Herd Size

[farmers_son]

How many cows does it take to break even? I have put some numbers together to hopefully show that. Some of the assumptions I made:

I assumed a commercial cow calf operation that uses bulls for rebreeding. I assumed a 15% inefficiency factor that should take into consideration open cows, death loss, calving loss.

I used the Alberta average before tax family income to determine a number for living. I assume the entire family works on the farm. Out that number the family must live, pay income taxes, utilities for their home and pay for the house, cars, trips etc. just like the people in town. If you think your living costs are less, for every $10,000 of living costs you can reduce the break even herd size by 41 head. Likewise for every $10,000 of off farm income the break even herd size can be reduced by the same number.

I assume the operation provides all the pasture and feed requirements for their cow herd from their own land base. A value is included for salt and mineral. The operation has the equipment to put up their own hay and to feed it. Values shown for fuel and gas are only the actual farm expenses, personal travel comes out of the family income.

I assume the cows drink out of springs or dugouts and no water is pumped for the cows or electricity used for waterers. A value for electricity is shown for a unheated farm shop and to plug in a truck and loader tractor in the winter.

Some costs are stepped costs, that is that act a little like fixed costs and but will change with herd size. I have attempted to split those costs evenly between the variable and fixed costs so you will notice some line items in both the variable and fixed areas.

I use the terms contribution and fixed costs. Contribution is the revenue minus variable costs. It is the amount available to pay fixed costs which are the costs the operation must pay even if there are no cows raised that year.

The costs assume no debt. However for each $10,000 of annual debt repayment capacity required the herd size must increase by 44 head. However since a portion of debt repayment must be made with after tax dollars I have assumed the debt payments were ½ principal taxed at a marginal 20% tax rate. That tax cost would require additional 4 cows.

And since debt repayment capacity could include principal payments we would not be looking at break even profit numbers, instead it would be break even cash flow with the extra cows needed to repay debt.

Anyway, have fun with the numbers. These numbers do not necessarily reflect my operation but I hope they are typical. The result was using the numbers shown it would take 481 cows to break even with no debt and no off farm income.

Variable Expenses
Salt and Minerals 25
Diesel 25
Gas 25
Depreciation and Capital Investment 25
Bulls 20
Repairs 20
Hay and Pasture Insurance 15
Grass Seed 15
Trucking $CWT 12
Veterinary Services 10
Auction Commission 10
Property Taxes 8
Ivomec Pour On 5
CattleMaster 4 VL5 5
Twine 5
Ear Tags 3
Scour Guard Vaccine One Dose 3
Checkoff 3
Implant 1
Brand Inspection 1
8 Way 1

Total Variable Costs 237

Revenue

Calf Weight 575
$CWT 1
Calf Value 546

Inefficiency Percent 0
Inefficiency Dollar Value 82
Net Revenue per Cow 464

Contribution per Cow 228

Fixed Expenses
Family Income 70,300
Depreciation and Capital Reinvestment 11,250
Property Taxes 3,600
Legal and Accounting Fees 5,000
Gas 3,750
Diesel 3,500
Fence Repairs 3,000
Farm Insurance 3,000
Office Expenses 2,000
Building Repairs 1,500
Licenses 600
Telephone 500
Electricity 500
Memberships and Subscriptions 200
Total Fixed Costs 108,700
Fixed Costs Per Cow 228

Break Even Cow Herd Size 477

Required Debt Repayment Capacity 10,000
After Tax Debt Repayment Capacity 11,000
Extra Number of Cows to Repay Debt 48

[farmers_son]

Oops... I did not update the text of my post after playing with the numbers. One place shows a herd size of 477 cows while the other shows 481 cows. It is all approximate anyway, about 475-485 cows, more if you have debt.

[PureCountry]

Wow. I thought I was on Agri-ville, but I must have clicked on a link for the Sim-Farm game. Gee, can I buy & sell properties with other players? Can I trade grassfarmer 2 Galloway cows for a Luing bull? Is that Luing bull redeemable as a Get-Out-Of-Jail Free card?

I admire your knowledge and expertise farmers_son, but I don't really see the point here. Everyone has to analyze their own numbers to come up with what it takes to break even. I guess this could be helpful for someone who does things exactly as you described in your simulated farm, and who has had their head in the sand not realising that they needed 477 cows to break even. Hope they don't read your post and call Ritchie Bros. tomorrow.

Sorry for the sarcasm, just don't see your point.

