“We do best the things we are passionate about,” said Clay Mathis of the King Ranch Institute for Ranch Management. “Accounting is not our first love in ranching, but it is that important to our business as it is in any other.”
At the Range Beef Cow Symposium in Cheyenne, Wyoming, in late November, Mathis looked into what defines good versus great management. His theory: Good managers make decisions to collectively keep costs low relative to the value of weaned calves they produce. Great managers, however, find leverage in the production system that will have long-standing benefit to the operation.
Showcasing benchmark data from the standardized performance analysis (SPA) database, Mathis looked into the key performance and financial measures affecting profit in cow-calf operations. He noted that besides 2014 and 2015, when everyone should have been making money, there are a few operations that consistently turn a profit, even in low-price years.
To find where to make change, Mathis said, “We have to find what the biggest pieces of the pie are.” He noted that labor, purchased feed and depreciation are the areas where the profitable producers are paying particular attention. He added, “We could always find about a 350-dollar difference in net income per cow between the top and the bottom quartile cow-calf operations in the data set.”
A closer look at expenses
Depreciation – As mentioned earlier, ’14 and ’15 were money-making years, but what about those that had to buy replacements during that time? Depreciation doesn’t just accumulate on equipment, but cattle as well. Mathis recounted that a bred replacement heifer brought about $2,500 in 2015. If she is depreciated over five years, and has a salvage value of $750, a producer’s depreciation on that female is $350 a year, for five years.
“I am not saying it was terrible to buy heifers during that time, you probably needed them,” Mathis said. “But that depreciation is real and it’s big. Be sure you know how much it’s really costing you to have them.”
Labor – Looking down the road, Mathis figured labor will continue to be an issue for ranchers. To get attendees thinking about how they could survive with less labor, he used this scenario: If a 1,000-cow operation has four employees with salary, benefits, housing and utilities, that equates to roughly $50,000 a year for each employee or $200,000 in total labor. But what if this operation only had three employees?
That would mean labor costs would go down $50,000 for this operation. In this scenario, if the ranch has $200 per cow in labor costs, it would reduce those costs by about $50. Less labor isn’t always good, but if producers can think about changing their system in a way where they need less labor, they improve profit, Mathis said.
“As we go into the future and have less skilled labor for the type of work we want our cowboys to be able to do, we have a challenge. Do you have fewer people that you pay more to keep on the ranch or do you continue to work in the same way that you always have? It’s a question everyone will have to answer,” he said.
Maximizing resources
To maximize profitability of the operation, Mathis encouraged producers to get to where they can calculate a unit cost of production. It’s really the only way to determine what is being optimized well, he said. Because it’s not about the most valuable calves and it’s not about the lowest cost – it’s about how a producer uses the resources on their ranch to yield greater profit by merging them together.
“Ranching is mostly a fixed-cost business. I believe successful managers understand how important it is to minimize fixed costs per unit, no different than Coca-Cola Bottling Company would be looking at ‘Hey, if we’re going to put out another bottle of Coke, we could spread fixed costs a little more.’ So it’s the same concept, we are just looking at cows as the unit of production,” Mathis said.
Let’s look at an example.
If a 100-cow operation had a total revenue of $105,000 and total expenses of $100,000 with fixed costs at 60 percent, that would mean fixed costs would be $600 per cow and variable costs would be $400 per cow. The net income per cow is $50. But what if the producer added one more cow? How much would the net income be?
Mathis explained that if 100 cows netted that operation $5,000 in income, 101 cows would net $5,650 in income. Mathis explained that since the fixed costs of the operation do not change with the number of cows, the contribution of the additional cow to net income is revenue minus variable costs, which is: $1,050 revenue - $400 variable cost = $650. When you subtract variable cost per cow from revenue per cow, you get what is called “contribution margin.”
Mathis said if producers understand their operation’s contribution margin, and the relationship between fixed costs, variable costs and revenue per cow, it would aid in better decision-making. He has found the most profitable producers have built production and marketing systems that minimize labor, feed and depreciation, and keep a watchful eye on maintaining cow numbers over which fixed costs are spread. 
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Cassidy Woolsey
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- Progressive Cattleman
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PHOTO: Clay Mathis speaks to producers at the Range Beef Cow Symposium in Cheyenne, Wyoming. Photo by Cassidy Woolsey.
