplished it in this article.
Just because we don’t write a check for it, many don’t consider these two major costs of running a cow. These economic costs I described are real. This high market has created some great times for cow/calf producers, but also some challenges in managing the value of the breeding animals.
I hope your management team spends some focused time discussing your strategy during this epic period in the cattle business.