Yardage costs?

[farmers_son]

Oops, I made a mistake. Land rent was not included in the cow calf enterprise numbers, rather they were included with the pasture costs.

I feel I was being too critical here. However when I am hoping to encourage a son or daughter to farm with me, numbers presented as the Alberta Ag benchmarking numbers are presented make it less likely that my children will pursue an ag career. Bottomline, I guess I am saying we need to make sure we are not painting the picture worse than it really is.

[cowman]

farmers son: I don't think there were any capital interest costs included in the yardage costs the article posted? Nor for that matter any feed costs, whether pasture or feed/bedding? The fact is most of these costs were actual "yardage" costs and they mostly come right out of your pocket...except the unpaid labor portion?
Now personally I like to be paid something for going out and working in minus forty weather...especially when that old wind is blowing! But if you enjoy doing it for free then you can figure it that way?
I don't know if "capital interest" should be included in production costs? Maybe not on land, but I would suggest "capital interest costs" on the cattle, feeding equipment, facilities used to winter, should indeed be included? If you weren't feeding cattle you wouldn't need them...so definitely the cows should be paying for them? If you don't acknowledge your actual costs where they are spent...you are just deluding yourself?
I also agree that one of the most important things is the "cost of living" which can be all over the map! What one man might need to live can be a world apart from what the next guy needs? A bachelor with modest tastes can live pretty darned cheap...not so easy when you have a family who might want to live as well as the city slickers! Is it any wonder why a lot of farm kids might not think farming was so hot? They lived it! While the kids in town were living an upscale type of life how were they doing?

[farmers_son]

Cowman: In the figures you put up the $553.14 total cost included capital interest. I had put up a link to Alta. Ag benchmarking numbers for 2003 which were more detailed and I looking at those numbers.

http://www.agric.gov.ab.ca/pdf/rtw/economics/03_South_Alta_0714.pdf

Profit is an opinion and cash flow is a fact. Now to be fair, the Alta Ag figures do not use the profit word but you did, $3.66 per cow. And I think that is very important, when these numbers are presented to producers it should not be without consideration for how producers will interpret those numbers. Any typical producer is going to make the assumption that the bottom line is profit even if it is not. We have been doing these kind of surveys for the ag department for two generations and the numbers you get back would always drive you to despair. Somehow we managed to carry on and do not too badly. Obviously these benchmarking numbers give a very distorted view of reality.

In my opinion, and that it is all it is, capital interest should not be included in financial analysis which is what we are talking about with these numbers. We are trying to compare operating costs for benchmarking purposes, not financing costs for benchmarking purposes. Although capital interest is an interesting number I think it should be excluded from these calculations. It is a financing cost. You will note that capital principal is excluded. Consider this, we could have two producers making exactly the same blended financing payments only one is in the early part of the term and is paying a lot of interest, the other is nearing the end of the financing term and is starting to pay more principal. No matter which one of the two gets surveyed the financing costs is going to distort the numbers for the other person. It could be more useful if the numbers were gathered leaving out interest but including a line for debt repayment capacity so producers could then consider their own situation directly.

It is my opinion there is a bias in these provincial ag benchmarking numbers to make farming look worse than it is. Now maybe that is done with the best of intentions, to justify more government support for agriculture or to encourage producers to even further lower the per unit cost of production (produce more for less). However I see what may be unintended consequences from presenting numbers in this format such as driving people away from agriculture who are either farming now and despair of their future or as in my case children who might otherwise be encouraged to start farming with their parents may decide to choose careers in town. I would not rule out the possibility that fewer farmers is a policy direction government is taking and presenting benchmarking numbers like this directly serves that policy goal.

Regarding the yardage costs you included… unpaid labour is 31% of the total. The next two largest cost items were utilities and depreciation. Totaled these three contribute 55% of what is grouped as yardage costs. These three items are fixed costs, if you want to cut those costs in half just keep twice as many cows. Doubling your cow herd would reduce yardage from $132.81 (perhaps an addition error, looks like $133.07 when I add it) to 96.36 by keeping 600 cows. Or 6000 cows, even better. I guess if we really focused on yardage costs we could move to Argentina or Brazil where they do not have winter and we would get rid of winter feeding costs and yardage too. After a while it gets absurd.

Reducing costs will improve your financial performance in a least cost commodity business. For the most part we are doing that. At some point we are going to need to increase our actual returns per head as we approach the point where we can no longer reduce costs.

