Bookkeeping

[pandiana]

When calculating the cost of production in a cow/calf operation, does the average producers calculate the cost of feed based on the average market value even when it was owned or do you base it on actual machine and input costs. What about pasture? Do you include cost of pasture you own based on the going rates in your area? Is profitability determined by your net over input costs per enterprise?

How do your input costs this year compare with last year, and 3 years ago? D

[kato]

I calculate based on local going rates for feed. Then if the cost is high, it posts a profit to the hay enterprise on the farm. The theory is that you could have sold the feed for that.

As for pasture costs, I guess you would cost out what you could have rented the pasture for if someone else was using it.

Our inputs were through the roof for hay last winter, but that made the hay portion of the farm incredibly profitable. It all adds to the total bottom line for the farm.

Six of one, half a dozen of the other.

[jmillang]

The economic theory says that you evaluate everything at market rates for cost of production comparisons. As you move into management accounting or resource allocations you can make the management arguement that you have cows to capture the value of the pasture land (and hopefully your return from cows if greater than renting to someone else)

In ALberta, and Sask we use the profit center concept that every enterprise must pay market prices and that there is no free ride for any enterprise. This again is over the long run there will be years that the pasture enterprise will subsidize the cows, and vice versa but all need to be evaluated as a separate business to decide if you want to be in that enterprise long term.

The greatest example is for producers in my local area (West Central Alberta). It usually rains and there is lots of hay around of all qualities. so does the 40-60 cow operation by a new 30,000 baler and a 20,000 haybine or does he pay market prices for his hay? almost all the time it makes more economic sense to buy hay rather than grow it (for this area atleast)

You're on the right track with identifying the enterprises and evaluating each separately.

[pandiana]

I guess one of the reasons for asking this question is in determination of the cost associated with feeding 'cows'. If you take to some producers, it costs .60c a day (probably referring to cost of home produced silage) Others say $2.00 a day (which may be cost of winter feed). One fellow told me it didn't cost him anything as he raised his own feed. There is little consistency in calculations. As a 'enterprise' we need to know what it costs to feed a cow on an annual basis in order to determine profitability. This would include pasture and probably bedding.

[rsomer]

pandiana: Be very careful to understand the implications of determining these "costs" and the resulting profits. Evaluating everything at market rates for cost of production comparisons is great but remember when are doing this you are comparing production costs and that is all. Don’t make this comparison out to be more than it is. Your cost for feed may be slightly higher than the comparison but your larger operation may be different too and it tells you nothing about cash flow.

Enterprise analysis allows you to breakdown the years profit into profit centers based on the years market prices. The catch here is your farm is a long term investment and you must be cautious when evaluating your various enterprises on market prices which fluctuate on a much shorter term. One year your hay enterprise will look profitable, another year your cattle enterprise looks to be best. If your calculations include a machinery enterprise, which it could, that enterprise could look good or bad in a given year depending on whether you calculated your costs per acre or per bale or per ton. That doesn’t give you any useful information with which to make long term decisions.

Farms need to be low cost producers to be profitable, but the critical success factor for farmers is not necessarily to be the least cost producer or to be the most profitable producer on a given year. Rather to succeed the average farm which has debt must manage its cash flow over the long term to ensure debt repayment needs are met. Even though a "cost analysis" may show it is cheaper to buy your hay than to own the equipment, critical cash flow may lost in a year like 2002 if you had to buy feed when you could have produced it yourself. Follow with a year like 2003 and a cattle producer who had made the decision to outsource a critical input like his winter feed may find that although the hay is reasonably priced he again faces a cash flow crunch because he may not be able to sell his calves when he wants for a price that is acceptable and has no money to buy his winter feed or pay to have his cows wintered for him. It’s all about cash flow. If you find the costs of your home raised hay is unacceptable you might want to consider a $10,000 baler instead of the $30,000 model and an older haybine may work too or consider custom work to lower the cost per unit of production.

"As a 'enterprise' we need to know what it costs to feed a cow on an annual basis in order to determine profitability." Yes. But in your enthusiasm to determine your costs and your profit don’t forget to consider the risk associated with your resulting decisions. You may be better off insourcing or producing your own winter feed needs even if the cost is somewhat higher if means that the cashflow is more stable over the longer term.

My father was like the fellow you mentioned that told you it didn't cost him anything as he raised his own feed. He would have said the same. I scoffed at that for years but with time I am coming around to see the wisdom in that line of thinking. It didn’t cost anything because it didn’t take any (I know it took some) cash flow to feed the cows as the feed was produced on the farm. Could the farm have been more profitable if a detailed cost analysis had been done. Probably. But the bottom line that my father watched was how would the bills get paid. Cash flow first, only then profitability.

