Category: Costs

5 Keys to Quality Cattle

by Dave Pratt

Here are the keys to producing quality (high gross margin) cattle, or any species of livestock for that matter:

  1. Fit the enterprise to the resource. It doesn’t matter how productive your cows are if you shouldn’t have cows. You can cram a square peg in a round hole, but it is expensive, exhausting and unsustainable.
  2. Fit the production schedule to the environment. Why don’t elk in Montana calve in March? It’s because nature’s production cycle is in synch with the seasonal availability of forage and because photoperiod has a big effect on the seasonal fertility of ALL grazing animals. This isn’t to say that everyone should be calving in late May or June. But being able to reduce hay feeding by $200-$300 per cow probably adds more value to most ranches than the extra $100 you might get for the calf weaned by the cow that consumed all that hay.
  3. Find animals that fit the environment. Hot and humid or cold and dry, subtropical or temperate, prairie, mountain or desert, a cow that works in one environment may not be suited to another. That goes for the production schedule too. A cow selected to be productive in a March-April calving program may not be fit for a May-June calving program.
  4. Hit depreciation head on. For most producers the biggest cost of keeping a cow isn’t feed, rent, or labor. It’s depreciation. We rarely even think of depreciation as a cost of keeping a cow, let alone the biggest cost! In a typical herd, depreciation averages $250-$350 per cow per year. That’s $250-$350 ON EVERY COW EVERY YEAR! Many Ranching For Profit grads have drastically reduced depreciation in their herds. Some have even eliminated it. In my mind’s eye, cattle that don’t depreciate are quality cattle.
  5. Come up with a replacement strategy that works. Most cow/calf producers have no idea of the REAL cost of raising their own replacements. The gross margin of a productive cow is almost always at least a couple hundred dollars higher than the gross margin of H1’s or H2’s on the same ranch. There are alternatives to raising your own replacement heifers. You can contract with someone else to raise them, buy them, or buy older, depreciated cows as your replacements. It is a breakthrough for some producers to realize that they don’t need replacement heifers. It’s not heifers they need to replace, it’s cows. That paradigm shift opens the door to several profitable opportunities.

These five principles can help you improve the economic efficiency of any kind of livestock. Please share with me and ProfitTips readers the principles you’ve found essential to producing quality (high gross margin) livestock.

Animal Unit Months

Here’s more math for figuring out how to feed our livestock while making a good living on leased pasture. Even if math isn’t your strong suit, we take it one step at a time so that it’s as easy as it can be.

AUM Breakdown

Animal Unit Months

Figuring pasture use rates by Animal Unit (AUM) is more common in the western United States where it is the basis for public lands leased to ranchers for their stock. The nice thing about this method is that it makes it easy to plug numbers into a formula to give you a good idea of how many animals you can feed for how long. The formula factors in pasture quality, and the market price of hay so that you can come up with something fair to both parties.

An Animal Unit Month (AUM) is the amount of forage required to sustain a 1,000 pound cow with her calf at her side for 30 days. That works out to about 26.1 pounds per day. Forage requirements for all the other classes of livestock are shown in relationship to that 1,000 pound cow and her calf.

Here’s the formula:

Number of Animal Units x Average Hay Price Out of the Field Per Ton x Pasture Quality Factor = Rate Per Head Per Month

Pasture Quality Factor(Note: This formula works well for irrigated pasture, but may over-estimate non-irrigated, arid range rental rates where there is less forage and very little infrastructure.)

Here’s an example of what the formula looks like using a 1200-pound cow with her calf, during a time when hay is going for $10o per ton, and you’re hoping to rent an excellent grass and legume pasture:

1.20 AU x $100/ton x .20 Quality Factor = $24/AUM

From here the landowner and prospective lease can negotiate price based on expectations for management of the pasture, past experience, water and fence infrastructure and other requirements.

