An interesting query

[cakadu]

We were with some friends the other day and they posed a question to us about cows. This is speaking from just a monetary standpoint, with no relation to current pricing.

If you paid $1,000 for a cow when she was 2 years old and she is now 12 and she has given you 11 calves that brought you about $700 each (price is for the sake of the discussion), then how is it you expect the same $1,000 when you sell this 12 year old cow? Wouldn't she depreciate or have to have age taken into account or something like that?

I found it an interesting question, what would your response be?

[jensend]

this cow at age 12 is a different commodity entering a different market. she is no longer a breeding animal but her value is determined by what she will bring in the slaughter market. that is where you sometimes have the fortunate instance of lesser depreciation. if she goes into the breeding market at age 12 her value is next to nothing and depreciation is almost complete.

[Muttley]

Don't forget to get that 700.00 calf took a lot of feed, power, medicine, transportation, etc. into both mother and calf.

[rsomer]

I don’t think depreciation or appreciation comes into play here. And I believe the beef market is influencing the value of the young breeding animal as well as the cull cow.

Pre BSE there was a good market for cull cows for beef which explains the $1000, which is a very good price for an old cow. The cost of getting the 12 year old cow into good market condition also needs to be considered.

The value of the breeding heifer would be influenced by her value for beef, which would effectively create a floor price. The breeding animal would never be expected to be worth less than what she is worth for beef.

Beyond her value as beef, the value of the heifer would be ultimately determined by the cost of keeping the animal and her calves for her 12 year life span minus the proceeds of sales of her progency. That the value of a breeding 2 year old cow is similar to her value as beef is a reflection of the high cost of keeping the cow and of feeding her calves to market weight.

In a nearly pure competitive market like commodity beef production we would not expect to see sufficient profitability to drive the price of breeding stock much above beef price.

[cowman]

Well first of all Linda that 2 year old probably costs more like $1200 or more? Now pre-BSE you could expect 40-50 cents for that cow and say she weighed 1400 lbs. so about $500-$700...so for those 11 calves(hopefully) each one cost you about $60 in depreciation on average?
Now look at the economics of that cows life. Costs of course vary and some people use some very "voodoo" economics to figure these things out, but that is okay...it is their money, right?
Per year costs:

Winter feed: $1.50/day X 200 days= $300
Pasture: $1.00/day X 165 days= $165
Salt &Min.: $ 10
Fence &corrals: $ 15
Vet costs: $ 20
Bedding: $ 20
Feeding cost(tractor etc.) $ 50
int. on $1200 at 5% $ 60
utilities: $ 10
taxes: $ 25
Int. on operating expense: $ 30
return on labor: $ 50
death loss @1% $ 12
sale expenses(including transport) $ 30
TOTAL $782

Now this assumes a 100% calf crop and every cow lasting for 12 years...which is unrealistic?
Now a 600 lb. calf would need to bring $1.30/lb. to break even. Unfortunately we haven't taught the cows to just have steers so we need to realize that the heifer calf brings 10-12 cents less? Therefore the steer needs to be pushing that $1.40 range?
Now when you sell your $1.40 steer calf, from your 100% calf crop, with all the cows living to be 12 years old...you have broken even!
Now consider what happens to these figures when we now get $150 for that 12 year old cow and 85 cents for that steer calf? A massive, massive loss?
Now people can certainly run their cows a lot cheaper than the figures I have quoted...or one hell of a lot higher,but I think that is probably about middle of the road! But I suspect the old banker would be sceptical of any business that posts the numbers of just about any cattle operation in Canada? Frankly it just is not very profitable...and in fact it never was?

[whiteface]

I'm impressed with your breakdown of the costs of keeping a cow per year. I've been bugged for years by people that I feel don't have any idea what their costs are and even more bugged by kids that were "given" their farm and equipment and cattle and brag about how much money they make at it. They don't and most of them have no idea why. I believe if cattle had to be run like any other business where we all had to buy it, run it, be accountable for losses and any profits and a whole lot less subsidies were handed out ( and yes, I realize most of the worlds farming is subsidized )the beef industry would very quickly like everything else work out a sustainable cowherd and very sharp business savy people running it. I'm not saying we're all like this, I'm saying I'd like to have a lot more of us like cowman. It's off the topic a little but I so admire people who realize their costs of production.

[cowman]

And of course I forgot the depreciation costs to the darned end price so now we have to add on the $60! So now you need close to $1.50 for that 600 pound steer calf!
Now I suspect a lot of guys are going "hey wait a minute, I don't feed my cows 200 days a year, and I sure don't pay $1/day for pasture"! But that is the going rate where I live...and if someone will pay me a $1/day then that is what it costs me?
Or they might say" Hey I swath graze and only feed 100 days a year?" Yes but...what could you get if you rented that same land out? And what does it cost you for the seed, fertilizer, seeding expense, swathing, messing around with electric fences, etc.? Or horror of horrors...what is the land worth and how is my return on that investment doing?
A farm is supposed to be a business? What kind of business gets the cruddy returns a farm does? Well, in fact no business? Lets face it, if it wasn't for the tax breaks we get, no one would be doing this(in a business sense)???

