Numbers for the cowman

[cowman]

farmers son: Actually I was putting the winter feed costs at $1/day for just the feed? And I was considering 85 cents as an unsupervised pasture rent?
Now I know $1/day might seem fairly high right now but was thinking of traditional hay prices of around 3 cents? I think purecountry quoted 32-40 lbs. of hay a day for a 1600 lb. cow so a 1400 cow would require 28-35 lb/day?
On the cow interest thing: Whether it is your own $1200 or the banks, somewhere there has to be an interest charge? Who would invest their money in anything without an interest return? No matter what someone needs to be paid $84?
Also on the feed thing: You sell your hay for $30/bale on Sept. 1st you put the money in the bank? Come March 1st, when the hay is finally all consumed, you have $31/bale...in the bank...so in reality your hay cost $31, not $30?
And finally in reality custom grazing and feeding cows might be the cheapest route, if we consider what our land costs are? If we own $1000/acre land it would be reasonable to expect a 7% return? Or $70 an acre? If you put that $1000 in an investment you would expect that kind of return? Now I'm not sure what you need to feed your cows, but around here 2.8 acres to grass, 1 acre to provide the hay, or 3.8 acres...or $266? Then add in haying costs, fertilizer, fencing, taxes, machinery upkeep etc. and probably your costs are above what I mentioned?
The only problem here is land is not worth $1000/acre but around three times that figure! Of course people argue you make that up on land appreciation and that is true, but land can also go the other way, sometimes real fast! And land appreciation should never be factored in anyway...it has nothing to do with production...just a wise(?) investment?

[cowman]

farmers son: Further thinking on this land appreciation thing:
The boy got a real sweetheart deal on 320 acres from my old uncle in late 2004. $320,000 over ten years no interest, if the uncle dies before the ten years that stops the payments! The uncle is 85.
So this is a very good deal as the land is worth a lot more on the open market?
But somehow or other that land needs to generate $32,000 a year to pay for itself? Not too easy with bush pasture!
On top of that we had to invest some money in some fence repair and a set of corrals as well as some brush control and more cows to take advantage of the added grass? I doubt this land can ever pay for itself.
But at the end of the day it is a good investment...due to land appreciation? The cow end of it is just trying to get part of the purchase price back.

[farmers_son]

You need to generate $32,000 per year to cash flow the payments and meet the financing requirements. The land does not have to generate that to be a good investment. You should think of the land as a perpetuity. If you want your farm to earn a 5% ROI then the land only needs to generate $8000 per year per quarter contribution. If the land can do that it is a good investment even ignoring appreciation in market value. If the land really could generate the $32,000 per year contribution its true value as a perpetuity assuming a 5% discount rate would be $640,000 for the half. You could think of the extra financing payments over and above what the land can generate as taking money from one pocket and putting it in another. Although you do have to have the cash resources in the first pocket to accomplish that. There are lots of good investments out there that would not cash flow their payments if financed. That is why the rich get richer.

On the interest thing. Yes we all expect a return on our investment, whether that investment is in cows or land or machinery. I would point out that agriculture is a long term investment and requires what is called patient capital. Some years you will realize that return on investment and some years you will not. Over the long term farming has not been a bad investment largely based on appreciating asset values. That may change in the coming years due to the changing dollar.

You penciled in $84 interest/return/profit per cow but then went on to say that your were loosing $109.25 per cow. In other words you lost $25.25 per cow plus the return you were hoping to realize. I notice you did not include an “interest” return on your machinery and land. However I know where you are coming from and if that works for you then go for it. I would point out that if you did not invest in that cow, even if she cannot earn the return you would like to have this year, without her you would loose the contribution she does generate to your fixed costs and the return or “interest” on the overall farm would be reduced even more. Maybe that is why the poor get poorer.

Harvard’s Michael Porter points out that a lack of profitable alternatives is what keeps people investing in endeavors that earn below average returns. For farmers investing in agriculture there would not seem to be too many other better choices, they all are questionable. Land, machinery… Cattle probably offer more hope than those two.

[cowman]

But farmers son, the $84 is not a rate of return. The bank wants their interest? Why should my pocket be any different? Think of the $1200 as borrowed money...not your own money? It is a cost.
I realize the 320 acres will never pay for itself through production in ten years even with no interest charges. Eventually it will. Appreciation and being undervalued in the first place, make it a sweet heart deal.

[farmers_son]

To me this is an interesting discussion. You obviously like playing with the numbers as much as I do. You are sort of right, kind of like you said my numbers were sort of right.

I think where our approaches are different is my numbers were calculating a break even cash flow while you were calculating profit or loss. Any enterprise must achieve two things in order to survive, profit and cash flow. You might think the two necessarily go together but that is not always so. More enterprises declare bankruptcy from insolvency or inability to cash flow their debt obligations than from actual unprofitability. Since most farms are financed with debt it is crucial that they be able to meet their cash flow obligations.

I would grant you that any investment needs to earn a return or interest on that investment. It does not matter if the money is borrowed from the bank or if you have paid with your own cash, as you point out. The terminology may be up for debate; whether we use return, interest, discount rate, cost of capital it matters little however the concept is the same. You are owed interest, if you will, on your equity contribution.

Alta. Ag used to have a publication entitled How Much to
Bid for Beef Cows. (# FS821-70). They have removed the link on their web site so I do not have access to it anymore.

There is a Cow calculator at

http://www.agric.gov.ab.ca/app19/calc/beef/beefcalculator.jsp

I could not get it to give me any reasonable results, so use with caution.