Bookkeeping

[cowman]

pandiana: Here's how some farmers made good money last year during the drought.Collected the crop insurance then sold the crop for greenfeed at outrageous prices. Some of them had their best year ever!!
Of course in the long run they cut their own throats as they drove a lot of cattlemen out of business. Sort of killed the goose that laid the golden egg! I don't blame them really...hey we all got to try to make a buck and Lord knows grain farming is a tough old business.
I wonder if the cow herd shrinks big time and our feeding industry basically goes bust, where is all the feed grain going to go? Maybe we'll need to dig two big pits...one to shoot the cows in and one to dump the barley in!!

[kato]

One of the best ways we have found to save money, and improve the bottom line is in wise equipment investments. Tying up all your money in depreciable assets has it's dangers.

For instance, we were shopping for a tractor a few years ago, and found a good used Deutz tractor that uses half the fuel that our old Case used, and cost the same as the down payment on a new Case. This tractor has literally paid for itself in fuel savings. I would bet any money that our cost of making hay is probably significantly less than the neighbour's is. (it uses 3 gallons of fuel an hour, and used to carry $1800.00 a year payments)

If you use the same sort of approach to all your equipment purchases, you can save a bundle. You don't need the newest and fanciest, you need the one that can pay for itself.

Check the farm auction flyers...you are more liable to find lots of big fancy new equipment than you are older, well maintained stuff. There is a reason for this...the big fancy things couldn't pay for themselves.

[rsomer]

junebug: your said "I'm sorry but there is no way that anyone can convince me they can feed their cow for nothing." I take that as a bit of a challenge. Let me try. This is a bit long but I thought it needed to be said.

Think about what you are considering as costs and you will see that your $744 is inaccurate and deceiving, my opinion. Your enterprise analysis software encourages you to think as if everything is based on market prices as if an actual cash transaction took place. But that is not reality for most of us. Most cow calf producers actually produce their own replacements and produce their own feed most years. If you purchase all your feed, replacements, cows, rent your pasture then my apologies. But the cow calf industry has evolved towards producers being self sufficient rather than going into the cash market to outsource all inputs. I think producers are more competitive and their costs are lower by doing so. I may be wrong but this how a producer who is mostly self sufficient views costs...feed being just one item, there are others.

You said that costs include death loss (cow or calf). Assuming that all my cows and calves are home raised, do I have a cost if one cow or calf dies? No. True my potential future revenues will decrease and my cost per unit of production will be higher than if the animal didn’t die but to be blunt shit happens. Unless I had to somehow incur a cost to kill the cow or calf i.e. euthanasia (my animals can die quite well on their own, thank-you) there is no cost to a single death loss. Explained another way, if I seed an acre of barley, that has a potential to yield 80 bu. per acre, and it gets hailed and only yields 50 bushels per acre, the 30 bushels I lost is not a cost, it is just lost potential revenue. There is no line item on my income statement for lost crop or lost calves.

If I keep a replacement heifer from my calf crop to go back into my herd do I have a cost? No. Assuming I could maintain cash flow for the operation while providing feed and pasture for her on my existing operation there is no cost involved. In fact my balance sheet position will slowly improve because by keeping the heifer to become a cow I am adding value to the animal. There is foregone revenue but that is what making an investment is all about.

Assuming I produce all my feed and pasture, if I reduce my winter feeding period by 30 days by extending the grazing season have I changed my costs to feed a cow? No or very little. There is a fuel cost to put up feed and spread it out but that cost is small. The cow has to eat and she doesn’t care very much if that feed comes in the form of pasture or bales. If I have no intention of selling my feed or pasture does it matter what the market price is. I don’t think so. My cows don’t care, they are smarter than us. All that matters is the feed is available.

If the worth of my cow drops from $1600 to $1000 has it cost me anything? Not if I wasn’t going to sell her anyway. The market price of a cow has gone up and down all the time since I have been farming and the value of a cow only is relevant when I need to sell that cow to market because that affects my cash flow. Before that does it really matter? Again I don’t buy cows but produce my own. It really matters when the value of my market calves drops, it affects my cash flow big time. But for the most part there is little I can do about it. Knowing my breakeven will not change the actual market conditions.

