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Operating Costs

I recently had an interesting email discussion with a few ranchers over the subject of profit. A well-known rancher in his newsletter commented, “If you can’t make a decent profit at today’s prices, you need to get out of the cow/calf business.” I wrote back explaining that most of the ranchers I work with are not making an economic profit today.

I have the privilege of working with some of the best, most profit-minded ranchers in the region, and I expect if they are challenged, then others are in an even tougher spot. I think the real issue is that we are likely working with two definitions of profit. Many ranches are satisfied if they can pay off the operating line at the end of the year or have enough money left over to pay for groceries. Having positive cash flow is different from making an economic profit.

For a livestock business to show an economic profit, we have to kick out the economic crutches we like to prop up a livestock business with. For example, if you sold your cowherd, what could you lease the grass to someone else for? Charge your cows for this as an opportunity cost for grazed feed. What about that hay you could have sold? Charge them market price for that, as well. This continues with labor. If our cows make an economic profit, then they don’t need to be propped up with free labor from ownership. Charge the cows what it would cost to replace you and other owners for your contribution to the business.

In today’s market, once we consider these often ‘non-cash’ expenses then most ranches are not making an economic profit.

Using this definition does your livestock business make an economic profit? If the answer is no, then the next question is – should it? I put a lot of emphasis in my work on profitable ranching. Maybe I put too much emphasis on this. If you are comfortable and content with where you are and the outcomes your ranch is producing, then maybe there is no reason to be overly concerned with producing a profit.

I think the reason I put so much emphasis on profit is that those with whom I’m working want their ranch to do more. Perhaps they want to create room for another generation. Maybe they want to expand the business. Maybe they want to create a nest egg outside of the ranch for retirement or maybe they like the challenge and excitement of creating and leading a profitable business. For me personally, it would not be motivating to work for a business whose ambition was “don’t go broke.” It would be much more enjoyable to be a part of something focused on winning.

The email I received from the rancher responding to my comment started this way, “This model makes it impossible to make a cow/calf operation pencil out.” A classic quote from Henry Ford comes to mind, “Whether you think you can or you can’t, either way you are right.” It is easy to just dismiss this and blame it on the markets or the weather as the chief factors that determine your profitability.

However, it is much more meaningful be proactive. This could be learning how to do an economic analysis of your business and discovering the enterprises that are working and those that are not or going the next step and comparing the economic performance of your business to key benchmarks and developing strategies to leverage your advantages and address your weaknesses.

After all, if someone is doing it, it might be possible. Have a great summer, and I look forward to hearing from you.

With spring rapidly approaching, producers may want to consider planting some annual forages to provide their cattle with additional grazing this year.

“Some producers choose to add an annual forage to their production system when pasture rent is too high or they want to expand and can’t find more pasture,” according to Mary Drewnowski, University of Nebraska Extension specialist. “They may find that it doesn’t pencil out to plant corn, so instead, they may plant an annual forage this year and go back to their crop rotation when corn prices are better.”

Pasture rents

Pasture rent in Nebraska is becoming a hard pill to swallow for cattlemen. In central and southern Nebraska, producers are paying $50 to $60 per pair per month, which is $1.60 to two dollars per pair per day.

“That is quite expensive when we compare it to other sources of the same nutrients,” she says.

Chad Engle, livestock operations manager at U.S. Meat Animal Research Center (USMARC), tells producers about different annual mixtures they have tried at the station. They have grazed pairs on triticale in muddy, wet conditions, and he still figured they received 1.34 animal unit months (AUMs) of grazing. They have grazed an oat-radish-turnip mixture with pregnant spring cows and seen 2.2 AUMS.

“It was three to four inches tall when we turned into it, but it continued to grow,” he notes.

“We use annual forage fields as a transition to go to something else, like perennial pasture or corn residue,” Engle tells producers. “In the end, most everything we have tried was still cheaper than pasture rent.”

“One word of caution, if we are planting annuals on irrigated ground, it may be hard to justify to a banker,” he says.

Annual forages

Planting annual forages is one way producers can provide their cattle with high-quality forage, at less cost, depending on which mixture they choose. Drewnowski encourages them to choose carefully, depending upon when they want to graze.

“Winter sensitive varieties will die over the winter,” she says. “They can be planted in the fall and will produce more forage in the fall than the winter hearty varieties planted at the same time.”

“The winter-hardy varieties will overwinter,” she explains.

Winter sensitive varieties have two planting dates, March through April or in September. Winter-hardy varieties can be planted in the fall as early as August, but September may be better.

Oats are still the best choice for a winter-sensitive, cool-season forage, according to Drewnowski. But, spring triticale and spring barley can also be good alternatives.

Annual ryegrass can also be planted to help maintain annual forage quality into the later part of the season.

