Margins are Tight

[ValueChainFX]

In the agriculture business we all know that we need to know our input costs! The challenge is how do we do these calculations?

We have had some suggestions as to what we need to include in these costs when we do them, but when it comes down to the bottom line, it doesn't take a mental accounting giant to know we all need to do something to make the bottom line better!

Big companies have cubicles set up for their creative accountants that can always come up with what ever number works for them! Is the business tough ... you bet it is! So we do need to cut our costs and increase our bottom line! I don't think anyone will disagree with that! So now the question is how do we do that?

We can do what we have always done and hope the status quo will work. (Doing the same thing over and over again expecting different results is the definition of insanity!)

We can hope the government helps us out! (Hello, unless you change your name, register your business in the US or have some pal that can manipulate some program to work for you in some government program that really doesn't do much for the primary producer, forget this option!)

Sell your soul to one of the big guys or a medium size company that has learned to control their (your) market segment. (You may get enough income to make it through one or two more seasons!)

Or figure out a way that will allow you to take back your farm, cut your input costs, increase your profits, become less dependent on the vultures and build your own niche market by duplicating tight business practices. Can this be done, I think so but don't think it can be done by any one person on their own!

Keep in mind I'm a radical, I'm a dreamer, I still believe in Canadian agriculture and I know that some people are going to sit on the fence and watch, some people will want to do something and some people will do everything they can to stop you from trying!

[cowman]

I think a person needs to be very realistic when figuring out prices. If you can sell your hay for $80/ton then that is what you need to charge the cow for it. If you can rent that pasture out for $30/mo/cow then she needs to pay that too. You can get that price while sitting on your butt!
So what are your real costs?
Winter feed 35lb. hayX$.04X200 days
=$280
Straw 15
Feeding equipment 20
fuel oil repairs 20
salt and min 12
fence/corral repairs 12
breeding costs 30
vet costs 20
pasture $30X 5.5 months165
interest/depreciation
on cow(over 7 years) 131

TOTAL $705

This has not included anything like labor, electricity/phone/heat/taxes/acct. etc.
You are making money owning the pasture and the hayland(maybe?) but are you really making anything on the cow?
When you take into account open cows,dead cows/calves, dud bulls etc. it lowers the "profit" quite a bit!
Now last year when hay got up in that $150/ton range and straw at $100/ton the "profit" got downright negative!
Now $705/calf quite frankly just doesn't cut it anymore. So if you have a 500 lb.(those April/May calves) calf you need $1.41/lb. to make $705! Steers are worth 10 to 12 cents more than heifers and outweigh them by about 50 lbs. So taking a wild guess I'd say you need $1.50 for that steer calf, at the very least. And I doubt that is going to happen this year!
But I've heard lots of old boys say they grow their own feed and have their own pasture so they don't need to make much! This is a business of idiots...and I guess I have to include myself in that definition, because here I am!

[rsomer]

cowman: I won’t touch that "This is a business of idiots" line although its tempting. I’ll just say that I disagree.

Your comments on needing to cost grass and hay at market prices is the crux of the debate. I firmly believe this is an incorrect approach for farmers to use when determining costs. For me to argue against using market based costing is actually difficult because the ag specialists do it all the time and using market costs if a market exists is a well accepted method of determining costs. But it is wrong for the cow calf producer, here’s why.

You can’t sell the hay and grass and feed it to the cow too. The two are mutually exclusive which is a fancy term for not being able to have your cake and eat it too. You can do one or the other but not both. If your cows are eating all the hay and grass you can grow it is irrelevant what you could have sold it for, it has already been consumed.

If you are actually selling or buying your hay and grass figure in market prices. But if you are consuming your produce by selling calves figure in the cost of producing that calf, not a product you aren’t selling.

When I was a kid there was basically no market for grass and hay or at best only a poor local market. Since the invention of round bales and better roads with easier movement of cattle and feed, grass and hay now have a market. Has that by itself changed the cost of raising a cow? Not one bit although it has provided an alternative market for the feed and the producer now has a choice of raising cattle or raising feed. Again, the producer has to choose which market they are in, most can’t be in both.

Can you imagine a trucker whose business is hauling cattle calculating in as a cost on every load hauled what he could have made if he had instead been hauling a load of grain and then wondering why he wasn’t making any money hauling cattle. No different for a farmer who every time he sells a calf he calculates what he could have made if he was in the feed selling business as a cost against that calf.

The profit center/market based approach to costing is incorrect for most cattle producers. First, most cattle farms achieve what profitability they can by being integrated, vertically integrated if you will, that is avoiding the cash market place wherever possible by supplying as many inputs internally as they can. Although external markets do exist for the various commodities produced, those markets are commodity markets which flucuate dramatically in short term cycles. As the cow calf industry is a long term investment determining the costs and profitability of the overall investment based on short term external markets is inappropriate. Yes some years selling grass may be more profitable but the producer cannot get into and out of cows quickly enough to take advantage of that exception. As a result the value of grass and hay is irrelavent unless the producer actually has to go out into the cash market as happened to many in 2002. But that is not the norm.

In addition to the products a farm produces and consumes internally for which an external market exists, for example grass, hay, grain, calves, backgrounded calves, fat calves and even manure, the farm also provides services to the overall operation. Those services for which an external market now exists includes custom calving, custom feeding, custom fencing. Why stop at calculating what the grass could have been sold for as a cost against the poor cow. Lets keep on and charge the feed against her at custom feeding rates instead of just selling her the hay. And when I am out fencing I am making a $500 or $1000 a day custom fencing for myself. Custom calving, why when the calf hits the ground I just bill out $25 against old 116W. And then figure out why I am not making any money raising cows. After a while most should see that it just gets to be nonsense.