Vet fees are a cost, but if I calve out my own cow should I include a cost? No, of course not but if I were to include custom calving as a separate enterprise, which might be entirely proper even though Alta. Ag. doesn’t do that, my enterprise analysis would show this as another cost against my cows. So now instead of $744 my cow might cost me $794. If this sounds kind of dumb it is just what producers are doing when they complete their enterprise analysis. You are viewing items that are internal and integral to your cow calf operation at market costs just because an external market does exist and then believing that this is reality. Lets face it, if it really cost $744 to raise a calf then the cow calf industry would disappear virtually overnight in good times much less the situation we find ourselves in.

I have asked you what decision you intend to make based on your computer calculated cost of $744 per cow. I mentioned we have being doing enterprise analysis for some time, the rational decision every time we looked at those numbers was to quit. Being of a stubborn nature, the next rational decision would have been to lower costs per unit of production by maximizing economies of scale. This inevitably means putting all eggs in one basket and either going all hog into hay production or doubling the cow herd and purchasing all feed off farm or going entirely into grain production etc. True the present safety net subsidy programs do tend to encourage single enterprise production by smoothing out some of the cash flow bumps in the road associated with not being diversified. However I am still unwilling to change the structure of my operation and end up relying on FIDP to save my sorry hide when I can’t write all the cheques I will find that are required by having to outsource my feed and maybe pasture too at the same time as there may be drastically reduced income when a single revenue source such as calves goes into the tank.

At some point producers, or at least the ones who stay in the business, realize there is a disconnect between an enterprise analysis and the fact that they are worth more today than they were worth 10 years ago, the bills are getting paid, food is on the table and the pickup truck is still good enough to go to town in. A profit must be there even if they almost never have sold a calf for $744 or worse $794. At times of crisis such as we are in there is more wisdom in the old saying "Hang onto a cows tail and she will pull you through" than any wisdom you will find in an enterprise analysis, breakeven analysis etc.

That is how I see it. I do believe enterprise analysis has value when used as pandiana suggests comparing the profitability of raising cattle in two separate locations particularly when one producer can use his own numbers or for tweaking costs by perhaps lowing machinery costs. But that is as far as it should go. If producers actually start believing it really costs $744 or more to raise a calf then the suicide hot lines are not going to be able to handle the volume after this fall. Its not as bad as all that. Take a long term view rather than worry about making a profit this year or how much it is costing to feed that cow right now. She will look after you in the long run, no matter what your enterprise analysis says.

[countryguy]

Kato you hit the nail EXACTLY on the head.New machinery is just a money pit.The way I figured in my head one day while sitting in the grain truck is that if we were to buy one of the fanciest new combines on the market now we may as well get custom harvesters in and do nothing all fall when you factor in all the expenses associated with owning the machine!I also shake my head when I see a $120 000 tractor on farms with 50 or 60 cows.It doesn't take a rocket scientist to figure out where alot of extra profit can be made on the farm.I think one of the best investments a farm can make is a farm shop to keep the old stuff running.

[Junebug]

Cowman , I agree with your comments. And especially about the investment return.
Rsomer I'm reading your comments off line. But first of all we didnot use a software program, we created our own formulas. Even if you grow all your own feed and replacements there is a cost to that.

[cowman]

Countryguy: You hit the nail right on the head with what you said about a shop! You can save a pile and enjoy doing it! I've always believed being able to use your hands is just as important as being able to use your brain! It's not all that hard to aquire some mechanical, electrician, plumbing, welding skills.
I sometimes get a little chuckle out of some of these young fellows coming out of universities and colleges. They know everything and are going to teach us old dinosaurs how the world works! They seem to think you can do it all in front of a computer screen!
Common sense, a good work ethic, and good people skills are what makes a successful business, not a piece of paper hanging on the wall. And they don't teach those in school! You are either born with them, are taught them at home, or work like hell to get them! Whatever it takes!

[rsomer]

cowman: I agree. I would add that luck and the ability to spot an opportunity is needed in addition to common sense, good work ethic and so on.