[grassfarmer]

No chance PC - besides we're all sold out of bulls already ;o)

[farmers_son]

I guess the point was to see how big of a herd you might need to break even.

There have been a lot of changes in the cattle industry lately and people seem to be wondering where we stand. I had talked with people recently who said they had 1200 cows and they felt that was not big enough to be a profitable herd. There was a discussion in another thread where it was suggested a 1,000 cows would make a profitable herd. See:

http://www.agri-ville.com/cgi-bin/forums/viewThread.cgi?1197050183

Rather than call Ritchie Bros. I think the take home message would be to increase your herd size especially if you can do it without a lot more debt. Reducing herd size would leave you without enough cows to cover your fixed costs. There still is contribution in every cow, each additional cow helps to pay those fixed costs.

If nothing else I thought it was interesting. These numbers show a little different way of looking at our operations than the typical numbers put out by provincial agriculture departments. In addition to the economics of herd size I think it also shows the effect an off farm job and debt can have on an operation.

We can get on a soapbox all we want about this industry issue or that industry issue but when the rubber hits the road we have to look after our own operation and this is the economic reality we are dealing with. Frankly, it was better than I thought it would be when I started that spreadsheet.

[rkaiser]

No real comment on your numbers farmer_son. Pretty typical of those who think that the only way to survive is to cut expenses and or get bigger. Is it okay for others to think about adding value and maybe spending more time with their families by doing so farmers_son? Or is the soap box that you are talking about the one that you and the ABP/CCA cronies keep jumping up on to prove your knowledge about sales by regulating private industry? LOL

[grassfarmer]

Again without getting into a discussion on the figures F_S has come up with surely we can see that larger numbers is not the way to go? If raising beef cattle produces such a low margin that you need 500 or 1000 cows per family to survive surely it's time to look at doing things differently? Sure there are some economic benefits of upscaling but that in itself does not guarantee profitability. I don't believe for a minute that if the margins are so low that you need to go to these huge numbers that you can afford to buy more land for the extra cattle on borrowed money, it just doesn't make sense.
A far wiser policy would be to use the land base you have to better effect. I think much of the pasture land in West central Alberta is capable of producing twice what it does at the moment with the only change being improved knowledge and management.
On the sales end if you can figure out a way to retain an extra $200 - $400 per finished steer by reclaiming a bigger share of the profit generated by that animal on its path from pasture to plate you would also be well ahead.
As an industry we have got to be smarter than accepting $20 margins and doubling numbers every time the packers decide to half our margins, that is clearly not a winning strategy.

[farmers_son]

Grassfarmer: I agree 100% with those comments.

Rkaiser: Although I am amazed that you took a thread like this and turned it into an opportunity to bash ABP, you are right to point out that adding value to our cattle is an option that needs to be explored. I think I am feeling pressured by our oilfield neighbours who appear to be doing quite well financially, therefore the focus on the off farm job. Myself, I have never worked off farm.

The traditional way to add value around here was to be a purebred breeder. But we have had three prominent purebred breeders sell out in the last three years, there is only one left close by. I am not sure raising breeding stock represents the road to riches. I do see a couple of outfits that appear to be doing well by playing it both ways, very big herds and selling large numbers of bulls. The traditional purebred breeders with the smaller intensively managed herds appear to be struggling and leaving the industry.

I saw our local Hutterite Colony had a small refrigerated enclosed trailer they pulled behind their ¾ ton. I presumed they were retailing meat of some kind to the city. I have not seen their trailer for almost a year, do not know if that means that did not work out for them. We are a long way from a major population center.

I was lying awake this morning thinking about how I could add value to our farm because frankly I do not have 475-485 cows plus I have debt so it seems like I am living on the proceeds of a few well sites plus steadily increasing operating loans. In all seriousness what I thought of was a small on-farm ethanol plant that could add value to the grain we feed on our farm. I know it could be done, in the old days they called it a moonshine still. In Saskatchewan Poundmaker feedlots has been doing that for years on a larger scale. But we as an industry, or I as an individual, need to add more value to the grain we feed our cattle, ethanol production on the farm may be a way to do it. If nothing else we could use the ethanol ourselves to offset fuel purchases.

On the subject of debt...The recent announcements of cash advances for livestock producers needs to be seen for what it is, simply more debt that is a noose around the necks of livestock producers. At some point government and our industry representatives need to clue into the fact that cattle producers cannot stand any more debt.

