Managing the business: Do you know your unit cost of production?
April 4, 2011
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 plain not knowing the answer, it is only those producers who truly know the answer.
Berger held a Cow/Calf Profitability meeting in Oshkosh, Neb., recently, to teach producers how to determine if their ranching 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 told the group. “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 continued. “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. Typically, the ranches with the lowest unit cost of production are the most profitable, but he also showed an example where that wasn’t the case. In his example, the first ranch sold 450 pound calves at $1.40 per cwt to produce. The calves were sold for an average of $1.60, which was a profit of $90 per head. The second ranch had 550 calves that cost $1.25 per cwt to produce. Those calves sold for an average of $1.40, which was a profit of $82.50 per head.
“The unit cost of production is a benchmark tool, but every operation will have different tools,” Berger explained. “However, you are still competing against them. You need to determine who has the lowest cost of production, and see how they are able to produce beef cheaper.”
Berger cautioned the group about making generalities. “You need to know your actual cost of production to determine if you are making a profit,” he explained. The ranch needs to be broken down into separate enterprises – like an oil, gas, water, or wind business, the cow-calf operation, the hay operation, the stocker-feeder business, and the land business. Once a producer does that, fair market value needs to be charged for each enterprise.
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“If you have a hay business,” Berger explained, “you need to figure a cost per ton of hay delivered, and the cow-calf operation needs to be charged for the hay they use. If land could be rented out at $30 per head per month, then the land cost needs to be charged to the cattle. The object is to determine which enterprises within the operation are making money, and which aren’t. 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.”
Although most ranchers are in the business because they enjoy cattle, Berger said producers 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,” he explained. “If they lease the ranch out, they wouldn’t be feeding cattle in a blizzard, or checking calving cows at 2 a.m.”
Berger said producers with a hay business also need to determine what someone would charge to come and put up 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 explained.
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 said 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,” he said. “Producers also need to have a low overhead. Buying $150,000 tractors and $50,000 pickups are expensive when the cow has to pay for it,” he continued.
Berger urged producers to become better grass farmers. “The better you can become at growing grass, the more profitable you will become at harvesting grass effectively,” he explained.
Feeding hay is expensive. Research has shown highly profitable herds tend to feed less hay, Berger said. “We have seen highly profitable herds that are $40 per cow ranches, compared to ranches that feed a lot of hay that are $166 per cow. Some research conducted by the University of Nebraska has shown the system with the greatest feed costs, for example – fed the most hay, had the lowest returns per calf in all scenarios,” he said.
“I always hear the saying, ‘If it rusts, rots or depreciates, try to own as little of it as possible,'” Berger said.
Berger also offered producers some final thoughts. “Try to match the enterprises on the ranch to the resources you have available,” he explained. “Cow-calf operations don’t work in all areas,” he explained, as an example. “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.”
Berger said he is willing to assist ranchers with conducting a whole ranch analysis or a unit cost of production for enterprises within the ranch operation, for more information, Berger can be contacted at (308) 235-3122, or by email at email@example.com.