[grassfarmer]

rsomer: your argument makes a lot of sense to me. There was a classic case in Scotland a few years back when a big estate that had integrated livestock operations for generations changed the land management company they worked with. A young whizz kid came in and could prove on paper that the estate would pay better by basically selling everything at market price with no stock. They laid off the staff, sold the livestock, rented out pasture and now I don't think it's looking such a clever move. If the pasture market turns down you have to accept that price - they can't afford to get back into livestock. The whizz kid is long gone of course and has no responsibility for the mess he made - basing his predicted rental income on figures attainable in another part of the country. As an old shepherd once commented to me "aye ye can prove anything with a bit of paper and a pencil"

[pandiana]

I guess, in the back of my mind I am still trying to respond to cowman's post about 'why should the tax payer pay?.' If most cattle farmers are doing alright and making a living wage, they I have to ask also why should the tax payer pay? But on the other hand, if what I hear from many of these postings is correct, and what my calculator figures, these are tough time for very many farmers. But is it a disaster? Getting a handle on actual dollar figures is rather nebulous as many of you have pointed out but how else to you make an educated assessment of whether the industry is in trouble or not?

[ValueChainFX]

pandiana you are right in asking why the tax payer should pay, and are the farmers making a living, and is this a disaster, and how do we get a handle on our costs?

I do believe that the tax payer pays one way or the other. I also believe you can prove anything on paper! I see many of the guys doing their calculations on input costs and margins in a rather creative way sometimes.

All we can really do is the best we can. Knowing that big business is there at every corner trying to "DO THE BEST THEY CAN TOO"!

From all this mess, I think the producer has opened their minds up to some of the possibilities. Many remain skeptical and cautious, as they should be. But knowing that they are not going to come out of this mess and gain ground by themselves may be the only silver lining in this cloud. Now the trick is to find enough good people to make working together profitable to us all! Can we do it? I hope so.

[cowman]

Well I guess you might just be right and maybe I've been looking at it all wrong. I do know it seems like at the end of the day I have less purchasing power from my agriculture pursuits! Not necessarilly less money...it just won't buy very much anymore.
It's like you sell a big calf and get $800 and it won't even fill up the gas tank where 10 years ago it filled it up twice! Somewhere along the line "real" prices to the primary producer are slipping pretty bad.
I see so many farmers today just looking for a way out. Not just in cattle but grain farmers and hogmen. Five years ago or so a pig barn was a ticket to success...now it seems to be nothing but drudgery and doom. I don't hear any pig farmers expressing any kind of optimism. They seem to be actively looking for a way out.
I suspect in the next ten years or so we will complete the farm "revolution" where the small(and not so small)traditional farmer will be gone. Years of neglect and the rising cost/price squeeze have made our whole industry an industry of old men. And in the long run maybe that is a good thing. No longer will our children have to live a life of debt,drudgery and lack of appreciation! There are so many opportunities for a young man(or woman) today if they have a can do attitude. Maybe better not to waste their life on agriculture!

[rsomer]

The local auction sold cows last week for as low as 5 cents per pound. A year ago at this time they brought 50 cents per pound. No need for a calculator to know if that is a disaster.

I have worked out that the average cow calf operator will have a cash deficit of at least $150 per cow this year. Actual accrual losses will more than that. When we recall how many cows were sold and herds dispersed last year because producers were unwilling or unable to approach their not so friendly banker lady for $150 per head to purchase feed we can get some appreciation for the disaster that is coming down the pipe once the calves are sold and the cattle cheque doesn’t make it to weaning time next year. And this time there is no market for those cows.

""aye ye can prove anything with a bit of paper and a pencil" I think the numbers cowman put up which I see elsewhere all the time are really trying to drive home the point that cost of feeding the cow is significant and reduced feeding costs are necessary to offer any opportunities for profit. Unfortunately I think many miss that and instead take home the message that there is no money to be had raising cows. The point I was trying to prove is there is money in cows once the debt is paid off and if you hang onto the cows tail she really will pull you through. Before that happens of course money is real tight. But cattle can provide a reasonable living once debt is paid off which takes 25, 30 or more years. A better living at the end of the road than would be provided by the alternatives available for many if they left the industry which they will if all producers ever see is depressing information like in the article.

[grassfarmer]

I agree that sweeping generalisations of how bad the economics of cow/calf are will depress people unnecessarily. All too often we read the figures - rough figures, of the cost to feed a cow, take Cowmans last quoted figures. He costs hay for a cow for the winter at 35lbs/day x 4 c/lb x 200 days to come up with $280 a cow. I would argue this is where management comes in as you can feed less (and cheaper)hay for less days and come up with a very different result. Feeding hay at 35lbs will be way more than a cow needs early in the winter so that can be replaced with some straw in the ration. Allowing for some straw usage plus hay at 3 - 31/4 cents a pound it should be possible to reduce the "hay" cost from $280 to $180 or less which makes quite a difference to the bottom line. I believe that if you want to make money at this job you need to make these efficiency savings - after all this is the easiest part of the production chain for the rancher to control.

[pandiana]

grassfarmer: How big are your cows? Do you feed straw to your cows in the 2nd and 3rd trimester. How much grain and supplement to you have to feed and at what cost to balance these rations? I agree that feeding the lowest cost ration makes sense. On the other hand all things have to be considered.