Now’s a good time for an analysis

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By The Staff

Most cattle producers happily waved good-bye to 2008, while crossing their fingers that 2009 will be much better. Many are wrestling with challenging management decisions as a result of the profitability challenges they are facing.

Production costs were extremely high in 2008 and feeder cattle prices fell dramatically from summer to winter.  However, it is difficult to make clear recommendations about strategies without good knowledge of the cost structure of the farm.

Given the situation that cow-calf operators are facing, UK Ag Economist’s are strongly encourage producers to spend some time this winter conducting a serious cost analysis.

All producers know they are facing a challenge, but I don’t think that many have a good feel for exactly what it is costing to maintain each cow in their herd. Winter is a good time to go through production and expense records to estimate costs.

While there are many ways to do this, Ag Economist’s like to start with forage production since it is probably the biggest expense for most cow-calf operators.  Producers should allocate fertilizer and lime between hay and pasture ground to separate grazing costs from hay production costs. From there, producers should not forget to include the cost of fuel, oil, repairs and labor for these forage programs.

You should also charge depreciation and interest on forage equipment to get an accurate assessment of what your total feed costs truly are.

UK’s agricultural economics department has budgeting tools available that may make this easier.

Once producers have assigned a cost to the hay that is produced, they can estimate how much hay is fed per cow. The best way to do this is by weighing representative bales and tracking how many bales are fed. However, a typical cow can easily consume two tons of hay per year or more; especially when storage and feeding losses are included. Grazing costs can be estimated by multiplying pasture maintenance costs per acre by stocking rate.

Next, move into things such as mineral, water, health, labor, breeding, marketing, fence and building repairs and other variable expenses.  You will likely find that a lot of little purchases can really add up here. If you don’t keep good financial records throughout the year, this will likely require going through many farm store receipts and determining which expenses truly should be charged to your beef enterprise.

Producers should also consider fixed costs like taxes, insurance and family labor, and opportunity costs like unpaid interest. This is also where depreciation on buildings and machinery that are not allocated to the hay enterprise will come in. Once producers consider all costs, they will be in a much better position to determine their best strategy given the challenges they are facing today. UK also offers enterprise budget tools for cow-calf operations, which could guide producers through this process.

Production costs are likely as high as they have ever been for cow-calf operators.  For some, the best strategy may be to reduce cow numbers and decrease their dependence on stored feed. For others, it may be to add complementary enterprises like stockers to help spread overhead costs further. These possibilities go on and on. Regardless, without knowing something about the cost structure of the herd, these types of decisions are impossible to make.

The first of the year is an excellent time to begin a financial record keeping system, especially if a producer has never taken the time to set one up. Many tools are available including record books, spreadsheets, and specific computer applications, like Quicken or Quick Books.

The most important record keeping decision producers will make is just deciding to keep records. It’s difficult to manage something that we never take time to measure. Record-keeping tools are available at www.ca.uky.edu/agecon/index.php?p=29.

E-mail Tommy Yankey at tyankey@uky.edu.