[cakadu]

That is the major problem that farming has - it is not treated as a business that should be making money. One way to know if you are making money is to know your costs of production, which many producers do not know. Those with sharp pencils are likely "getting by" through all of this, but are by no means making a high standard of living.

We have had this debate many times over the years on this forum - is farming a business? What do you call a "hobby" farmer versus a real farmer?

The face of agriculture is changing and like it or not, we should start treating it like a business. There is no saying that you can't love your job, which is why many stay farming. If you don't like what you're doing, you need to get out - it's like that for anything that we do.

Now, if only we could figure out how to get out without loosing our shirts! Right now I'm sure that is the dilemma that many are faced with. No easy solutions.

[rsomer]

In my humble opinion primary agricultural commodity production is an investment, not a business. However, as with any investment, profitability can be increased by reducing costs and making wise investment decisions.

Thanks cowman for putting up the figures on the cost of raising a calf. A few things I noticed in your figures:
You forgot breeding costs. You cannot include the cost of pasture at rental rates and also include the cost of taxes, fences. The fellow renting your pasture would not have these costs. Your costs for interest suggest this fellow was running entirely on borrowed money. Although that is possible, in reality the cow would not be able to stand this interest cost and still offer the producer a return on labour. Most of us have built some equity up in our operation.

I believe few producers know their costs because costing in a farming operation is very difficult. And although it is important to know your costs, if done improperly the information can lead the producer to incorrect conclusions, for instance that there is no money in cattle production when in fact I see a large number of producers who have done quite well, thank you very much. Cowman alluded to the fact that there is little that really can be done about costs anyway, for instance reducing the feeding period by swath grazing would not change the cost measurably.

I think cakadu’s question on why is a young breeding animal worth about the same as a old cull cow is most interesting and if thought through will lead to some important insights on the profitability of raising cattle. And even though the value of the young and old is not the exactly the same they are indeed comparable. Cowman and I have both pointed out the low profitability associated with raising cattle. But lets take that a step further. What would happen if raising cattle suddenly became profitable. Would, after a brief period of adjustment, the value of the young breeding animal increase substantially over the price of the old cull cow. I suggest it would not.

I assume that if cow calf production suddenly became profitable it would most likely because of a sudden and dramatic increase in the price of beef. I suggest that after three years when the market had time to adjust, the value of the young breeding animal would adjust to be only slightly above beef price and the cull cow would be of course valued at mature animal beef value. Now for certain the value of the cull cow and the value of the breeding heifer would increase because of higher beef prices, yet why wouldn’t the value of the young breeding animal sky rocket? Because, using cowman’s accounting all the profitability of raising cattle would disappear and be eaten up by much higher costs for pasture and forage. Cowman’s market values for pasture and winter feed might double, even though the cow is not eating anymore. The value of pasture and forage is a reflection of the profitability of cow calf production more so than the price of a breeding heifer which is a reflection of beef prices. The increased value of pasture would get translated into higher prices of land and any positive cash flow could well end up invested in more cattle and more equipment. Some would point out that the cow was still not making any money, based on typical cost accounting such as cowman illustrated for us. Although there would have been a brief period of a couple years when the cow would have shown a positive cash flow, typically this cash flow would end up reinvested in the farm. The price of land would have increased, and the value of the cow herd will have increased, there would no doubt be more cows and more equipment/depreciation. But soon the market would have adjusted so there was no profit in a cow again and the young breeding animal would be worth only slightly more than her value on the hook. The eternal hue and cry that there was no money in cattle would start up again.

So where does that leave us. I hope it leaves us with an appreciation where the returns in farming come from, i.e. increased equity values, not necessarily huge returns on each calf sold. The challenge for producers is to cash flow their investment until that increase in equity happens, which can take 20 years to 5 generations. During most of that period of time if you used the accountants costing as cowman illustrated you would be driven to despair and a farm sale.

Bottom line the value of a breeding heifer reflects the inability of the animal to cash flow her purchase cost, not the overall profitability of the larger farming investment which is substantial. It just can be difficult to see and often is in the form of increased equity values as opposed to increased cash flow. I believe I need to correct my statement in an earlier posting which suggested the cow is not profitable. In as much as owning the cow is a strategic part of the entire farming investment she is profitable. Getting out of the business, especially now during a downturn in beef prices, may not be a wise investment decision. My opinion.

And farming is not a business, it is an investment.

[whiteface]

I appreciate your opinion, rsomer, but seriously, if farming is an "investment" let me ask you this...
If you had a half a million or a million bucks to "invest" in a farm, why the hell wouldn't you just put it into a "business" that actually gets you a regular paycheck? A return on your money? Rather than handing it off to your kids or having a farm sale, giving a huge chunk away in capitol gains tax plus factoring in the years of depreciation plus accrued interest to live in near poverty in an old age home advising your kids that farming was never the way to go? Just one possible scenario to consider. And its just my opinion. None of my business what you do with your money. I just recognize that the only people farming are the ones who had it handed to them because if you had the cash to get into it, a smart "investor" would find an "investment" that actually pays dividens on a half decent regular basis. Again, my opinion.

[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.