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Depreciation is 'hidden cost' of beef production

cattle in pasture
Beef producers should evaluate management practices and determine ways to become more efficient without sacrificing production.

With years of all-time high cattle prices in the recent past, it is logical to assume high profitability in the cow-calf sector, says Patrick Gunn, ISU Extension cow-calf specialist and Denise Schwab, ISU Extension beef program specialist.

Related: Real cow depreciation isn't the same as Uncle Sam's

But remember, profit per cow is "return per cow over cash costs."

Because many operations have reinvested in infrastructure and herd expansion in the past couple of years, fixed costs and in particular depreciation should not be overlooked. These costs include depreciation on machinery, equipment, housing and fences for the cattle operation, as well as interest, insurance and depreciation on the cattle themselves.

ISU Ag Decision Maker estimates that total fixed costs in 2014 were likely upwards of $180 per cow. Standardized performance analysis in Iowa suggests depreciation alone was upwards of $65 per cow.

As always, these figures are estimated averages, and likely not a good representation of enterprises that have invested in new machinery and added cattle to the herd. These data suggest that many expanding operations may have been significantly closer to breakeven than experiencing a windfall over the past couple of years.

As the feeder calf market came back to reality toward the end of 2015, fixed costs and depreciation are likely to play a much larger role in profitability working forward.

Unfortunately, fixed costs are just that – fixed – and they will not come off a budget until the cattle/machinery is fully depreciated. Therefore, as we work forward in a period of lesser profitability, Gunn and Schwab say it will become increasingly prudent for producers to evaluate other management practices and determine ways to become more efficient without sacrificing production.

Related: Consider tracking key performance indicators to boost cattle profits

As always, for more information on enterprise records and enterprise management options, consult with your beef extension specialist, nutritionist and herd health veterinarian, they suggest.

Source: Patrick Gunn, ISU Extension cow-calf specialist and Denise Schwab, ISU Extension beef program specialist, ISU Growing Beef Newsletter

TAGS: Livestock
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