[pandiana]

So how would you calculate you breakeven?

[ALICIA]

I'f you got a bill payed, you broke even. And if you can buy a pop you did real good.

[rsomer]

pandiana: When you calculate breakevens, cost of production in a cow/calf operation or complete an enterprise analysis of your farm you are doing it for a reason and that reason is to gather management information for decision making purposes. So you calculate your breakeven on your cow herd this year and lo and behold your breakeven is higher than the expected selling price of your calves. So what decision do you make? A good manager doesn’t make any decision this year based on this analysis because he/she knows their investment in cattle is a long term investment and there will be years of profit and loss during the investment's term. They might however need to make some decisions based on their projected cash flow needs however because cash flow is critical, profit is there some years and some years not.

Instead of microanalysis of your various enterprises consider looking at the bigger picture over a long term rather than yearly and based on cash flow instead of individual enterprise profitability. For example consider a typical total farm operation that maintains a 25% debt to equity ratio with financing arranged for an average of 10 years. If that farm can simply meet its cash flow needs on a year to year basis it will show a profit over the long term of 2.5% return annually ignoring growth in asset values, also depreciation. But we would expect the majority of the farms assets like cattle and land to appreciate in value over the long term at conservatively say 3.5% annually after depreciation for a total annual return, most of which is after tax, of 6% return to equity compounded. At the end of 20 years a operation worth $1,000,000 today will have a net worth of over $4,000,000 just by generating sufficient cash flow to meet debt requirements. That’s your profit. Not too shabby but if you had calculated profitability, breakevens or cost of production in some of those years like this year it would drive you to despair. The key to realizing that long term return to equity is to generate net cash flow not to show a profit every year because that won’t happen. During this time of crisis we have to take a longer term view. This year may not be the best time to know the profitability of your cow calf enterprise. Instead focus on cash flow, the profit will come later. And if you have enough money for a can of pop at the end of the year its a bonus.

[TOM4CWB]

pandiana;

Watch the fair market value issue... it is a tricky one for accounting purposes.

Counting hay and pasture at your real "true" economic cost is the most efficient and reliable on a long term basis.

I say this because if everyone had sold the hay and pasture they fed cows last year, the price of hay would have been much lower, and the cost of renting pasture much less if no cows were around.

This is much like future simulation trades vs. a person actually doing the trade. Hindsight is 20-20, and we need productive information that supports our goals for our farm, our families, and our communities. Inputs at cost is supportive to this objective, and lowering COSTS is our goal, on all sides of our business. COSTS are much more controlable than increasing income, the majority of the time. Yes increasing income is very important, and marketing needs to be the first part of a farm economic plan, but getting costs accurate is key to the long term stability of our farms. Adding a "profit" cost for hay and pasture IMHO is not helpful is a marketing plan for producing a specific product.

Hope this helps!
TRJ

[rsomer]

I need to correct an error in my previous post. The $4,000,000 figure is incorrect, the correct number would be $3,200,000. My apologies.

[cakadu]

Well, there goes the can of pop! ;-)

[ALICIA]

Can't say I didn't tell you so. But I told you so.

[Junebug]

The farmer that said he can feed for nothing because he grows his own feed is also the one who will continue to feed the world at his cost. We have been calculating the cost of keeping a cow for a year for some time now and most resently came up with a figure of $744.00 per year.(This is for west Central Alberta) Went to a BSE inform meeting and the cattle ag specialist speaker there said, a four member panel calculated the cost of keeping a cow which was $765.00 per year. So we feel we have done our homework fairly well.
You must take into account everything that is related to having that cow on the place. (If you lived in town you wouldn't have the related cow expences)

[Junebug]

Beware of those who say it doesn't cost anything to feed. Do they strictly graze their animals summer and winter ?If you have to start a tractor or truck to feed your animals, then it costs you something. It also cost you something to get the bales into bales to feed. Was any fertizer used on the hay ? Alot of farmers think because they grow their own feed and do their own work it costs them next to nothing. I totally disagree.

[pandiana]

To recap what I think I hear from this thread:

For projections of profitability and goal setting you need to know the cost of feeding a cow based on fair market value.

However, in the real world, whether you are profitable at any moment in time depends on cash flow, i.e. money to pay the bills with some left for pop.
Does cash flow in this context refer only to income generated from production?