NEWS for North Dakotans
Agriculture Communication, North Dakota State
University
7 Morrill Hall, Fargo, ND 58105-5665
January 15, 1998
Harlan Hughes, Extension Livestock Economist
NDSU Extension Service
[Part IV in the series: "This Is the Year to Do Your Homework Before You See Your Banker" ]
This column continues my Market Advisor series on Northern Plains beef cow herd benchmarks that ranchers across the country can use to complete production and economic evaluations of their own beef cow herds—focusing this time on benchmarks for non-feed costs grouped as livestock costs and fixed costs.
The Northern Plains benchmarks are generated from the average of all 1996 Northern Plains beef cow herds processed through North Dakota's Integrated Resource Management (IRM) herd analyzer. Overall values are presented, as well as values for the low-cost third of the herds, the middle-cost third of the herds and the high-cost third of the herds. I recommend that you compare your herd's facts to these IRM benchmarks and determine if your herd matches the low-cost, middle-cost or high-cost herd averages.
Let's first look at the nine specific benchmarks that make up the livestock cost category. Veterinary and medical expenses for the Northern Plains benchmark herds averaged $16 per cow. The low-cost third of herds averaged $11 per cow while the high-cost third of herds averaged $24 per cow.
Trucking costs averaged from $1 to $3 per cow for the benchmark herds. Fuel costs for winter feeding and checking summer pastures averaged $9 per cow overall—$7 for the low-cost herds, $10 for the high-cost herds. Fuel used to raise and harvest farm-raised feeds is not included; this will be accounted for if you charge market value for your farm-raised feeds. (Be sure you don't double-count the fuel costs.)
The benchmark herds' share of total ranch utility costs averaged $6 per cow overall, ranging from $5 to $8 from the low-cost to high-cost herds.
Artificial insemination (AI) was used considerably more by the high-cost herds than by the low-cost herds. AI costs averaged $17 per cow in the high-cost herds, only $2 in low-cost herds.
Beef cow supplies and lease payments are combined into one benchmark. Supply costs are fairly straightforward, but lease payments need further clarification. Leased beef cows are handled as if the operator owned the cows, but with one additional cost—a lease payment. The lease payment consists of the dollar value of the calves and cull cows allocated to the cow owner. It is not uncommon to find a lease payment averaging over $100 per cow.
The total dollar value of supplies and leased cows averaged $20 per cow for the benchmark herds overall, $8 for low-cost herds and $35 for high-cost herds. Clearly, the high-cost third of the herds had more leased cows.
Marketing costs averaged $4 per cow for the benchmark herds, ranging from $2 for the low-cost herds to $6 for the high-cost herds.
Breeding cost benchmarks are based on bull depreciation only. Since equity capital is considered to be one of the residual claimants built into the bottom line of the beef cow herd, no interest is charged for equity capital invested in bulls. Interest paid on money borrowed to buy bulls is accounted for in another benchmark. Breeding costs for the benchmark herds averaged $12 per cow—$10 in the low-cost herds, $14 in the high-cost herds.
Hired labor and management costs averaged $8 per cow for all benchmark herds— $7 for low-cost herds, $8 for high-cost herds.
The sum of these nine cost items is called livestock costs. Livestock costs averaged $83 for all the benchmark herds—$53 per cow for the low-cost third of herds, $125 for the high-cost third. Vet and medicine costs and supply and leasing costs were 135 percent higher for the high-cost herds than for the low-cost ones.
Let's now turn to fixed costs. Fixed costs are those associated with beef cow facilities, equipment and the breeding herd. If there are other livestock on the ranch such as backgrounded calves, some of the facilities and equipment are charged off to these other livestock.
To reduce the input numbers needed, the annual fixed costs are calculated with the farm management "dirti-five" principle. "Dirti-five" stands for depreciation, insurance, taxes and interest on equity capital. Facility depreciation is set at 5 percent (20-year life), insurance at 1 percent, repairs at 1 percent and taxes set at 0 percent (based on North Dakota not having any personal property taxes). Interest on equity capital is set to zero as equity capital is again a residual claimant and is a component of the bottom line. These "dirti-five" factors total 7 percent as the annual fixed cost for beef cow facilities.
Fixed costs for equipment are based on the same "dirti-five" factors but with different percentages. Depreciation is set to 10 percent of fair market value based on a 10-year asset life. Insurance is set at 1 percent, repair cost is set at 2 percent, taxes are set at 0 percent and interest on equity capital is again set to zero. This adds up to an annual fixed cost of 13 percent for beef cow equipment.
The breeding herd's annual fixed costs for insurance were set at 1 percent of the benchmark herds' market value, with no charge made for equity capital.
Annual fixed costs of the benchmark herds averaged $37 per cow—$27 for the low-cost third and $56 for the high-cost third—which means the high-cost herds had annual fixed costs 107 percent higher than the low-cost herds.
Debt interest on the benchmark herds is based on the annual amount of all interest paid for any money borrowed for the beef cow herd, including interest on breeding herd, facilities and equipment. Debt interest for farmland and farming machinery is not included. Since many of the benchmark herds had no debts, the average interest payments are very low.
Interest payments for all benchmark herds averaged $10 per cow—$4 per cow for the low-cost herds, $22 per cow for the high-cost herds. Again, these averages are low due to fact that many of the herds had no debts.
Debt principal payments are not part of the economic costs of operating a beef cow herd. Principal payment is a cash flow cost and not an economic cost.
Total fixed costs averaged $47 per cow for the benchmark herds—$31 per cow for the low-cost third of herds, $78 per cow for the high-cost herds. Fixed costs per cow were 151 percent higher for high-cost herds than for low-cost herds.
Compare your herd's non-feed costs to these benchmarks, using the benchmarks to identify your herd's livestock-cost and fixed-cost strengths and weaknesses.
Click here for a pdf version of this graphic.
Click here for a pdf version of this graphic.
###
Source: Harlan Hughes (701) 231-7380
Editor: Barry Brissman (701) 231-7866