“If we plant a winter sensitive species in mid-March or early April, we could graze it into June, but it could get away from us in terms of forage quality. Adding an annual ryegrass or spring barley will help maintain quality,” she explains.

Drewnowski urges producers to keep in mind that annual forages are a crop risk, and they should have extra feed on hand in case the crop doesn’t establish.

“Anytime we are trying to establish something, there is a real opportunity for it to fail,” she says. “I would have some hay stockpiled to avoid wrecks. Some people even have an extra field they plan to hay but can graze if they have to.”

“Producers shouldn’t put themselves in a situation where they have a crop failure and realize that they have no feed for the cows,” Drewnowski comments. “Annuals are not like perennial grasses.”

Planting and harvest

Drewnowski recommends planting warm season species May 1 through August 1.

“The earlier you plant, the earlier we can graze,” she explains. “I would recommend planting cool season varieties after Aug. 1, but if we intend to plant July 15, I would decide whether to plant a warm-season or cool-season variety based on quality.”

“If we need yield but not high quality, I would plant warm season. If we need high quality for lactating cows or weaned calves, I would plant cool-season varieties,” she says.

Harvest efficiency is extremely important, the Extension specialist says.

“Fall forages don’t decline in quality with maturity like spring or summer forages. I would try and get all the yield I could and allocate grazing,” she explains.

Grazing

Grazing is not as efficient as haying, but it is more cost-effective, she continues. How cost-effective it is depends on how well grazing is managed.

“The first key to grazing management is starting at the right height and not letting it get away from us,” Drewnowski claims.

Small cereal grains like oats, rye and triticale should be six to eight inches in height when they are grazed.

“For rye, we may need to put cattle on it when it is four inches, depending on stocking rate. It can get away from us quickly,” she adds.

Drewnowski cautions producers who plan to graze varieties like Sudangrass and other warm-season grasses to wait until they are 18 inches tall if they could have prussic acid or nitrates.

“They need to be managed carefully,” she warns.

Gayle Smith is a correspondent for the Wyoming Livestock Roundup. Send comments on this article to This email address is being protected from spambots. You need JavaScript enabled to view it..

Worland – A session led by UW Extension Farm Management Specialist John Hewlett at WESTI Ag Days in early February focused on estimating machinery costs using the Wyoming Machinery and Operating Costs Bulletin.
    Compiled in 1993, the bulletin provides a basis to estimate machinery costs and outlines how to do that for one’s own operation. In addition, there is now software that will help an operator accomplish the same thing.
    “With machinery costs, there are two categories we’re worried about – ownership, or fixed costs that remain constant and variable, or operating costs that increase the more you use the machinery. The two of those together make the total cost,” said Hewlett.
    Averages dictate that machinery and the labor to run the machine total 30 percent of the costs on a farm in the Big Horn Basin. “Machinery costs are high, and we can’t take them away. They have a direct impact on the bottom line, and if we can better manage them we can help increase our dollars of return,” noted Hewlett. “It’s not unusual that 30 to 50 percent of an operation’s costs are made up by machinery and related services in a typical farm situation.”
    Fixed costs on machinery include taxes, housing, insurance and depreciation. “Housing is important. If you keep equipment shedded it won’t wear out as fast and have as high of repair bills,” he explained. “You’ll either have that cost in repairs or in housing.
    He mentions insurance against theft, fire or vandalism and depreciation due to wear, age and obsolescence. “Depreciation is the sense of management,” he stated. “You need to allocate the initial cost of the machine over its useful life, or how long you’d expect a $100,000 tractor to last. You can’t assign that cost to one crop next year, but you need to allocate some of that initial crop and each crop you produce.”
    Fixed costs also include long-term interest. “You need to charge yourself for the capital tied up in that machine after purchase, whether you purchased it with your own funds or borrowed. Either way there’s an interest charge associated with that machine and it ought to be returning some sort of rate of return.”
    Hewlett said the variable costs are the ones that get noticed most often. “Many of your fixed costs are non-cash, but you’ve got to pay the variable costs on a regular basis, including fuel and maintenance.”
    Fuel and lubrication includes fuel, obviously, as well as grease, oil, hydraulic fluids the labor that goes into fueling and lubricating the machine. Repair and maintenance include all costs to keep the machine in working condition, including parts, welding and other services, as well as the labor that makes it happen. “That includes not only off-farm costs, but what we’re doing on-farm with our own labor and parts,” said Hewlett. “That needs to be accounted for.”
    Another variable cost is the labor to operate the machine, whether that be day labor, hired labor or owner labor. “There needs to be an hourly charge for someone to sit on the tractor and make it go down the row,” instructed Hewlett.
    UW’s machinery costs bulletin goes down through each cost, describing it and giving  the method for calculating it. The results are given on either an annual basis or per hour for a number of different machines and implements.
    “We’ve provided some background to allow operators to see if the tables match up with their equipment. Typically people don’t have the list price, and if it’s older equipment that you’re not quite sure of the value, the table gives you an estimate of list prices,” said Hewlett. UW came up with those figures through a survey of machinery dealers around Wyoming.
    Hewlett said the university has again collected similar data to update the bulletin. “But even brand new data needs to be reflective of your situation. The best data is your own information if you can come up with it.”
    Why go to all the trouble of figuring out exactly what it costs to operate your machinery? Hewlett said the data is helpful in estimating the cost and return of various enterprises. “Accurately estimating the machinery cost is an important piece of estimating the total cost of an enterprise,” he said. “Then you can calculate various break even points.”
    He said one scenario when this is extremely helpful is setting custom rates. “If you do any custom work, having the ability to calculate the cost of operating your machinery is a whole lot better than looking it up in a custom rates guide, because that’s just a survey of operators and can vary greatly. You’ve got to calculate the rate for your particular situation.”
    Both the Wyoming Machinery and Operating Costs Bulletin and the Wyoming Machinery Cost Calculation software are available through the UW Extension website. Christy Hemken is assistant editor of the Wyoming Livestock Roundup and can be reached at This email address is being protected from spambots. You need JavaScript enabled to view it..