My son is about to leave for university and he will eventually get a piece of paper to hang on the wall. Although he is not pursing an ag related degree I expect the skills he will learn there will do him well if he decides in the future to come back and farm. I strive to present him with an optimistic view of farming so that someday he might see agriculture as a viable option, and it is. Unfortunately there are fewer and fewer young fellows coming out of universities and colleges that want to farm and they are missing a great opportunity.

To be successful in any venture an person needs to develop as many skills as possible, but will likely be better at some things than others. I enjoy working in the shop but I know other people who really have no repair skills but their strengths in other areas does them well. Some skills in front of the computer screen are becoming more important all the time.

I think the number one skill that you may have to be born with is the ability to spot an opportunity. Farming is still as every bit as good an opportunity as when I started in 1972, it is just disguised behind a lot of negativism.

[pandiana]

rsomer, your comments make perfect sense for the individual farmer who is in a position to be 'independent'. This is the crux of the matter. Many who started farming in the last decade have had to build their enterprise in an environment of ever increasing cost with ever diminishing returns.

In order to raise your own feed, you must have enough land. Land has more than doubled in cost during this time in most areas in Alberta. There is no number of cows that can be raised on this land that will pay for themselves and the land payments as well, let alone the machinery required to farm it.

If you increase your production base, i.e. cows, in order to benefit from economy of scale you must purchase feed. Feed prices have doubled or tripled in the last five years. You can cut back on the number of cows but your overhead is still costing you. These costs are not influenced directly by the cattle cycle. In other words you get paid what the market dictates regardless of your increase in input costs.
In summary, for many of us, that $744.00 figure is real. Yes cutting costs is an important aspect of solvency. You can sell your tractor and buy a team. But how much can you cut and still elicit any joy in what you are doing?

[rsomer]

pandiana: Point well taken. Your comments remind me how fortunate I am to have started farming when I did and to live in an area where land is still somewhat priced in relationship to its productivity.

You mentioned "build their enterprise in an environment of ever increasing cost with ever diminishing returns." I believe it has always been this way except for a brief period after World War 2.

Yes, for some it will be $744 if they are paying out cold hard cash for feed, buying replacements etc. The next few years will be very hard.

[Junebug]

Rsomer: You did a good job of trying to convince me but I see this venture from a much different point of veiw. First I'd like to comment on what the young farmer is facing today. 29 years ago a 1/2 section of land in our area (grey wooded soil) sold for 24,000.00, ten years later it sold for 125,000.00 Last year it sold for 412,000.00. Even with all the most modern farming technics the production will not increase enough to pay for this land. The land is an investment that you hope in the end reaps financial gain.
now to reply to your remarks. Everything considered is directed to the cost of keeping the cow because she is the one producing the product that is to make the profit.
We do grow our own feed and replacements. Everytime that fuel trucks pulls up to fill the tank there's a cost. The equipment purchased (even old)Twine, parts, depreciation etc. there's a cost. If you have replacemnets you must have had a bull. He eats and more often than not when sold, he brings less than was paid.Read another thread about the fence smashing happening, There is a cost. However we have a neighbour( who has cows) who has figured out how to keep his fences well maintained at NO cost to him. He lets the 3 surrounding neighbours do all the repairs and replacements. He does not offer to help pay for some of the repairs nor does he offer to help with repairs.
Death loss: Home raised or not when they die you've loss the opportunity to make any profit from that animal. The crop scenario, The cost of putting in the crop I assume is the same if you get 30 bushel instead of 80 bushel. Again loss opportunity to make profit and it could mean the difference between having to purchase grain/feed or not.
Feed and pasture: You are very fortunate to have the option to graze for an extra 30 days if you choose. Here once it freezes, what little grass is left is done. Only rarely can we seem to have late fall grazing and this year we won't make it to the end of September, and we have had No animals or hayed about 200 acres and there is nothing there. Down sized the herd by 75% last year. normally we can put up 1200 big round bales, This year we have 360 These pastures need to be worked up once in a while and there is a cost to that.
Vet Fees: I don't know anyone who hires a vet to calve their cows, most farmer do this themselves so maybe I worded this wrong. Animal health expences: treatment for scours, pneumonia, pinkeye, footrot, ID tags, Vaccinations etc. is a cost.
I do agree that if your cow drops from 1600 to 1000 when you are not selling is like playing the stock market. It only really counts when you need to sell. However it takes a long time to build a good herd and its not easy to sell when prices are high and buy back when they've dropped. But if that cow is worth 800.00 in a year of drought or any anforeseen thing and you had to sell some (as many of us did)when she was worth 1600.00 last fall, then we did lose equity.
Basically in short term ligo, I think if you have 100,000.00 Jan1 and after you have paid all the bills, Fencing, fuel,repairs,interest,crop inputs,cost of infrastructure etc.etc.etc. and on Dec 31 you can put back in the pot 100,000.00 plus some the farm has made a profit.or After 25 years if you have built up your herd and facilities, have no bad debts, and have cash to play with ( WITH NO OUTSIDE INCOME) The farm is paving the way. The increased land value is gravy or maybe a nice bonus to your kids.
One cost that most farmers don't consider as a cost is the cost of selling through the auction mart, as the money is deducted before you get the check, therefore gone before you had it, but it is a direct cost to the producer.
I own a business and I'm fortunate to have the office in my yard in a junk shed, that I revived into an office. I did all the work and used an existing building.Does this mean there is no cost? I view this as: I had to have an office some where, which would cost. therefore the business pays the farm office space rental. True the money is just going from one account to the another but it is a cost the business would have incurred. ( And the farm needs the income).
I guess if you are getting the bills paid, have a roof over your head, food on the table, and you are happy with what you're doing thats what counts most. Good luck to all for the rest of 2003

