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Uncover your true costs for successUncover your true costs for success

Diversification only makes sense if all parts of the business prosper

Doug Ferguson

December 18, 2020

8 Min Read
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Watch each Friday for Doug Ferguson's Market Intel blog on Beef Producer and BEEF magazine.vectorbomb-ThinkstockPhotos

A couple weeks ago I wrote about tracking enterprises within the business. I have had some questions as to what that means, and the affect it can have.

I live in Southeast Nebraska so I will use a typical operation here as an example. I will assume this operation is multigenerational and that it owns the land (both pasture and crop land), machinery, and cattle.

The land is its own enterprise. The cattle enterprise rents pasture from the land enterprise, and the farming enterprise rents crop land from it also. Most people here put up hay, so the hay enterprise rents the hay ground.

Each of the three enterprises, cattle, farming, and haying pay their own operating expenses. The cattle pay for feed, vaccines, trucking and things like that. The farming operation pays for fertilizer, chemical, seed, fuel and so on. The land enterprise pays for its own up keep like fencing, and wells.

I am not saying we need to go to the bank and open accounts for each enterprise and write checks back and forth between them (some people do). I am saying we need to set up some kind of accounting system for ourselves to track these things separately.

Since this operation is diversified in the way that it is, it raises its own feed. The cattle operation buys hay from the haying operation. If it chops silage, or feeds corn it purchases those from the farming operation. When it makes these purchases, it must buy them at market value, or cost of production depending on which one is higher. This is the only way we can accurately track our expenses.

I’ll give an example. If it costs this operation $45 to make a round bale, and the local hay market is fetching $80 a bale, our hay enterprise must sell its hay to the cattle operation for $80. If our neighbor pulls onto the yard and wanted to buy that hay we’d sell it to him at $80/bale.

When we sell it to our own cattle operation at a discount, we are only hurting ourselves. This is how that happens. The cheap price of feed gives us an unrealistically low cost against our cattle. This gives us a false bearing of what its costing to keep cattle around and we end up bidding to much when we buy cattle. It doesn’t matter if its feeder cattle or breeding stock.

When a cow calf operation weans its calves, it has just started a new stocker enterprise. Any expenses directly tied to those calves get charged against them. This includes purchasing them from the cow enterprise at that day’s market value.

As I reflect on what I have paid for calves this year one thing is clear to me, I can buy calves cheaper than most people in my area are raising them for. If you enterprise things out and charge that cow pasture rent, hay, silage, freight, machinery rent, and depreciation (her own depreciation) it’s clear that weaning the calf doesn’t cover the bill.

Managing real costs of production

Now that I’ve led you to this point, I have several points I want to make. First and most important this doesn’t mean we shouldn’t have cattle. All this means at this point is we are spending too much money to keep the cows around and we need to find a way to cheapen that up. In this case it will be easy to fix, instead of substitute feeding we need to extend the grazing period and only supplement feed them. Supplement feeding includes things like mineral or protein. Substitute feeding is giving her a rumen’s full of hay or silage every day.

The other thing it may mean is that we are doing a poor job of marketing. This too is an easy fix. This week I heard through the grapevine that one of the participants in the marketing school Wally Olson and I taught a few months ago earned his $1,000 tuition back on his first trade and he didn’t even have to market very many cattle to achieve it.

Here’s the rub on this enterprise thing. I have sat in auctions and bought cattle and the seller whose cattle I just bought begins telling me all about all the money he just made on those calves. One year the guy was telling me he made $200 per head. I thought there is no way he’s running cows that cheap, so I asked him what he charges himself for pasture rent. He laughed me off telling me he owns the pasture and so he doesn’t have to pay any rent, just the property taxes. At that point in time pasture rent was $200 for a pair. All he did the day he sold his calves was collect pasture rent. This guy also substitute feeds hay all winter. If he didn’t charge pasture rent, I’m certain he doesn’t charge himself for the hay.

Now think about that. He could make more money by renting his pasture to someone else, and by selling his hay. I do not have to tell any of you how much work it is to get a calf to market, especially if you’re one of those guys who calves in winter and has to do night checks to keep some of them from freezing to death. If you’re not tracking enterprises and accurately tracking expenses you are doing all that work for nothing, or worked all year to collect a season rent check.

I have seen a lot of articles lately about strategic planning for 2021. Not one mentioned anything about examining your enterprises. How can you plan strategically if you have no idea where you actually stand. Maybe the strategic plan means dissolving an enterprise, or maybe it means tweaking one a bit, or maybe it means you need to allocate more time and resources to the one that is making a huge return. You won’t know until you measure it.

Diversified operation?

When I was growing up, I was told to have a diversified operation. The theory was that on years the cattle made money farming probably didn't, and on the other years the opposite would hold true. This led me to dislike the word “diversified,” because used in this way it implies failure. By enterprising things out we can find ways to ensure all are making money, and instead of being diversified in that traditional sense we now have Multiple Sources of Income.

This week the female markets made a big change. Cows became undervalued to bred heifers. It was in dramatic fashion too. A second calver had as much as $600 depreciation compared to an AI bred heifer weighing over 1000 pounds! From that point on there was $75 of depreciation per year of age.

Bred heifers that weighed over 1000 pounds captured some appreciation value. There was a premium paid once again for AI bred.

If the heifers didn’t weigh 1000 pounds there was little to no appreciation value. I’m going to explain that in more detail this time. If you buy an open heifer, either at auction or from our cow herd, and run her out for a year and breed her we have expense in her. This is our value to us. Let's say we have $1,600 in her. The market establishes the actual value which is what people are willing to bid her up to. The actual value this week was under $1,500. Our value in runneing her a year is more than market value. This mean we can buy a bred one cheaper than we can make a bred one, or we will not capture any appreciation value.

The market signaled this week there are better things to do with open heifers. The value of gain for eight weight heifers was strong this week, so if you have eight weight heifers just sell them instead of breeding them.

This week feeder markets were higher. Snow storms earlier in the week in this region had some buyers going to different sales early on, which gave those local sales a boost.

Four- and eight-weights were the hot ticket with the best values of gain this week. Looking at the value of gain between the other weights in the spectrum it was a bit erratic. The market made one thing clear, it doesn’t care for cattle weighing over 900 pounds.

This week feeder bulls were 20-29 back, unweaned cattle were 6-16 back, and fleshy cattle were 7-10 back. Replacement quality heifers caught a $5 premium.

This week the Southern markets were undervalued to Plains markets. To put it in a more colorful way it was like no one wanted to buy cattle in the South, at all. The only good tickets there were load lots of heavy feeders. This did set the stage for some really attractive VOG there. It was a really good week to be a stocker operation in the South if selling these load lots and replacing with the undervalued light weight cattle.

I know some of these slang terms I use, like value of gain, cow bell curve, depreciation and so on don’t make sense to some people. This is all explained in the marketing schools. Hand in Hand Livestock has one coming up in a couple months, and Wally Olson has some coming up as well. Contact them to check on availability. Here’s my thought, warm clothing and flashlights are okay gifts, but what if you sent the person you love to one of these schools as a Christmas gift and then you can watch them blossom.

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