[rkaiser]

Did I bring up the standing on the soap box issue farmers_son? I would say that like the wise politician you are, you set the trap for this old coyote, and saw your chance once again to call me a basher, or a complainer. No farmers_son, I am an optimist, one who thinks that I am being held back by you and your organisation.

We can talk about bailout programs and all of the negatives that you like to keep reminding us of until we are blue in the face. But when it comes to dealing with a very positive move for the producers of this country - you label me a basher??????? LOL

Tomorrow night when you are lying in bed worrying, why not try to dream of new demand for your wonderful beef product, uniquely identified to the world, and now worth more money because of a change in the way that Canada deals with the beef industry.

[farmers_son]

Even if I were able to dream up a way to make our beef product worth more, I get paid for live cattle on our farm, not beef. I can dream about beef till the cows come home but when the bills need to get paid the time for dreaming has to end.

Cargill and Tyson pay me for live cattle based on the U.S. price minus a basis; not based on what they sell the beef for. I live too far from a population center to think that I can peddle beef cuts door to door myself. There was a fellow near us who tried to retail beef and I thought he did a great job, I really admired what he was trying to accomplish, but I do not think there was enough population close enough to sustain his marketing costs. His farm auction was about this time last year. So much for the $200-$400 he was value adding, the costs ate all that up and more. It is not so easy. I am not interested in having a farm auction.

I would love to sell beef but the reality is right now I sell live cattle and I have to make my operation work with live cattle. And when I came up with an idea about on farm ethanol production I was wide awake, which is how cattle producers need to be in the next few years. I need to focus on what I can do myself to improve my situation.

To that end I worked up some numbers on break evens, it is a start, and I shared those numbers here. I did take note of the comment about value adding and made a few additions to my spreadsheet just to see what could be done. The easiest and most practical way for me to add value is to add more cows. I can do that without adding any fixed costs as long as I can do it within my existing land base. That is where I really liked Grassfarmers advice to use my existing land base to better effect.

[grassfarmer]

That's what I don't understand about you f_s. You say "Cargill and Tyson pay me for live cattle based on the U.S. price minus a basis; not based on what they sell the beef for." yet you support ABP whose policy regarding the packers has always been one of appeasement. Again this year I understand two resolutions were defeated at the AGM that sought to limit packer ownership of fed cattle - why? Why will ABP not try to fight the packer control issue that is keeping our beef returns low? At the same time ABP continues to fight the idea that BSE testing for marketing purposes should be allowed. Personally I don't know if there is a market for BSE tested beef, or if there is a live test that will work on BSE opr even if that is relevant - but I would support all of these proposals if they had any chance of removing the power from the hands of the corporations who control us and giving it back to producers. I see no justifiable reason why ABP will not support these aims either.

[rkaiser]

Your post tells me that you did not have the time to read the proposal that the five industry groups are working on in a series of meetings farmers_son.

In fact ABP is there farmers_son.

Are you simply ignoring that part of the big picture of trying once again to make this BSE testing issue as small as you possibly can?

[PureCountry]

Grassfarmer's last post said it best. How can anyone argue with it?

As for your numbers f_s, I blasted away at you because they are numbers for one situation, and that always scares me because no 2 operations are the same. No one can really take your numbers and put them to use for themselves. They need to figure it out on their own.

And I disagree that your easiest method of adding value is to increase cow numbers. Would you agree that it could be easier to change herd bulls or calving dates to fit a particular value-added program already in business? All it takes is a look outside the box, and there are several groups in Alberta marketing a niche beef product. Switching a little of this or that would be much simpler than buying more cows, when you stated you already have debt. The hardest step would be swallowing your pride and accepting change. That was the hardest one for me.

Just trying to be helpful here...this time.

[smcgrath76]

Just a couple of further questions...
What happens if land is all leased (maybe own a home quarter). Most young guys I know are taking this approach. Still a cash flow concern, but a relatively low debt load requirement?
I think in the current paradigm (commodity, sell via auction market or to Cargill/Tyson), your number is actually low for the prototypical operation.
The next question is as it relates to folks who work off farm. Is it better to have more small outfits with off farm income, fewer large outfits that are employed full time on farm, or ultimately is there another way?
I do agree with the ability to increase production off the same land base, and to greatly increase forage production through some relatively simple management strategies such as MIG.

[pandiana]

I am curious, fs, how you derived the $20 for Bulls?