The new year symbolizes a great opportunity to reflect about ways to reduce costs and improve upon 2018 profitability. Ranch profitability is essentially determined by enterprise cost structure. Specifically, cow costs represent the largest difference among profit segments (i.e., high to low) in the cow-calf business. Knowing cost of production is a critical element of a ranch management plan. Yet a majority of ranches do not know their breakeven. Since understanding cost structure is key to becoming a low-cost operation and attaining profitability goals, here are a couple of considerations to help improve your bottom line.
1) Consider keeping better records:
Few ranchers enjoy record keeping, but good records support sound management in the face of rising costs, weather uncertainty and volatile markets. Choosing the best record-keeping system depends on the ranch (i.e., number of people, technology adoption, data requirements, etc.). The red book is widely used and a great place to start. A computerized system can make tax time easier and provide more access to information. Regardless, managers need a good system for tracking inventory, cattle performance (pregnancy rate, calving distribution, etc.), pasture and feed usage, and enterprise costs and revenues.
2) Consider developing an enterprise budget:
One of the best tools to identify management opportunities and evaluate cow costs is an enterprise budget. Analysis of production costs and income utilizing accurate production and financial records offers important benchmark data for decisionmaking. Identify all possible cost categories (variable and fixed). Expenses can be used to calculate a breakeven. Make assumptions about cow herd productivity measures based on historical data to estimate total production (income). Utilize ranch accounting system records and the Schedule F tax form. Numerous examples of cow-calf enterprise budgets are available via the web.
3) Consider focusing on the big three expenses:
The most profitable cow-calf producers have comparatively lower feed, depreciation and labor costs. Low-cost producers control feed costs by reducing supplemental feed (match calving with forage production) and utilizing better pasture management (rotational grazing). They also focus on cow herd depreciation, the often-ignored second-largest expense.
Depreciation expense can be reduced by decreasing replacement purchase price, increasing cow salvage value or increasing cow years of service. Improving grazing management and decreasing dependence on harvested forage (i.e., contracting services) can significantly reduce labor costs. Cutting production costs must be looked at cautiously to avoid unintended consequences. Utilizing records is the common link among each consideration. Good record keeping requires time and effort. Becoming a low-cost producer can help improve profitability.