[cowman]

And without a doubt this year we have increased those returns? Last time I looked 600 lb. calves were around $1.30 or$780...an increase of $233? So now the "profit" would go from $3.66 to $236? If you add on the unpaid labor you could argue your profit would be $277? So if you own everything you might not be doing too bad.
And yes we are reducing our costs, especially feeding costs and maybe our yardage costs? Swath grazing, banked forage etc. reduce both? In fact "yardage" might be reduced more than feeding costs under those systems!
Consider this: If you were renting everything, including the cow how much of a profit would be in it? I would suggest the figures for 2003-2004 both from you and the ones I put up would be fairly accurate? Obviously those figures do not represent a sustainable operation, which is pretty well excepted? If those prices were constant why would anyone bother raising cows? Fortunately that isn't how it stays and it has turned around.
We all make decisions on how we manage our assetts. For those who hung in there and ate the loss the rewards are coming back into the market.
Quite frankly the return we get on our products are largely in someone elses hands? We can do a whole lot of marketing stratedgies that might make us some more money (or lose us more!) but with the situation we were in we were at the mercy of the market? We do however have many ways to reduce our costs including feed and yardage? If you are happy with those costs then that is fine. If not then find a way to reduce them. Costs are one thing we have some control over...we don't have that much control over the market.

[farmers_son]

I think you hit the nail on the head when you say “Quite frankly the return we get on our products are largely in someone elses hands?"

I have worked out my yardage costs in 2004 on a per head basis:

Fuel 1.5
Mach. repair 2
Building repair 0
Utilities 1
custom work 0
paid labor 0
unpaid labor 12.5
taxes/misc. 2
depreciation 0
lease payments 0
Total 19

However until you know my total farm costs you really do not know nothing about my operation. You do not know how my numbers are that much lower than the example. In fact my total farm costs would be similar to any other farm but the costs just get allocated to other enterprises because of the way I happen to winter my cows.

Rather than lowering my yardage costs I am working hard to increase them. Why? Because the critical success factor on our farm is not whether my yardage costs are $10 per head lower than someone elses but whether or not one or more of my children decide to farm with me and keep the farm going after I am gone. Part of attracting a child to farm may be making feeding the cows a little nicer by having a nice FWD John Deere tractor and loader with hay shredder, even if that costs more.

I know what you mean when you say that if we rented everything the benchmarking numbers you and I are looking at would be fairly accurate. However we need to bear in mind we do not know how the cost allocations between the various enterprises are made, just like you do not know how I came up with my yardage costs. The numbers are always presented out of context with the whole farm so although the numbers may be accurate for a particular enterprise the picture they paint is not accurate at all. The provinces benchmark farm numbers is based on a farm model that does not exist, a model where all pasture is rented and all forage is purchased.

When you say "costs are something we have control over…we do not have control over the market" I would point out that in these examples pasture and winter feeding costs are determined by a market too. And while 2005 may make our cow calf numbers look better our forage enterprise just took a beating. Can’t win for loosing. In fact we are winning but viewing a farm enterprises in isolation from the whole farm gives the impression that it is feast or famine.

I certainly do not want to leave the impression it is not important to know costs on our farm. First and foremost we should be benchmarking against ourselves. On our farm although my costs and returns are viewed on an enterprise by enterprise basis they are never considered out of context of the whole farm. My spreadsheets show all my enterprise costs and returns side by side with the whole farm totals included in the first column right of the line items. Enterprise breakdowns are shown after that. Gives a much better picture and a more optimistic picture. However when I do my costing there are no BS items like “unpaid labour” and while capital interest is not ignored it is not included as a production costs to be paid by a particular enterprise.

About capital interest. To put it in technical terms, capital debt is fungible. All that means is that debt is debt, doesn’t matter if I borrowed for land or machinery or a new house. It is still debt but it cannot be allocated to a particular enterprise just because I decided to borrow for land instead of machinery instead of cows or vice versa. At any given point I could refinance my capital loans and shift the burden of debt from cow calf to pasture or forage.

Perhaps another way of looking at it is the right hand side of every balance sheet is liability, either owed to others or myself. Although return on debt owed to others appears as interest and is a cash flow item it is not a production cost any more than net returns is a production cost. Another way of viewing net returns is the interest I receive on what the farm owes me for my equity or personal financial contribution to the farm.

I think the way the provinces present benchmarking numbers unfortunately gives a inaccurate and pessimistic image of agriculture and any benefits of that may be offset by unintended consequences of discouraging people from choosing farming as a living.

[cowman]

Farmers son: Thanks for explaining your thinking...I think I get it! You have a funny way of looking at things from my perspective but that is okay.
And perhaps you are right about the need to put a more positive spin on things if we hope to have another generation down on the farm. Despite the challenging times I do believe their is a future in agriculture, although I suspect we will be always faced with a lot of change and being able to adapt will be very important.