An interesting query

[rsomer]

Fair enough. When I look at some of the off farm investments out there they don’t excite me. Nortel, Martha Stewart, Air Canada, Enron, World Com, farming looks good by comparison. Farming is actually a very good and secure investment. During my time on the farm I have seen many supposedly good off farm investments collapse.
The farm has provided a self employment opportunity for me and my family plus a very decent rate of growth over time. Most of that growth is after tax or tax sheltered dollars. I certainly would never advise my children that farming is not the way to go. I encourage them all the time to consider farming as a very viable and worth while career.
Most of the growth in a farm comes from its ability to pay off debt. You start with debt and pay that debt off, that equals growth in equity.
Interesting comment about having a million dollars cash to invest, would I invest in a farm. If one or more of my children expressed an interest in farming I certainly would. I would be really investing in their futures and the future of my grandchildren instead of some foreign business. People are more important than money and the return I would see by investing in their futures would be worth a great deal.
Thanks for sharing your opinion.

[ALICIA]

Just say if not for the 12 year old cow, a McDonalds hamber would cost you $5.00 instead of the $2.00 or so that it costs now. So way should we give away 600lbs of hamburg for nothing, just because the cow is how 12 years old. Tell her that a 12yr old cow is like a 35yr old women.

[cowman]

Well rsomer that is an interesting way of looking at things and it sort of strikes me as being true. I'll need to consider your ideas...
One problem I have with what you said was about the equity thing? Whether I use the banks money or my own to pay for the cow, there still should be an interest charge? If I didn't buy the cow I would obviously have the money somewhere earning me interest...so therefore that lost interest needs to be charged to the cow?
I do realize you are optimistic about the North American cattle business and that is a good thing and I do hope you are right. My decision to get out of it stems from the fact I have just too many darned brands in the fire sort of thing and not because I didn't(or don't) enjoy it! This was never a short term decision caused by BSE. I find that as I get older I'm doing a lot more work and getting involved in more things. There comes a time when a person needs to take some time to enjoy the things you've accumulated?
My son coming home has been a blessing but it seems it just freed me up to go chasing more work! Sometimes I think I'm like that old duck in the Donald Duck cartoons...I just see $$$ signs and I'm off again! But somewhere along this path called life you have to change...I believe it comes to us all sooner or later?

[cowman]

Oh and one more thing rsomer: Yes I did forget breeding costs. Which I'm glad you brought up as it lets me get on my favorite hobby horse!
How much are breeding costs? And do we want to reduce this cost while hopefully still maintaining production?
If you buy a yearling bull for say $2500 and use him three years what are your costs? The first year he might not get a lot of cows bred but lets say in total he averages 25 cows a year= 75 calves?
When you sell him at 70 cents(we'll go pre-BSE!) and he weighs a ton you get $1400? So he's cost you $900 right there.
First summer- $160 (pasture,salt,etc.)
first winter- $300
second summer-$160
second winter-$300
third summer- $160 then he is sold

So he's cost you another $1080 in maitenance the $900 = $1980
75 calves = $26.40/calf
Now consider this: Take your ten best cows(however you define that! We all have some superior cows) A.I. them to a really superior bull. Say you end up with 4 bull calves. Pick two if they look like they will be good. What has it cost you? Say $35 X 10 for the semen? $350, right? But we also have another 6 calves so we need to deduct the regular breeding costs off the semen price...$150? Now in the fall the calf is worth $700 so you have $800 invested in him? Feed him through the winter but don't push him. Come spring you have a bull(with superior genetics) for say about $1000? Use him for the same three breeding seasons and then sell him. You have spent $1000 $1080=$2080 for 75 calves. You subtract the $1400 you got for him when you sold him and you arrive at your breeding cost...about $9/calf. In the meantime you've put 4 superior genetic heifers back into your herd while saving about $17 on every calf born? on a 200 cow herd that's $3400 in your pocket per year? Also you will find that these bulls are healthy and fit because they haven't been pushed and you can cull them in an instant because you don't have much money ted up in them?
If you use them only two years you can actually reduce your breeding costs to zero!

[rsomer]

Cowman: I believe it is incorrect to include a basic return to your equity as an interest charge when doing break even calculations. By definition, break even is the selling price at which you neither make or loose money. If you are calculating the selling price at which you would make a 5% ROE then by all means include those numbers but know that is what you are doing.

I agree 100% with your comments on the AI bull, and although there is still a breeding cost, using your example, enough value is added to completely offset that cost maybe make a little extra.

[cswilson]

This is an endless argument-is ranching profitable-of course it is-in our country there are lots of outfits that do nothing but run cows-their bills are paid-they have a lifestyle-so no matter how they are getting it done it is working. As for investing my equity offfarm in this so called garanteed return-I have much more confidence in my own abilities to manage my money and generate a return then I do in leaving it in a broker's hands. Lets face it were all smart enough here to make the numbers support any argument we chose to put forth.

[jmillang]

There are many ways to skin a cat, Alberta Agriculture has just posted an online web calculator that is one way to analyze this decision? It is posted at this web address http://www1.agric.gov.ab.ca/app19/calc/beef/beefcalculator.jsp

[cowman]

Somehow I can't get into that site Jeff.
The basic point wasn't that the bills aren't getting paid or that someone never had a lifestyle. I have a neighbor who bought a "ranch" and he has a very good "lifestyle". Now a days he is a full time "rancher". But the money to finance his little adventure came from the construction business!
Or for example look at most of the heritage ranches south of Calgary? These are the cream of the crop for ranching. Owned by all the oilmen...turned rancher.
A hobby and a business are two completely seperate things. Now it would be difficult to label someone like Doc Seamans (the Rio Alta) a "hobby" rancher or Greg Noval(Turner Valley ranch)? After all they have thousands and thousands of acres and probably thousands of cows? And yet that is exactly what they are...their money came out of the ground, not from a cow.

[rsomer]

Jeff: I was able to get into the site, no problem. It is interesting and worth the look. I did a spreadsheet up several years ago which was similar.

Based on a very quick look at the on line calculator I couldn't see if there a provision for death loss on the cow or the bull. The online calculator does a before tax calculation of the value of a cow when I think producers can only consider the after tax value of any investment. I liked the expense worksheet which was good for benchmarking. The on line calculator allows the producer to input returns over time but averages expenses. This might cause some distortion as pasture and forage costs may be influenced over time by producer returns from cattle production. I note the line item for capital interest. When I get a chance I will give you a call about including capital interest in a NPV calculation.

The calculator seems to offer enough flexibility for each producer to come up with information relevant for his/her operation. When seeding is over or we get a rain I look forward to comparing the value of a cow done through the online calculator or my spreadsheet. My spreadsheet suggests the value of breeding heifer tends to be approximately beef price, maybe even less, if the investment is to return a positive NPV.

[cswilson]

Thats the difference between Alta and Sask.-there's isn't much help here from the Kremlin in Regina so our ranches here were bought,built and paid for by cows as I'm sure lots were in Alta. What I'm saying is you can spin numbers till they come out your wazoo and the fact still remains is that there are people making moneey off cows. As for cost of production it can vary by literally $100's of dollars. We had evidance of that here ourselves having to calve in March again instead of May. If my bulls were to get out in June I think I'd just shoot them and still be money ahead. Ranchers calve on grass-end of story.