4 minute read
Message from the Treasurer
Know the math to know your beef operation’s path
As costs and prices fluctuate, figure out the breakeven point and ask vital questions about expenses
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BY CODY HENDRIX ICA Treasurer
This has been an interesting year. Despite all the challenges, it looked like there was going to be an opportunity for producers in all sectors of the beef industry to be profitable. Then we started to watch the price of feed climb, and it continues to climb today.
We have been hearing some quotes for hay at $260/ton, which leaves us feeling good if we can find hay at $225/ton. This is crazy, thinking that the same hay was $100 less a year ago.
How did we get here? A big driver of the increased price on calves has been the need for herd reduction due to drought. The increased cost of hay also was driven by the drought. Imagine, the same event that hurts us can also help us.
There is nothing we can do to change the drought we are currently in. All we can do is make decisions to help us get through it. Some of those decisions have been tough and resulted in portions of the herd being sold. The reason for this, as we know, is that we can’t afford to pay $250/ton for hay, feed that to cattle and be profitable.
In my opinion, the real question should be how much we can afford to spend on feed and still be profitable. That answer is different for every operation, but it’s one that every operation needs to know in order to manage operations now, and for years to come.
FIGURING OUT YOUR BREAK-EVEN POINT
The question I’m asking is, what is the breakeven on your cattle, at what price? In agriculture we are largely price takers, often able to sell our cattle only for what the market price is, regardless of whether the quality of our product is worth more.
Because we don’t have full control over the sale price of our product, it’s important to manage the things we do control: our cost of inputs.
We have fixed and variable costs. The fixed costs are the things that must be paid each year, regardless of what we sell. These can include debt service, rents, power/utilities, living expenses, etc. Things that drive our fixed costs are our business model, location, overhead costs, total debt levels or the technology we use. For example, if we are renting a farm, we pay that rent regardless of the crop that is produced and sold off that farm.
Variable costs are driven by the market. The prices of feed (as mentioned), chemicals, fertilizer, twine, fuel and many other supplies we need have increased this year. And we either pay the asking price, or we don’t get the product.
Following the example of renting a farm, our variable costs are the expenses necessary to get our product to market, over and above the fixed costs.
You might be asking, how do I figure out what my break-even is? It’s a simple calculation:
Fixed Costs / (sale price - variable costs) = Break-Even Point (# of head)
EXAMPLE 1
If you are a feedlot and the average sale price of your cattle is $750/head, the fixed costs of your operation are $100,000 and the variable costs are $250/head, then the formula to figure out how many head you need to feed/sell to break-even is:
$100,000 / ($750-$250) = 200
Based on the calculation, we need to feed 200 calves to break even, and after calf 201 is sold, the operation is profitable.
EXAMPLE 2
We can calculate the break-even price using a ranch that sells 200 calves per year with fixed costs of $100,000 and an additional $250/ head in variable costs as follows:
$100,000 + (200 hd x $250) = $150,000
$150,000 / 200 hd = $750
In this example, we calculate that each calf has a break-even price of $750 and must be sold for more than that to be profitable.
Doing these calculations can answer my previous question: “How much can we afford to feed a cow and keep her?”
Other questions to consider: • Where can we trim expenses to be more efficient? • How much do we have to generate to cover all expenses? • Can we afford to make a change (like an expansion)? • Does it make sense to continue as-is, or does something need to change to preserve the operation? • Is this helping us obtain our goals?
We all have different costs, both fixed and variable. Calculating the break-even on an operation can help answer questions, make management decisions easier and — most importantly — determine whether you are on the path to success.
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