Don’t like that formula?  Here’s another option:

Hay Value Per Ton / 8.5 Rule of Thumb Forage Equivalent x Animal Unit = Rate Per Animal Unit Per Month

Using the same cow-calf pair and hay price, here’s that formula in action:

($100 per ton/8.5) x 1.2 = $14.12 per AUM

This is also just a starting point and depending on the result may point out whether you’ve over- or under-estimated the value of your hay.

Sharing Profit and Risk

If you intend to graze Stocker Cattle, establishing a rental rate based on pounds gained means that the landowner and the lease share the profit if there is one, and the risk if gain isn’t as great as expected. If you’re considering this method, you’ll have to have base values for the cost of gain, the expected gain, how long the animals will graze, and the per animal costs for caring for them through the grazing season.

All of the formulas I found for this method start with a Pasture Charge per Head per Month, also called a Seasonal Cost.  None of them told me where they got that number, but they all started with $10.  So starting with that as my full disclosure, we’ll go through this figuring process.

Pasture Charge Per Head Per Month x Number of Months = Seasonal Cost

$10 x 6 months = $60 per head

We use this as our base and then we divide by the pounds of gain we expect. This will change depending on the kinds of animals you’re running, grazing management, health and parasite load of the livestock and forage quality. This is where the risk sharing comes in. Let’s say that we think our stock will gain 200 pounds each while they’re on pasture.  Now our formula looks like this:

($10 x 6) / 200 pounds = 30¢ per pound of gain.

Thirty cents per pound is our break-even price and if the animals all gain 200 pounds each, that’s what the landowner gets. If the stock gain more, say 240 pounds, here’s what the landowner gets per animal:

240 x .30 = $72 per head

But if the animals only gain 175 lbs each, the landowner gets less money per animal:

175 x .30 = $52.5 per head

2019 Nebraska Cow-Calf Pair and Stocker Rental Rates

Recent findings published from the Nebraska Farm Real Estate Market Highlights 2018-2019 indicate changes in cow-calf and stocker monthly rental rates trended slightly lower when compared to 2018 (Table 1). Nebraska monthly grazing rates represent a typical fee for one month of grazing during the summer. Many leases run for a five-month grazing season subject to annual weather conditions.

The University of Nebraska-Lincoln Department of Agricultural Economics annually surveys Nebraska land professionals including appraisers, farm and ranch managers, and agricultural bankers. Results from the survey are divided by rental rate class and summarized by the eight Agricultural Statistics Districts of Nebraska (Figure 1).

Reported rates for cow-calf pair and stocker from the Nebraska Farm Real Estate Market Highlights include by district the average, high third quality, and low third quality. The range in these averages reflect the differences in the quality of the grazing land. Features influencing the quality of the grazing land might include the mix of the forages present during the growing season, livestock water sources, fencing upkeep, and general market competitiveness for the area.

To determine a cow-calf pair rental rate for a five-month period, the monthly rate for a district would be multiplied by five to calculate the seasonal rate. For example, the Central District average cow-calf pair monthly rental rate of $50.70 multiplied by five would be $253.50 per cow-calf pair for the 2019 grazing season.  This rate would vary depending upon the district of the state and provisions considered as part of the lease.

Negotiations on contractual terms for the grazing season include considerations on the landlord and tenant’s willingness to provide fencing maintenance, weed or brush control, and monitoring or providing water. Depending upon the willingness of either party to maintain, control, or provide these resources as part of the lease, the final rental rate may vary accordingly as panel members noted.

In addition, panel members also reported on the need for reviewing leases to account for different kinds of weather-related disasters such as flooding or drought. Reviewing these provisions by the appropriate agency or organization providing disaster assistance ensures compliance on grazing land in the case of an adverse weather event.

Survey results shown and discussed in this report are findings from the University of Nebraska–Lincoln 2019 Nebraska Farm Real Estate Market Survey. Complete results from the survey may be found at the Nebraska Farm Real Estate website: http://agecon.unl.edu/realestate.