Fuel costs keep challenging Wyo ag

    “Our fuel expenses have gone up from first quarter of ‘07 to first quarter ‘08 by 60 percent,” says Dennis Huckfeldt, owner of Torrington-based Huckfeldt Trucking.
    Pull into the local truck stop to fuel up your tractor trailer and he says, “Right now, on today’s prices, it’s going to cost $1,100 to $1,150.”
    The U.S. Energy Information Administration predicts diesel will average $3.62 per gallon in 2008, 26 percent higher than the 2007 average. So far in 2008, diesel prices have risen more than 18 percent.
    “Fuel price crisis,” is the term the American Trucking Association (ATA) uses to refer to the problem they say is a threat to the backbone of America’s economy - the trucking industry. It’s also a crisis driving the cost of nearly every input for American agriculture. “At the current price, compared with five years earlier,” says information from the ATA, “it costs 155 percent, or $720, more to fuel up a typical tractor-trailer. Compared with 10 years earlier, it costs 271 percent, or $866, more to fuel up a typical tractor-trailer.” ATA says a one-cent change in diesel prices results in a million dollar a year difference for the nation’s trucking industry.
    “First quarter of ‘07 to first quarter of ’08 I have not raised my freight charges,” says Huckfeldt, “but my fuel surcharge has gone up 58 percent from a year ago to this year.” It’s a difficult situation for Huckfeldt Trucking and its customers for multiple reasons.
    It’s not the only area where Wyoming agriculture is seeing increased costs. “If you got it, it was brought by a truck,” says Huckfeldt. “Fuel surcharges are going up on all of the industry.” He adds, “It’s also affecting anything made from, or using, petroleum. On anything from paper to cows, it all has to do with trucking.”
    “It’s affecting every single thing we do, not just what shows at the pump or on the fuel bill,” says Greybull rancher Mary Flitner. “Everything we do, everywhere we go, everything we grow or buy or sell has its worth altered by fuel costs, probably several times along the way. We’ll have to hope our market allows us to pass this cost on, as other industries are doing.”
    “We’re seeing it a lot with farmers and the inputs for their fields,” says Jana Shimic of Lingle-based L&M Irrigation. “Fertilizer has more than doubled.” Noting that underground irrigation pipe is a petroleum-based product she adds, “The cost of fuel has not only affected our grain business, but our irrigation business as well.”
    While grain prices have gone up, Shimic says farmers aren’t making more money than before because of escalating input costs. “It’s not better than it was before, we’re just operating at a higher level than we were,” she explains.
    Fuel efficiency has consistently increased since Huckfeldt’s grandfather launched the trucking business in 1942, but he says he’d like to see that effort continue. By reducing speeds and running a smaller generator for overnight stays, he says the industry is doing its part to make fuel go farther. His business has also added fairings to the tops of trucks to make them more aerodynamic. “We’re also trying to work more loaded miles versus miles ran,” he says, noting that’s easier in some segments of the industry. Hauling cattle usually calls for running only one direction loaded.
    Huckfeldt would also like to see the state reconsider its weight limits on highways, but says he realizes there are trade-offs with road damage and maintenance. “We need to work with alternative fuels, not necessarily for the transportation sector, but in the energy generation industry,” he says. “All of that would cut petroleum free to be used for cars and trucks.”
    Jennifer Womack is managing editor of the Wyoming Livestock Roundup. Send comments on this article to This email address is being protected from spambots. You need JavaScript enabled to view it..

