Profitability on the ranch includes both costs and revenue considerations
When looking at costs related to cattle production, University of Wyoming (UW) Extension Economist John Ritten says, “There are lots of numbers to look at.”
“One thing we talk a lot about is cutting costs,” continues Ritten, “but the top part of the budget is really revenue. We can impact the bottom line by other ways than just cutting costs.”
However, costs are an important part of profits, and Ritten explains that costs fall into two categories – variable and fixed.
Variable costs account for things like feed and cow care, while fixed costs include expenses like machinery, buildings, taxes, land and depreciation.
“We should also include management,” Ritten says. “I’d bet that most ranchers don’t pay themselves a true management fee. We have to include how much we might make if we worked for someone else – and that’s not going to be just $18,000 a year, at least if we’re good.”
“People often blame overhead for the reason that they’re not profitable, but I don’t buy into that,” he says.
Determining profitability, Ritten explains, means that producers must have a solid definition of what is profit.
“I talk about profit differently than an accountant might talk about it. We’re talking about something different than economic profit,” Ritten comments. “Answering the question, ‘Did we cover costs?’ is not the same as, ‘Do we have to pay income taxes?’ They are different.”
Ritten also cautions producers against benchmarking their ranches against operations that aren’t comparable.
“Benchmarking is a great idea – if we all use the same terms and measure things the same way,” he says. “If we compare to someone else, make sure to look at the same measure.”
In determining profitability, Ritten encourages producers to use economic profit.
“If we really want to consider the ranch profitable, we need to make money economically,” he says, and to do that, all expenses must be considered.
Accounting for expenses
When looking at the ranch, Ritten says that producers must look at all aspects, including feed and labor.
“All grass has value, whether we use it or rent it,” he says. “We need to charge ourselves for using the grass.”
Additionally, labor costs often go unaccounted for on the ranch.
“We need to account for all the labor – including the kids, aunts, uncles and neighbors – at calving, branding, etc.,” Ritten says. “We also need to pay ourselves a management fee, at least when we’re calculating profit. Otherwise, we’re subsidizing the ranch with our own time when we could make money somewhere else.”
Ritten also notes that revenue includes production, as well as marketing.
“Weaning weights and percentages really impact how much money I bring in,” he says, “but marketing also matters. Two calves aren’t the same. If one is marketed well, he can make more money than the other.”
Marketing is one area where Ritten believes many producers can spend more time to have an impact on the profitability in the operation.
“We can make ourselves more money by investing time and energy into marketing,” he comments.
With a look at both costs and revenues, Ritten says producers should understand that costs can be traded from operational to overhead. Ranchers also must be careful to cut costs without expecting to pay more somewhere else.
“For example, there’s a lot of talk about no more fed feed in ranching,” he explains. “In some parts of the state, that’s not feasible, but remember, there are substitutes. If we can buy one feed at a cost advantage, we should use it when we can.”
The same goes for buying versus raising hay.
“We need to charge ourselves market price. Even if I can put it up for $40, if I can sell the hay for $100 a ton, I need to charge myself $100 a ton,” Ritten says. I have to account for these costs.”
A Kansas State University study collected costs and revenues from a subset of producers from 1987 until today, and Ritten says that, sadly, if fixed costs are included, ranchers were only making money 15 percent of the time.
“Analysis showed there’s more variation in a year across farms than across the four-year data set,” Ritten continues. “There were farms that made money almost every year. Going back to 1940, the average producer made $85 per cow per year, which is sad. But some people made $233 a cow, even in bad times.”
When looking at their costs, Ritten adds that the most profitable producers weren’t necessarily the lowest cost. Many of the top one-third of producers had higher vet costs and higher labor costs, which Ritten attributes to the use of artificial insemination.
The top one-third of producers made 49 percent more per cow than the bottom third, which is a remarkable difference, Ritten says.
“The highest profit farms wean more calves,” he says. “Production matters. These producers also get a higher price per pound or hundredweight. That tells me these people spend their time on marketing.”
“Granted, we won’t have an overnight success story,” Ritten emphasizes. “But if we can reduce costs, it’s a start.”
Ritten discussed spring calving costs during the 2016 Progressive Rancher Forum, held on Dec. 5.
Saige Albert is managing editor of the Wyoming Livestock Roundup and can be reached at firstname.lastname@example.org.