Determining cost of producing a calf important indicator in improving profit
Chadron, Neb. – A lot of numbers can go into the cost of raising a calf each year. Unfortunately, keeping track of those numbers can become so overwhelming, many producers have no idea what it really costs to produce that 500-pound calf they sell each fall.
Determining unit cost of production, whether it is how much it costs to produce a calf, a pound of gain for a yearling or a ton of hay, can be the most important piece of the profitability puzzle. University of Nebraska Extension Educator Aaron Berger told ranchers it is an indicator of how things are working on their operations.
Berger spoke about unit cost of production during the recent annual Upper Niobrara White Natural Resources District Range Day at Chadron State College.
From hosting ranching profitability workshops across the region, Berger finds that many producers are surprised at what their costs actually are. “Did it really cost that much?” producers frequently ask Berger.
Determining the unit cost of production helps producers determine what the costs really are, and it gives them the value of making good financial decisions.
“The thing I like about unit cost of production is it combines both the cost side and the production side. If I put something into the system, what do I get back? If I pull something out of the system, what does that cost me?” Berger said.
When looking at costs, Berger said producers frequently have trouble distinguishing between direct costs and overhead costs.
Berger explained that overhead costs are costs that don’t change much until a unit of labor is added. A stock trailer or a four-wheeler would be considered overhead costs.
Direct costs are ear tags, salt, mineral and protein supplements. These items increase incrementally for each cow that is in production, he explained.
In any grazing system, Berger said producers need to consider what their grass is costing them.
“Here in Nebraska, we have some of the most valuable grass in the U.S. We have the highest cost to rent here on a per-pair basis,” he explained.
Cow depreciation is another important cost that is often overlooked.
“Did anyone buy $3,000 bred heifers a few years ago or sell cull cows for 45 cents last fall? Cow depreciation costs can be significant,” he said.
Identifying what things could be done to keep better records will help producers make better decisions, Berger stressed.
“Whether we realize it or not, every decision we make influences our unit cost of production. If we buy a new pickup and expect the cows to pay for it, that impacts our cost of production,” he shared.
Producers who keep careful track of their costs also use unit cost of production to determine how much they can afford to pay for a bull.
Berger told producers to ask themselves, “Will a $10,000 bull produce enough calves in its lifetime to pay for itself? What is the cost? What do we get back for what we put in?”
Distinguishing between enterprises is also an important part of determining an accurate unit cost of production for each enterprise. Most producers will have more than one enterprise, such as a cow/calf operation, replacement heifer enterprise and feed enterprise.
“The challenge is to distinguish where the costs occur, where the value is generated and how these enterprises interact as one. Understand a different value is created by each enterprise,” he explained.
Typically, when ranchers think about the land on their ranch, they think of forage production.
“Frequently, land will be priced above its forage production value because it has other uses,” Berger explained. “When enterprising a ranch, we need to recognize there is often value beyond forage production.”
“We should ask ourselves how we can incorporate that to capture more value,” he added.
Analyzing each enterprise for profitability is also important.
“If it costs me $150 a ton to put up hay and I can buy hay for $100 a ton, should I be buying hay? Analyzing each enterprise separately helps us determine what we do well,” Berger said. “If we could rent our land out at market value, can our cows pay for that?”
“Don’t look at unit cost of production as a snapshot, but look at how each enterprise is doing long-term,” he continued.
With calf prices up and down each year, producers would need more than one year of records to accurately determine how profitable each enterprise actually is.
Once they have accurate numbers, making hard decisions may come easier.
As an example, Berger refers to a tractor that may be used for the haying part of the operation during the summer and feeding cattle during the winter. Producers have to determine a percentage basis of how much the tractor is used for each enterprise.
If the producer decides to stop haying and grazes the land instead, the percentage of the tractor allocated to the haying enterprise will need to be reallocated to the remaining enterprises it is used for.
“The value of enterprise analysis is knowing our cost of production, so we have the information to make decisions and understand our costs,” Berger said. “Use that information to make changes in the operation.”
“Knowing our unit cost of production will give us confidence in our decision-making and a way to benchmark the operation so we can compare it to others,” he said.
Gayle Smith is a correspondent for the Wyoming Livestock Roundup. Send comments on this article to firstname.lastname@example.org.