Good ranchers love caring for their cattle and land. Great ranchers keep on top of the numbers that keep it all profitable.
“When we’re talking about profitability, it’s usually some calculation. Some metric that helps us make the decision but we need to know what those are, we need to know how to utilize them. That’s why I’ve talked about unit cost of production and contribution margin as some tools that can be really helpful in a cow-calf enterprise,” says Clay Mathis, director, King Ranch Institute for Ranch Management.
Unit cost of production is, how much it costs to produce a single unit, such as a calf.
“So, we spread that across a whole cow herd, and we could even look at it as what does it cost to produce one pound of weaned calf? With that tool, we’re evaluating not only the production in terms of the total number of pounds but against the cost to produce those,” Mathis says.
The concept doesn’t change if you’re marketing finished cattle on the grid.
“What the grid would tell you is that the dollars that you’re going to get for each one of those pounds, but if you had a unit cost of production for the cattle that were going into that grid, you know exactly what you need in terms of a price from that grid, whatever bid that you would get or that grid valuation of the calves that would be sold,” Mathis explains. “You can simply do the math and determine is that profitable or not.”
Mathis suggests spreading fixed costs like depreciation, interest, taxes and repairs over more cows or enterprises, because they don’t usually change with the number of cows.
“So, think about a cow-calf enterprise and a wildlife enterprise on the same ranch. The taxes of that ranch don’t change, so some of the insurance of that ranch doesn’t change. So those fixed costs are now spread over not only more potentially more cows, but more enterprises to reduce them,” he continues.
Another metric is the “contribution margin,” or a return to variable cost that shows how much each cow contributes to profit or covering fixed costs.
“If we know how much a cow is worth in terms of revenue or can estimate that, and we know what her variable cost are since the fixed costs are all going to stay the same, we can evaluate how much can we really spend to keep that cow during a drought. And the way that we would find that number is we would take the revenue that we would expect her to generate minus her variable costs and whatever that number is, whether it’s 400 or $500, that’s how much we could spend,” Mathis says.
Big decisions may always be hard, but a few key calculations can add valuable confidence.
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