Cattle prices have trended higher since the start of the year. This is most welcome news. But the strong market raises an interesting question. How do you plan to spend the extra money?
The traditional response to higher prices has been to let our cost of production rise. If we are not careful we can raise our cost of production so that there is no more profit at the higher price than there was at the lower price. Everyone in the cow business has learned some cost-cutting measures in the last 10 years. By and large these things have worked. Don’t abandon them because prices are higher.
Let me suggest some ways we might take our profit and invest it wisely to build a more profitable and sustainable business.
My first suggestion is don’t spend the money before you have it. It is easy to anticipate a high price down the road and begin to spend the money before we even have it.
My second suggestion is to invest in your people. This will be the most valuable investment you ever make. The strength, knowledge and skill of your people will determine how successful your future will be. What this investment might look like will be as varied as the people reading this article. It might include things like marriage enrichment, improved communication skills, writing a will, developing a plan for intergenerational transfer, education about grazing or financial management, low-stress livestock handling, mechanics, welding, marketing etc. etc. the list can go on and on.
My third suggestion is to invest in improving your land. Here I am implying working with nature to strengthen the ecosystem building blocks (energy flow, water cycle, mineral cycle and succession). The end result will be more production off a set land base. Investing in your land by improving your management pays huge dividends. Let me share some numbers to demonstrate this concept.
From the Alberta Farmer Express website: Tight supplies and rising prices give cattle producers a reason to smile
Let’s start with a gross profit for a cow-calf operation. The definition for gross profit is income per cow minus the variable expenses. A variable expense is one that increases as cow numbers increase. Overhead expenses are not considered at this time. Overhead expenses are not related to the number of cows and will be a constant amount regardless of cow numbers.
Income: To keep this simple I will use a 500-lb. weaning weight and a price of $2 per pound. I suggest that you don’t get hung up on my numbers. Use your numbers and this process to arrive at your own answer.
Variable Expense: Once again use your numbers to arrive at your answer.
Gross Profit: income $900 minus variable costs $468 = $432.
We now have a base to work from. Each cow in our herd will generate a gross profit of $432. We will start with 200 cows. Our overheads per cow are $300 (this is an arbitrary number, use your own numbers). Doing the math ($432- $300 = $132) we find that each cow produces a profit of $132. We have 200 cows so our profit is $132 x 200 =$26,400. Now let’s see what happens when we improve our land so we can increase our carrying capacity.
As we increase carrying capacity our overheads remain constant at $60,000 but the overhead per cow declines. This results in more profit per cow. Increasing carrying capacity by 25 per cent increases profit per cow by $60. This is an increase of 45 per cent ($60 / $132). The profit for the ranch increases even more dramatically. This is a result of having more profit per cow plus more cows. The end result of increasing carrying capacity by 25 per cent is an increase in profit of $21,600. This is an increase of 82 per cent ($21,600 / $26,400).
Improving your land has more potential for profit than anything else you can do. It is obvious that the above example will change as gross profit and overheads change. The point is that the trend of a large increase in profit won’t change. Improved land will mean more profit now and far into the future. Two challenging questions arise from this line of thinking.
One, is there any other management change you can make that has the potential for this amount of increased profit?
Two, will you consider investing in land improvement as we enjoy better times?
Managed properly cattle are a powerful tool to improve our land. Improving the land will result in more profit in the short term and sustainability in the long term.