Understanding unit cost of production can increase ranch profitability long-term
When University of Nebraska Extension Educator Aaron Berger asked a group of cow/calf producers if they knew their cost of production, there was total silence in the room. Whether that silence was from not wanting to share that information, a shyness to speak in front of the group or just not knowing the answer, only those producers know the answer.
The point of unit cost of production is to help ranchers determine if their operations are profitable.
“I want to talk about the cost of production because we don’t always know what it costs to produce a pound of beef,” Berger tells ranchers. “If we did, it might be pretty sobering for some people.”
“Every decision in the cow/calf business can be evaluated by determining the unit cost of production,” Berger continues. “The herd’s total cost divided by the total pounds produced is the unit cost of production. It is important for producers to ask themselves, ‘What did it cost me per pound of beef produced?’”
Profitable ranches have good reproductive rates and calf growth, which keep the costs per pound of beef produced in check, he continues. Typically, the ranches with the lowest unit cost of production are the most profitable, but that isn’t always the case.
“The unit cost of production is a benchmark tool, but every operation will have different tools,” he says. “However, we are still competing against them.”
Berger emphasizes, “We need to determine who has the lowest cost of production and see how they are able to produce beef cheaper.”
Berger cautions the group about making generalities.
“We need to know our actual cost of production to determine if we are making a profit,” he explains.
Producers can determine actual cost by breaking the ranch down into separate enterprises. For example, an oil, gas, water and wind enterprise; cow/calf business; hay business; stocker-feeder business; and land enterprise may all be a part of the ranch.
The next step is determining a fair market value for each segment.
“If we have a hay business, we need to figure a cost per ton of hay delivered. Then, charge the cow/calf operation for the hay they use,” he says. “If land could be rented out at $45 per head per month, then the land cost needs to be charged to the cattle.”
Berger continues, “The object is to determine which enterprises within the operation are making money and which are not.”
“Producers need to determine if they are making enough money to run the cattle themselves or if they would be more profitable taking in cattle,” he adds.
Although most ranchers are in the business because they enjoy cattle, they need to look at the value of their land and determine what they would have if they leased the ranch out.
“That land has value. If the ranch is leased out, they wouldn’t be feeding cattle in a blizzard or checking calving cows at 2 a.m.,” he says.
Producers with a hay business also need to determine what they could pay a custom haying company to put up the hay for them.
“The hay business has value, and if a producer has a meadow, it also has some value besides being put up as hay,” he explains.
The key to operating a profitable business is to identify the profitable segments within the ranch and eliminate the costly ones.
Based on studies, Berger says feed expenses are about 65 percent of the annual costs of maintaining cattle.
“Producers need to determine how to reduce feed costs and, at the same time, maintain the cow’s productivity. They also need to have low overheads. Buying $150,000 tractors and $50,000 pickups are expensive when the cow has to pay for it,” he states.
Producers should try to become better grass farmers, as well.
“The better we can become at growing grass, the more profitable we will become at harvesting grass effectively,” he explains to ranchers.
Feeding hay is expensive. Research has shown highly profitable herds tend to feed less hay, Berger says.
“Some research conducted by the University of Nebraska has shown the system with the greatest feed costs, for example, fed the most hay and had the lowest returns per calf in all scenarios,” he says.
“I always hear the saying,” Berger says, “‘If it rusts, rots or depreciates, try to own as little of it as possible.’”
If the rancher purchases equipment, the enterprise using the equipment needs to be able to pay for it. If the machinery is used for multiple enterprises, a percentage of the cost of the piece of machinery needs to be charged to each enterprise, based on how much each enterprise uses it.
Berger offers some final thoughts.
“Try to match the enterprises on the ranch to the resources we have available. Cow/calf operations don’t work in all areas. Also, producers need to identify their competitive advantage. Think in terms of systems and develop a marketing and risk management plan that can be adjusted as conditions change,” he explains.
Gayle Smith is a correspondent for the Wyoming Livestock Roundup. Send comments on this article to firstname.lastname@example.org.