BeefTalk: Let the Cow Save You Money and the Bull Make You Money

By : Kris Ringwall, Beef Specialist

NDSU Extension

A recent conversation regarding economic drivers in the cow-calf enterprise left me with a lot to think about.

Let me summarize: The thoroughfare to consumers begins with the conception and birth of a calf that slowly morphs into beef. The beef industry is huge, so reflecting is good as the calf moves from the cow-calf producer to other beef enterprises throughout the beef chain.

Much like the source of a mighty river, at some point, only melting snow or raindrops were present. Mighty rivers do not become majestic if the snow does not melt or the rain does not fall. Everything starts somewhere, albeit small, and needs to grow. The cow-calf industry is no different.

Let us consider some thoughts regarding the cow-calf enterprise. Generally, the cow-calf producer has had some cushion between total expenses and market price (positive cash flow). Expenses, however, loom on the horizon as historically high, and given the relative low rates of return on investment, along with the challenges of finding adequate labor, some cattle producers are giving up the reins.

What steps can producers take to improve probability and, ultimately, return on investment? Almost anybody can buy a cow and bull, and produce a calf, but that is not the definition of a cow-calf enterprise. The operation needs to have some scale, and I usually review data that involve operations of 50 or more cows. But today, even 100 cows probably are below the threshold of “economy of scale.”

I will be the first to state loudly that the cow-calf business has many economic drivers, and “economy of scale” does not have to be one of them. Why? Cow producers like cows and enjoy the lifestyle of raising beef. But a positive cash flow will put more smiles on the producers’ faces.

That being said, how do we do that? Here are some thoughts.

First, recognize the environment one is in and quit fighting it. Building to beat Mother Nature is futile; feed the cows, breed the cows and calve the cows when the weather is right.

The weather is right when cool-season grasses are growing actively. As a consequence of calving when the grass grows, a shift occurs when the third trimester of pregnancy starts, creating the opportunity for alternative winter forage programs.

At the Dickinson Research Extension Center, we turn bulls out on Aug. 1. The third trimester starts Feb. 12, and calving starts May 7. Winter feeds costs, which are 70-plus percent of the total cow-calf costs, have the potential to decline significantly, depending on the extent that “extensive winter forage” is utilized.

Second, recognize the importance of monitoring cow size. The maintenance of excessively large cows has proven difficult to offset with increased weaning weights. The center has targeted mature cow size at 1,100 to 1,300 pounds. Although individual calf weights will be lighter, total calf weight based on calves produced per acre will be greater, resulting in more total pounds of calf.

Third, recognize the importance of good bull selection using technological advancements that improve accuracy. Generally, keep expected progeny differences (EPDs) above the 50th percentile within the desired traits and breed. As matter of practicality, become comfortable with bulls that are above the 50th percentile but may not exceed the upper 30th percentile for commercial production.

Fourth, recognize the value of breeding systems, maximizing the traits of interest in the terminal sire program while balancing appropriate traits on the maternal side. Let the cow save you money and the bull make you money.

At the center, 1,100- to 1,300-pound cows bred to bulls above the 50th percentile for growth and marbling and in the upper 10th percentile for rib-eye area have an advantage of $26 per acre of ranchland over traditional cows. The calves are summered on forage, and after a short feedlot stay, they are harvested at an average weight of 1,450 pounds, with 94 percent at the “choice” grade at an average yield grade of 2.9.

The search for the next generation of cow-calf producers has a tremendous opportunity for success, provided some simple targeted goals based on real numbers are put in place. Efficient beef production starts when the bull mates with a cow and biological efficiency mates with economic efficiency.

And just like the majestic river that starts with a few raindrops and a small stream, beef production needs to start with the cow-calf producer. Fishing in the big river may catch some big fish, but do not let fishing tales run the operation.

For new cow-calf producers, the single biggest mistake made is the tendency to work hard physically and set aside the homework. Each cow-calf enterprise is a unique business, and businesses need records. Focus, listen and learn.

May you find all your ear tags.

Depreciation – Take a close look…

Quoted from Pharro Cattle Company…

I’m not a depreciation expert either.  However, I AM a recovering ag banker and have dealt with depreciation in one form or another for 20 years.

Steve, you are correct when it comes to “tax” depreciation, which is what most farmers think of when they hear the word depreciation.  You need to have purchased a depreciable asset in order to claim the depreciation.  A raised heifer that peaked in value as a second-calf cow at, say, $3,000 and is now worth only $1200 as a butcher cow has generated no depreciation for income tax purposes.

That’s not to say she didn’t cost you that money.  As Charlie correctly points out, selling animals at or near their peak value is a great way to avoid “real world” depreciation, which is the loss of value as an asset ages or is used up.  And as he says, that number is not given a great deal of thought by many producers today.

Accrual accounting is a wonderful tool for cutting through the mess that is often caused by accountants and producers looking to limit tax liability.  It can be complicated and requires that a producer be honest with himself, which is not always the easiest thing to do.  But it can also create some good surprises.

I used accrual accounting exclusively when I was a banker.  While I learned this method at Farm Credit training school, I was surprised that very few bankers did this in the real world, because it takes digging pretty deep in a balance sheet as well as a tax return.  I soon discovered that even bank examiners didn’t have a firm grasp on the concept, which pretty much allowed me to BS my way through many exams!

If you do a good job filling out a financial statement on the same day each year (January 1st works great for those of use who are on the typical year tax cycle) and you are honest with yourself about the value of all your assets, including hay on hand, prepaid expenses, stockpiled forages, and capital assets, you can identify good and bad trends in your business long before your neighbors, no matter what the Schedule F says.

Consider this example:

Rancher A has a five year average Schedule F profit of $100,000, with tax depreciation of $50,000 a year.  He has a herd of 200 cows that he bought five years ago and annually bought enough bred heifers to replace his open cows.  He has a full line of newer machinery that he spends $50,000 a year on between payments and updates.

His “real world” depreciation is probably somewhere around $70,000 to $90,000 a year.  $50,000 of that is due to equipment depreciation, and his cow herd is dropping at a rate of $100-$200/cow/year due to aging.  To handle that depreciation, he has $150,000 in profits (Schedule F plus the depreciation), so he’s left with something in the neighborhood of $60,000 to $80,000 to feed his family and grow his business.

Rancher B has a five year average Schedule F profit of $150,000, with tax depreciation of $0 a year.  His herd of 200 cows was raised, and he has a full pipeline of heifers each year.  Rather than selling steers and heifers, he sells steers, a handful of open cows, and a large number of 4 and 5 year old bred cows.  His equipment line is smaller, older, and depreciated out.  He doesn’t even use most of it.

On an accrual basis, we can see that rancher B has no real depreciation, and actually has APPRECIATION.  His cow herd maintains its value year after year because it is not aging, and as cattle prices have increased over the last five years his average animal is worth $500/head more than it was 5 years ago.  This averages out to an gain of $100/head/year, or $20,000 for him.  This, added to his income, gives him $170,000 to feed his family and grow his business.

Driving by these two operations, one would be fairly certain Rancher A is better off.  He has nice equipment, after all.  Digging deeper, you can see that he is barely feeding his family, while Rancher B is poised to grow his business.  Granted, this is a pretty simplistic example, but I can assure you that accrual adjustments make a world of difference for many operations.