Editor’s note: This article is part two in a three-part series. In the first article in this series of three, we discussed the difference between unit cost of production (UCOP) and break-even price, and contend the two are not interchangeable.
The primary difference: Break-even price involves deducting secondary revenue from market cows and bulls from total expenses. Therefore, a ranch’s break-even price is expected to be lower than the UCOP.
There are several ways to express UCOP for a cow-calf enterprise, each with its own utility. Validity of the UCOP is dependent upon accurate inventories and cost accounting with appropriate allocations. Determining the total expenses is paramount to determining UCOPs and, once determined, the same total expenses can be divided by several inventory counts to determine that particular UCOP. Several UCOPs are explored below.
UCOP per hundredweight of weaned calf (dollars per cwt)
Here, total expenses are divided by the hundredweights of calf weaned, resulting in a cost directly comparable to the payweight price offered or received and useful as the calf marketing process commences. It is important to note the difference between payweight prices and market prices. The potential buyer will quote a market price to the seller; however, the seller typically receives a different price, known as the payweight price. This payweight price is the market price less any slide adjustments, commissions, fees and freight. If this UCOP is calculated correctly and includes all expenses, the positive difference between the payweight price and UCOP is equivalent to the financial return to ownership for this enterprise.
If weaned calves will be retained as stockers or fed cattle, expressing UCOP on a dollars-per-head basis makes sense as the calves are transferred from the cow-calf enterprise to the next segment of the beef production system. From a financial accounting standpoint, the total expenses would be transferred from the cow-calf center to the raised stocker center.
From an evaluation standpoint, dividing this total expense by either the hundredweight of weaned calves or by the total head of weaned calves will provide an analytical figure that is easier to compare to payweight price offers or per-head offers for any possible heifers that might be sold. According to the Ranch KPI database, which includes ranches of various sizes and geographic locations, average annual weaned calf cost is $1,135 per head.
UCOP per breeding female
In this case, divide the same total expense by the number of breeding females on inventory as of the first day of the fiscal year (typically Jan. 1 for most operations). Though not directly related to cow-calf enterprise revenue, tracking UCOP as a function of breeding female inventory is a practical method for monitoring enterprise efficiency. According to the Ranch KPI database, average annual female cost is $957 per cow. This compares with the UCOP per weaned calf above and is lower because not all cows wean a calf.
This expression reflects a combination of how well cows are producing calves and how well they fit the environment. While open cows have an annual maintenance cost, these costs are built into the UCOP per female as of the beginning of the fiscal year. Furthermore, the use of fed feed to fill forage nutrient voids is generally the largest variable cost for a cow-calf enterprise. Cows with larger mature size and greater milk production potential require more nutrition and incur greater costs but may not produce a concomitant increase in calf weaning weight sufficient to cover the additional maintenance cost.
UCOP per acre grazed by the enterprise
Land is typically the largest investment involved in a cow-calf enterprise and is the supporting resource from which beef is produced. For range or pasture-based production systems, stocking rate is the largest management decision affecting sustainability of the grazing enterprise. If cows are lightly stocked, fed feed cost will likely be lower while average weaning weight is heavier. Yet from a system perspective, UCOP per weaned calf may be higher while total ranch revenue and income suffer compared to when the ranch is appropriately and sustainably stocked.
Perhaps the UCOP per acre grazed by the cow-calf enterprise is the gold standard for enterprise analytics. This calculation includes acres grazed by weaned heifers, yearling heifers, bulls and the cow herd. However, most ranches do not just have cow-calf enterprises. Whether it is stocker cattle grazing pastures, sheep or simply growing replacement heifers, an accurate allocation of the grazing acres to the appropriate enterprise is necessary to achieve an accurate, repeatable UCOP per grazing acre. Allocating based on an animal unit equivalent (AUE) is a good starting point.
King Ranch Vice President and General Manager Dave DeLaney frequently reminds listeners, “Ranching is a fixed-cost business.” Similarly, the Ranch KPI database indicates that, on average, fixed costs account for about two-thirds of annual ranch expenses. Sustainable operations minimize the financial impact of fixed or overhead costs by spreading them over as many acres and production units (breeding females) as possible. Obviously, stocking rate is the connection between grazable acres and production units.
Expressing UCOP per acre grazed facilitates assessment of land use by enabling comparisons among well-suited enterprises. For example, comparison to small ruminant or other large herbivore enterprises (ex. bison) that could use the land resource as effectively is allowed. Note: The sustainable stocking rate (acres per AUE) and revenue per AUE may not be the same across enterprises and must be considered.
In each of these UCOPs, the primary objective is to generate a key indicator for management to track periodically over time. Annually calculating the UCOP provides an insight into whether management is on the path toward fulfilling the goals of ownership.
This article is part one of a three-part series. Be sure to read part one, "Bragging rights require knowing costs," and part three, "Evaluating stocker cattle cost of production and profitability."