Please address questions regarding preliminary estimates from the 2018-2019 Nebraska Farm Real Estate Survey to Jim Jansen at (402) 261-7572 or jjansen4@unl.edu.

Jim Jansen, (402) 261-7572
Agricultural Economist
University of Nebraska-Lincoln
jjansen4@unl.edu

Jeff Stokes, (402) 472-1742
Professor, Agricultural Banking and Finance
University of Nebraska-Lincoln
jeffrey.stokes@unl.edu

 

Interviews with the authors of BeefWatch newsletter articles become available throughout the month of publication and are accessible at https://go.unl.edu/podcast.

The 3 Secrets For Increasing Profit™

by Dave Pratt

There are three, and only three, ways to increase profit in any business. Stan Parsons called them The 3 Secrets For Increasing Profit™ and introduced them to Ranching For Profit students in 1980. Lately I’ve seen more and more articles by industry pundits that incorporate the 3 secrets in articles and conference proceedings. They rarely if ever acknowledge the source. Worse yet, they don’t always get them right. I’m going to use this ProfitTips to go back to basics and explain the 3 Secrets.

There is a common belief that profit is a function of weather and prices PERIOD. But weather and prices are, for the most part, beyond our control. If we believe that profit is determined by things beyond our control, it becomes easy to see ourselves as helpless victims.

In Ranching For Profit we don’t accept for one moment that we are helpless. Even if we can’t influence the market or make it rain, we can create and structure enterprises to fit this uncertain and volatile environment.  In selecting our enterprises and building our business for profit we need to understand the 3 Secrets:

  1. Reduce overhead costs
  2. Improve the gross margin per unit
  3. Increase turnover

Secret #1: Reducing Overhead Costs

Overhead costs include land and labor costs. Land and labor are broad categories. Land includes rent and the cost of maintaining fences, pipelines, building and anything else attached to the land. Labor costs include salaries & benefits, vehicles, equipment, horses, dogs and anything else that does work.

 

Overhead costs tend not to change much as the units of production (e.g. cows, steers, ewes) change.  Think about increasing a cow herd from 400 to 500 cows. That’s an increase of 25%. Would the interest, insurance or depreciation on our pickup increase by 25%? Of course not. As much as our hired hand might want a 25% raise, raising 500 cows is not 25% more work than raising 400 cows. Sorry Charlie, no raise.

Of course, anyone with a BLM or Forest Service grazing permit pays for land on a per-head basis. It doesn’t matter. While it may not behave like other overheads, rent is always an overhead.  The video at the end of this article explains why.

Reducing depreciation on our truck, or refinancing it to pay less interest will not impact the number of cows we run, the productivity of those cows or the price I get for my calves. But it will increase our profit. That’s why reducing overheads is the first secret.

Secret #2: Improving Gross Margin per Unit

Gross margin per unit measures the economic efficiency of cows, steers, sheep or whatever our units are. The higher the gross margin, the greater the efficiency. When gross margin per unit increases it means that each animal makes a bigger contribution to covering our overheads and making a profit.

To calculate gross margin we have to know two things; gross product and direct costs. Gross product is the value an enterprise produces. It’s simple to calculate:

Gross Product = (Closing Inventory Value + Sales) – (Opening Inventory Value + Purchases)

Direct costs are costs that go up and down as the number of animals in the herd goes up and down. Direct costs include supplement and substitute feed, health and breeding related costs, trucking, marketing commissions and interest on the livestock note.

To calculate gross margin just subtract direct costs from gross product. Then we divide by the number of units in the enterprise to figure gross margin per unit.

We can use different units. In livestock enterprises we usually start by calculating gross margin per animal unit.  Gross margin per animal unit is an effective way to compare the efficiency of a stocker enterprise to a cow-calf enterprise, or any other livestock enterprise. Gross margin per acre is a useful tool for comparing the efficiency of grazing enterprises to farming operations.