[rsomer]

junebug: Thanks for your reply, yours and others comments are helping me work through a problem I have had for years, how to approach costs on my farm. Re land, our numbers for equivalent time frames would be $8000, $40,000, $75,000 with less productive capacity. I think land prices might have eased a bit due to BSE but none had traded since May 20 that I know of.

What we are talking about is bookkeeping. There is no right or wrong way, one could say it doesn’t matter. But it does matter. How management information like costs and profits are viewed by the decision maker will influence the decisions made. Viewing internal production such as pasture and feed at market value and thinking of them as profit centers offers advantages when comparing your operation to others as this method offers a standardized approach to costing. You will be able to view your operation in more detail. It is "need to know" information. As a result of this discussion I have dusted off my "Cowprofit$" and intend to get back to my enterprise analysis after freezeup. And yes when I do my enterprise analysis using production centers feed will appear to be a cost when it is transferred from forage and pasture to the cow-calf and backgrounding centers. I do need to know that cost, it is useful information.

But I will still stay with the larger whole farm approach to costs that I have been using because I can’t loose sight of the big picture. I will be doing my enterprise analysis two times, one way with more detail, grain, straw and aftermath, cow-calf, backgrounding, hay, pasture, (which are my farms production centers) and the other with just grain and cattle (my actual revenue centers), the last way is how I think of the operation anyway. And of course my income statement provides me with a yearly view of the overall farm as a complete whole. I guess in the end I will have three enterprise analysis, one based on production centers (showing feed/pasture as a cost), another based on revenue centers (on-farm feed won’t appear as a cost) and one based on the whole farm (the income statement).

However I view my costs and profits, I need to remember that on a farm like mine which has debt that cash flow is king. If there were no debt then I could focus on increasing profit. But until that day comes, if ever, I need to make sure cash is there for this year, next year and the year beyond. My enterprise analysis won’t tell me that. Enterprise analysis is like a little devil in your ear telling that if you just did this and if you just did that then you would make more money. But the direction the little devil leads you may have a cash flow trap around the corner.

Enjoyed all the comments. I do think that even with all the management information at our disposal now that we should not loose sight of how others before us managed their farms in difficult times. My grandfather operated this same farm (only smaller) in an era when at one time he couldn’t even afford a stamp. Now that is tight cash flow. In the next few years it is likely there will be less cash flow than there was in the last ten years. The fellow that manages his cash flow best is the one who will be still farming when the BSE thing is past us. He/she will see their profits then but not in the next few years.

For me what matters the most is that the farm survives and grows, that it doesn’t crash on my watch. That I can look back when I am old and say I did the best I could.

Thanks again to all, the discussion has been invaluable to me. Good luck.