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COST CONTROL AN IMPORTANT MANAGEMENT TOOL Part 1

Dr. Steve Blezinger
Ph.D.

Managing a cattle operation, large or small requires many different skills and abilities. Basic cow sense is a good place to start. Managing and handling cattle whether they are breeding animals, stocker calves, developing heifers or bulls, etc. is made much simpler if the cattleman has a basic understanding of the animal's thought process and what they will do under given circumstances. An understanding of breeding and reproduction is important. In a cow-calf operation, commercial or purebred, little will be accomplished if the cows don't get bred and produce a calf that can be weaned and sold. A knowledge of pasture management is helpful. Forage production is the foundation upon which we build virtually all cattle operations. At least 99.99 percent of cattle will pass through some type of forage based program at some point in their life. This may exclude operations such as veal or something similar but this is a very small part of the industry. The point is, you got to know how to grow grass. Nutrition is a pretty important part of the picture and probably makes up one-third of the overall production system, shared with genetics and management. Of the recurring annual production expenses an operation incurs, the nutritional program typically makes up the majority of the total cost. When we look at each of these segments we find that costs are incurred, some large and some small, but it all adds up. A successful operation knows what it's costs are and keeps records, tracks and regularly evaluates operational and other expenses. With this information as well as receipts from sales of calves, culled cows, hay, etc. we can evaluate returns per animal, returns per acre, return on investment or assets or any number of methodologies of performance evaluation. In this issue I'd like to discuss some of the production costs incurred in a typical cattle operation and how they can be controlled and minimized.

Taking a Look at Expenses

I've been pretty amazed in the past at the extensive nature of expenses incurred by a cattle operation. What I've been more amazed at is how many producers do not track their expenses or do so in such a limited manner that they really have no idea what their production is costing them. In working with my clients, I emphasize that this is, in fact a business and that in order to determine how profitable (or not profitable) you really are, you have to keep comprehensive, accurate records. Let's take a moment to examine some of the basic expenses a typical cattle operation incurs:

a) Fixed Costs: Fixed cost are those that are typically ongoing year to year and change little if any. These can include: 1) Land Payments; 2) Property Taxes; 3) Property Rent or Leases; 4) Insurance Liability.

b) Variable Costs - Medium to Long Term: You could potentially include land costs here. Other costs may include: 1) Equipment loan payments; 2) building loan payments; 3) animal payments -- financing of breeding animals.

c) Variable Costs - Short Term or Annual: This is primarily your production costs and recur yearly in some shape, form or fashion. We probably have the greatest opportunity for control in these areas through experience, education and management. This is also the area where we have the greatest potential to enhance efficiency and reduce costs.

1. Hay

a) Fertilization, Herbicide, Insecticide

b) Land preparation

c) Harvesting and storage

2. Pasture

a) Fertilization, Herbicide, Insecticide

b) Land preparation

c) Fencing costs and maintenance

3. Feeds and Supplements

a) Protein/energy feeds and supplements

b) Mineral supplements

4. Herd Health

a) Vaccinations

b) De-worming

c) Grub/fly/lice control

d) Processing -- dehorning, castration, implanting, branding

e) Veterinarian

f) A.I. costs (semen, liquid nitrogen, etc.)

5. Labor

a) Custom Harvesting

b) Day Work -- cattle processing, movement, etc.

c) Miscellaneous

6. Equipment Costs

a) Fuel

b) Maintenance and Repairs

c) Depreciation

7. Utilities

a) Electricity

b) Water

c) Propane/Butane

d) Phone

8. Marketing

a) Transportation

b) Commissions, Check-off, etc.

c) Advertising, promotions

9. Miscellaneous

a) Insurance

These short-term or annual production expenses are our primary concern at this time. First, understand that all operations are different and that no two will have the same set-up or cost configurations. You will surely see costs that you have that are not included on this list. You may also see some listed that you have not considered before. The more you can go through and evaluate what it is costing you to run your operation the better handle you can get on your true profitability.

Establishing Some Basic Guidelines

To begin we have to establish some basics:

1) Develop a record keeping and accounting system. In other words, write your expenditures down and get and keep the receipts. This gives you an opportunity to go back and look at what you have done and develop an on-going record to estimate future expenses.

2) Plan your expense -- budget. Generally you know what is going to have to take place and when it will occur. Set up a calendar to track these. For instance you know that typically in March you will need to make initial fertilizer applications to pastures and hay fields. Plan how many acres will be fertilized and at what level. We'll address this a bit more in a minute. Subsequently you know you will try to cut hay in the summer at given intervals. Obviously, this depends on weather patterns but get some dates written down for planning purposes. Subsequently you will have refertilization as well as herbicide treatments. If you have a year like 1998, you may have army-worm treatments in late summer. At the same time you know that you will need to work or process cattle in the spring and fall. Write these estimated dates down and what you plan to do. The more you can plan your activities, looking 1, 3, 6, 12 or more months down the road, the better you can play your expenses and expenditure.

3) Comparison shop. Work on your buying techniques. What I mean by this is to first, be informed about what you need to purchase, whether it be medications or vaccines, supplements, barbed wire or tractors. The more homework you can do initially the better your decision will be. Locate at least three sources to purchase any major items such as feed or commodities, fertilizer, seed, etc. In situations such as these you need to understand a concept known as price discovery which simply means taking to several sources of a given item to determine what the current market costs are and what the actual value is. Make sure you are comparing apples and apples. For example, you may call two feed stores to get pricing on free-choice mineral. Store One may tell you they have a bagged mineral for $12.00 per bag. Store Two may have a mineral for $8.50 per bag. The second product may be more appealing initially but you have to look at the tag to determine if they are the same thing or if it is even what you need. The second may be less expensive but end up costing you much more in terms of poor performance, reduced pregnancies, etc.

4) Plan ahead. Once you have developed your calendar it may provide an opportunity to pre-purchase or contract fertilizer, feeds, commodities, etc. This is where becoming a student of the markets comes into play. Look at trends to determine if prices are expected to go up or down. If it appears that feed prices are going to increase over the next three months, you may want to look at your expected usage rate over this period of time and contract all or part of your needs. If there is a lot of uncertainty in the market over a given period you may only want to contract part of the amount you will need, perhaps only 1/3 or 1/2 of the expected volume. That way if prices go down, you can still enjoy some of the reduced costs in this downward movement. If costs go up, you have provided yourself some protection and have limited the risks.

5) Buy in volumes. Whenever possible, buy in larger volumes and take advantage of volume discounts. Do not over-buy or purchase such large amounts that the product could spoil or pass an expiration date. Also, feeds and supplements can often be purchased in bulk instead of in bagged form. This will require a way to handle the bulk product but often saves a lot of money. Remember that bagging can add $15 to $30 to the cost of a feed product. In many cases the investment in a bulk storage facility (commodity shed, feed tank, etc.) will quickly pay for itself. In some cases, if your operation is not particularly large, try to work with neighbors who are doing something similar to purchase items in larger quantities so you can both save money.

In the next issue, we'll discuss management practices that can help you reduce costs. In many cases, simply doing things a bit differently can mean the difference of hundreds if not thousands of dollars at the end of the year.

Dr. Steve Blezinger is a consulting nutritionist with an office in Sulphur Springs, Texas. He can be reached at P. O. Box 653 Sulphur Springs, TX 75483 by phone at (903) 885-7992 or by e-mail at sblez@unicomp.net.

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