Casper – There’s something to support nearly every viewpoint amidst the 2009 predictions for American agriculture. There are also a few viewpoints that are sure to inspire a good, old-fashioned family debate around the kitchen table.
    If one federal agency is correct, corn prices are heading for a decade-long slump below $4 as production in the U.S. catches up with demand. According to an article on the Livestock Marketing Association’s news pages, that’s the prediction from the Congressional Budget Office (CBO), in a document used as part of a government-wide estimate of federal spending over the next decade.
    According to the LMA, the CBO said the average cash price for corn will bottom out at $3.65 in the 2012-2013 marketing year, then rise no higher than $3.94 through 2019. While the CBO predicts total use will jump by 18 percent, to 14.719 billion bushels by the end of the decade, they also forecast production will increase 23 percent over the same period, to 14.738 billion bushels. Those figures, and a predicted gain in yields, will absorb rising demand for corn for exports, and as a source of ethanol.  Corn is the biggest U.S. crop, valued in 2007 at $52.1 billion.
    Meanwhile, the U.S. Department of Agriculture is predicting that the global financial situation will result in reduced beef exports in 2009. “The big unknown in this whole global beef market is…the impact of the global financial crisis,” said a USDA deputy undersecretary, Chuck Lambert.  For example, he said, export sales and shipments to South Korea looked “really good into Korea until early October, but then they declined on a weekly basis.”
    Speaking to attendees at the 90th Annual American Farm Bureau Federation convention this past week in San Antonio, Texas, Purdue University ag economist Chris Hurt predicted a “year of struggle” for the livestock industry. Hurt noted that livestock producers were hit with the “double whammy” of a recession and high feed costs last year. “We’re going to see another year of struggle” for producers, he said at a livestock market outlook session at the meeting.  Keeping beef supplies down is necessary for the cattle industry to make a profit, he said.  Higher feed costs have trimmed meat production for the past two years, and Hurt said because of the recession, he expects another decline in production this year.
    Late December 2008, a Certified Angus Beef statement predicted that feed costs wouldn’t be a feedlot’s biggest worry in 2009. Rising to the top instead? Sourcing feeder cattle.
    “I’d argue that the biggest challenges cattle feeders will face over the next few years are going to be sourcing feeder cattle and economically utilizing excess feedlot capacity,” said Mike Sands of Informa Economics at a CAB-sponsored forum.
    According to CAB, cowherd returns fell from $180 a head in 2005 to just a few dollars in 2008.
    “Typically, changes in profitability have about a two-year lag effect in the size of the cowherd,” said Sands, “so the slowdown in returns in 2007 and 2008 will continue to impact the size of the beef cow herd as we go into 2009 and 2010.”
    This past summer, said CAB, cow slaughter hung around 20 percent above a year earlier, suggesting about 700,000 cows were taken out of the nation’s cowherd during the calendar year. That reduction could extend into the next few years, bringing total cutbacks to a million head.
    “Well, if we don’t raise our own feeders, why not just import them from Canada?” Sands asked. “We’ve been fairly aggressive in doing that in the past, but they’re under the same kind of economic pressure we are and reducing the size of their cow herds as well.”
    Sands estimates the industry is peaking seasonally at 80 percent feeding capacity right now and he expects that number to dip to under 70 percent by late spring or summer.
    “It’s going to be real tough for a lot of cattle feeders to maintain profitable operations with capacity utilization rates slipping that low,” he said. This could lead to changes to dairy or beef heifer developing, more specifically backgrounding yards and more consolidation.
    Sands said the worldwide demand for beef continues to grow despite the recession. Noting places like China, India, South Korea, Hong Kong and Singapore, Sands said, “In the past two or three years, we’ve probably added about a billion people to the worldwide middle class. That demand on resources is not going away.”
    Sands aid economics favor higher retail beef prices and strong beef demand despite the U.S. recession and worldwide economic slowdown.
    “I keep hearing that we’re in a recession, and isn’t that negative for beef demand? Historically, no,” he said. Beef consumption will get smaller, but mainly because we’re going to produce less.
    “People are going to talk about eroding beef demand — and that still is a risk — but historically, that’s concentrated in the foodservice industry while retail demand increases. Taken together, beef demand during recessions does not fair badly,” Sands explained.
    To hold or grow that line over time Sands said producers need to keep supplying consumers with the type of beef they’ve continued to crave.
    “Over the past couple of years, we’ve gotten used to a certain level of quality in the industry — more choice cattle in the slaughter mix,” he said. “I don’t think consumers are ready to compromise that. They’re going to want to see grading continue to increase.”
    Compiled by Roundup managing editor Jennifer Womack using reports from the USDA, the Livestock Marketing Association and Certified Angus Beef.