The ranch with the highest production per unit rarely has the best gross margin/unit. Smaller cows weaning lighter calves, but requiring fewer inputs, generally have a much higher gross margin per unit than larger cows.  Whatever the enterprise, improving gross margin per unit is the second secret to increasing profit.

Secret # 3: Increasing Turnover

We may have a productive cow with a great gross margin, but one cow won’t be enough to cover our overheads. We need more cows … at least we need more something!

Turnover refers to the number of units in an enterprise (e.g. the number of cows or steers that we have). A business can increase turnover by increasing the scale of an enterprise or by adding enterprises. Increasing turnover, provided that the gross margin per unit is healthy, is the third secret for increasing profit.

There are three, and only three ways to increase profit in your business. All three are in play in your business all the time, but only one of them is the most important right now. Do you know which of the three secrets is your biggest problem and which offers you the greatest opportunity? If you are ranching for profit you’d better find out!

Finding Your Deadwood will show you how to tell which of the three secrets you should focus on now. To hear how one RFP graduate applied the three secrets to increase profit watch John’s Story.

AG Talk – quote for grazing. Keep it Simple

Don’t seed or fertilize anything. Buy a couple of OBriens reels, poly wire and step in pigtails (Kencove Fence) and a good solar fencer. Max investment $1,600.00, utilize high stock density grazing to get this 10 year dormant grass back in shape.

You don’t need fertilizer if your grazing properly with daily moves allowing for the required amount of rest. 30 days is not enough rest, your going to run out of grass. A 30 day rotation is fine for one turn, but then every subsequent turn after that will get faster. Meaning your grass was not rested enough to re-graze. You eventually exhaust the root reserves and its just like driving a truck 50 miles a day and only putting in enough gas for 30 miles of driving at the end of each day. Its only a matter of time and your going to be out of gas, The grass is the same way, its fuel tank (root reserves) must be refueled to full capacity before you return to graze again or your going to run out of grass.

You will likely have lots of waste (trampled grass) in this 10 year dormant grass, that should not be viewed as a problem. That trampled grass is what feeds the mini critters in the soil, and they are needed to recycle all the manure urine and trampled grass back into new vigorous grass growth naturally. Fertilizers Herbicides, Insecticides all work against the soil microbes and drastically reduce the presence of Earth Worms as well. Cows, grass and fencing to control their grazing is all you need.

And here is the hardest part, put all the seed fertilizer herbicide and equipment money in the bank and leave it there. You can not buy your way to prosperity. The best place you can spend money is by buying a good style cafeteria mineral feeder and keep it stocked with the 11 different minerals (less than $200,00 worth of minerals) keep it supplied as they consume the minerals. It will change often as far as what they need.

Then stand back and let the Cows do the work for you. The goal is to extend the grazing season as long as you can. It gets better in time as your learning curve progresses. Spend time observing your stock, what they are doing and what is happening in your grass as it improves.

Clovers will come back naturally as will other grasses that may not be there now. Every day you don’t feed hay is like putting those dollars directly into your pocket. Those Canadian Thistles are like Candy to a Cow, mine eat them to the ground, high Calcium makes them a treat to a Cows appetite.

The seed bank is already in the soil it just needs hoof action to kick it into the growth mode. If bragging rights are important to you then you should be warned the learning curve is not straight up. The learning curve is actually an inverse curve, you will make mistakes, its sort of like jumping off a cliff. But hang in there and be brave because most people bail out just before they would have started to make some noticeable gains at the bottom of the learning curve.

With persistence and some self discipline you will be a winner. Just let the Cows do their thing they will show you how its done. Fence control, proper rest of the grass with water and minerals are all you need. All else is just like recreational tillage. There is nothing so useless as doing efficiently that which should not be done at all “Pete Drucker”

If you have problems or questions as you progress let me know, there is usually a simple solution to any problems that arise. E-mail is good, and good luck with the grazing, don’t let anybody convince you it will never work!! Prove them wrong