Profit Tip: Unit Cost of Production for a Cow-Calf Enterprise
Unit cost of production (UCOP) is a value based on the relationship between costs and units of product produced.
The relationship between the numerator (Costs) and the denominator (Units Produced) is what drives the UCOP value. If costs increase, while units produced increase at a proportionally slower pace, stay the same, or decrease, UCOP values go up. If units produced increase while costs increase at a proportionally slower rate, stay constant or decrease, UCOP values decrease.
Value of Knowing Unit Cost of Production
The value of knowing UCOP is that everything involved in production is represented in the numerator or denominator of the equation. For example, if a producer wants to buy a bull that will be used for calf production, he can estimate how the purchase will affect his UCOP in terms of cost per pound of calf produced. Knowing UCOP allows a producer to benchmark their costs against other producers who are producing a similar product. Knowing UCOP allows producers to track what is happening in the cow-calf enterprise and can be useful in evaluating management and marketing decisions.
Unit Cost of Production and Enterprise Analysis
The first step in calculating UCOP is to have production and financial records. These records do not have to be complicated, but they need to be accurate and thorough. They need to allow for the allocation of expenses to different enterprises within the operation. Many financial record keeping programs are designed to track and allocate expenses to enterprises.
In a cow-calf enterprise, the production unit is pounds of weaned calf. To accurately calculate unit cost of production, use the Standardized Performance Analysis method to calculate pounds of calf weaned per cow exposed to breeding.
Major Costs in a Cow-Calf Enterprise
There are two types of cost in a cow-calf enterprise: overhead and direct costs. Overhead costs don’t change much in relation to the number of cows in the herd. For example, if you have 300 cows and buy your neighbor’s 100 cows and lease their land, you are probably not going to hire another person, or buy another pickup, horse, and livestock trailer to care for those additional 100 cows. Overhead costs are reduced per cow as numbers grow, until the number of cows reaches a level where additional labor and equipment are added. Direct costs are costs that increase incrementally with each cow in production. Protein supplement, vaccine, salt, mineral, and tags are examples of direct costs.
For most cow-calf enterprises, the largest expense is feed. Grazed and fed feed along with supplements usually make up 40%-60% of the costs associated with cow-calf production. Controlling feed costs is a critical component of keeping production costs in check. To help track these Nebraska Extension has developed the Feed Cost Cow-Q-Lator, an Excel® spreadsheet to compare feeds on a dry matter basis according to cost per unit of crude protein and cost per pound of energy. This spreadsheet includes all costs and waste in receiving, storing, and delivering the feed to the cattle.
Cow Depreciation and/or Replacement Heifer Development
The second largest cost for cow-calf operators and one which is often overlooked is cowherd depreciation.
Depreciation expense can be addressed by reducing replacement purchase price, increasing salvage value, or increasing years of productive life. The cost of depreciation is often “hidden” in cow-calf operations because many costs associated with developing bred replacement heifers are not expenses the producer writes a check for. Enterprising replacement heifer development can bring clarity to the true costs associated with developing bred heifers.
Equipment, Buildings and Labor
Equipment, buildings and labor expenses vary greatly between cow-calf operations. These overhead expenses need to be accurately tracked and accounted for. The depreciation, interest, repairs, taxes, and insurance associated with buildings and equipment for the cowherd can be a substantial expense. Managers of consistently profitable cow-calf enterprises work hard to minimize building and equipment expense.
Labor is a cost that many cow-calf producers struggle to figure as they frequently “pay” themselves from returns after all other expenses are met. If you are wondering what you should charge the cowherd for the labor you contribute, figure in the total cost of what it would cost to hire someone to replace you. The cow-calf enterprise should be charged accurately for both hired and family member/ownership labor.
Bulls or Breeding Expense
Bulls and/or breeding expenses associated with getting heifers/cows pregnant are a significant expense for most operations. Using genetics that fit a producer’s production system and marketing program are important. Carefully analyze investment in this area and examine ways to capture greater returns per dollar invested. Nebraska Extension has developed the Breeding Costs Cal-Q-Lator, an Excel® spreadsheet that can be used to calculate natural service as well as artificial insemination costs to produce a calf.
Other Cash Costs
Other cash costs are operating expenses related to things such as veterinary supplies and care, utilities, fuel, marketing, professional development, etc. Even though this category is often a smaller percentage of total annual cow costs, it should be scrutinized to identify ways to efficiently use input expenses.
Ownership or Opportunity Costs
These are “costs” such as interest on equity invested in the cowherd. Most cow-calf producers have equity in the cowherd but don’t charge themselves interest for that capital investment. Many cow-calf producers fail to consider what should be a “fair” return on the equity they have invested in their cowherd. Charge the cows what you believe to be a fair interest rate on their value.
The Unit Cost of Production is a ratio that takes into account both product produced and input costs. Knowing this ratio allows managers to look forward, utilizing both present and projected input costs with production numbers to make informed decisions. Cow-calf producers who know UCOP numbers for their operation’s enterprises and understand the interaction between input costs and production can implement strategies to effectively manage resources to meet business and personal goals.
Producers can download a simple sample budget (PDF) to produce a weaned calf at a central Nebraska ranch in 2017. The replacement rate for this cowherd is 16%. The number of bred heifers entering the herd is equal to the number of cows culled or lost to death. All costs, including labor, depreciation, and opportunity cost on cowherd value, are included in this example. Producers who do not currently know the UCOP for their cow-calf enterprise can use this example to develop an estimate of their costs.
Aaron Berger, Extension Educator
Panhandle Research & Extension Center
University of Nebraska-Lincoln
Listen to the BeefWatch Podcast on this topic