In the last issue we began a discussion of managing your costs and how they can be minimized. We started by identifying many of the expenses normally incurred in a typical cattle operation. One thing that needs to be emphasized is that no two operations are the same and while there are many similar or even identical cost components from ranch to ranch, this is still a highly individualized situation. This becomes especially true when we start weighing in personal living expenses. Factoring in living expenses such as food, clothing, utilities, house-payments, etc., becomes especially important on operations that completely support the family. Taking account of what living expenses are and how much they pull from the ranch or farm can be very difficult in many cases and cannot be done without records or in one sitting. It typically requires a significant amount of homework and study. Once these costs have been quantified they need to be added into the equation as we did with the other operational costs in the last issue.
A second issue that I'd like to briefly address is that of debt and subsequent interest costs both on a personal and operational level. In the United States, personal debt, primarily in the form of credit cards and other consumer debt is at an all-time high. I regularly encourage clients to aggressively service the debt they incur and retire it as quickly as possible. Interest payments can have a severe draining effect on cash flow and can take a big bite out of profits. In many cases it helps to regularly evaluate your debt structure, reviewing interest rates as well as the cost of the interest and how this is effecting your monthly expenses. In certain cases it is useful to restructure this debt and refinance certain items if it can result in a cost savings and can be done without incurring additional debt.
Suggestions for Reducing Expenses
As discussed in the last issue we need to take some time to review ways we can minimize production expenses on the ranch. By first listing out and evaluating these costs we can methodically break each of these apart and take steps to better utilize resources. In many cases we may have already addressed some of this in past issues but I felt it would be useful to look at this in a step-wise, methodical manner.
When evaluating production costs and how they can be minimized it works well to first categorize the costs and list them from the greatest to the least. In most cases you can effect the greatest change in those areas which have the greatest cost, i.e. forage production, feeding and supplementation, labor, etc. Since these are also variable costs we ought to examine what causes some of the variability:
1) Markets -- commodities such as fertilizer and feed are effected by supply and demand, world market (governmental export/import policy), environmental conditions resulting in reduced or increased production, etc.
2) Changing practices -- as we learn more about how to manage a given operation, what is effective and what's not, emerging research illustrating useful production practices, etc. we find a greater or reduced demand for certain items.
3) Sporadic need -- we do not necessarily require all inputs at all times. For instance, certain types and levels of supplementation may be required only during the winter months, during drought periods, etc. Fertilization, likewise is not required at the same levels at all times. Pesticides such as herbicides, insecticides, etc. can vary depending on a number of conditions. For instance, in much of the southern United States in 1998, because of climatic conditions, Army worms were exceptionally bad in certain areas in late summer and early fall. This caught many producers and even chemical companies off-guard. Numerous producers spent thousands of unplanned dollars in order to attempt to control these pests only to have them come back again and again.
Probably the single most important financial tool a producer can use is basic budgeting. By looking back at how dollars have been spent historically and planning how they will be spent in the future and much more structured approach can be taken with these costs. Lets evaluate some typical production expenses and how they can be reduced.
1) Forage Production Expenses
Since most cattle operations (with the exception of feedyards) rely on the production of forage to maintain the herd, this can be one of the greatest expenses normally incurred. Depending on the part of the country where you are located different levels of harvested, stored forages may be required to provide for the cow's nutritional needs. Here is also where we can have a significant effect on supplementation costs as well, since production of high quality forages which provide acceptable levels of protein and energy along with good digestibility, can significantly reduce supplementation costs.
We can normally expect to provide growing, grazable forages through the mid to late spring, summer and early fall months while providing stored forage (i.e. hay, silage) in the late fall, winter and early spring months. We can also use winter annual varieties such as wheat, oats, rye, ryegrass, etc. at this time of the year, although it is seldom if ever advisable to only rely on this forage base through the months of the year when more severe weather is common.
If production of perennial forages is the norm on your facility, your main expenses can include fertilization, herbicide application, harvesting and storage costs. By utilizing winter (and summer) annuals you also must include cost of seed, land preparation and planting expenses.
A. Fertilizer -- like feeds and feed ingredients, fertilizers are a commodity that is used in large volumes. In most areas a number of fertilizer dealers are available to provide this product for you. Several factors should be considered prior to making fertilizer purchases in a given year.
1) What are the true fertilization needs? The single best tool that can be used to reduce fertilizer costs or insure you are buying the right thing is soil testing. Pastures and hay fields should be tested early in the year prior to initial fertilizer applications so you can determine what is needed and so you do not under or over fertilize. Plan your soil testing so you have several weeks between receiving your results and the first application. This gives you time to plan and to locate a supplier or suppliers that can best meet your needs.
2) Talk to several fertilizer suppliers. Determine what their capabilities are. Can they custom blend the fertilizer to your specific needs or do they simply carry a few stock products. In most situations your fertilization requirement for a given field will not match a given fertilizer carried by a local supplier. This is why it is useful to work with someone who can custom blend several different fertilizers to more precisely match the rations needed. In many cases they can also blend in other nutrients aside from the Nitrogen, Phosphorus and Potassium (NPK) normally called for such as Sulfur, Magnesium, Zinc, Copper, etc. to truly fine-tune your fertilization program. You may also need to take steps to correct soil pH levels by the application of lime (calcium) to the soil. Acidity or alkalinity of the soil can have a great effect on plant absorption of nutrients so keeping the pH in the appropriate range is very important.
3) Bid out fertilizer needs. In other words, once you have gotten your test results back, know what you need and know who are your possible suppliers, add up what your fertilizer requirements may be over the next six months. Once you have this put together get with each of the potential suppliers and have them bid on this product or products in the volume you need and over the time period you are interested in. Assuming all their capabilities are the same in terms of application if needed, this gives you the opportunity to accept the lowest bid. Remember, however, that it is important to insure that you are comparing “apples and apples” so they need to disclose what forms of fertilizer they would use, what the application charge is per acre, etc. The more information, the better.
4) If your operation is large enough, consider buying in truckload volumes direct from the supplier. This will require being able to handle 25 tons of fertilizer at a time. In some cases it may be possible to split a load with your neighbor providing savings to you both if your programs are reasonably the same. Consider that if you are applying 200 lbs. per acre, 25 tons will provide enough fertilizer to treat 250 acres. Buying your fertilizer in this manner can save you a great deal of money per ton resulting in savings of thousands of dollars per year. Once again, you will want to do as much advanced planning as possible and bid these purchases out.
5) Contract fertilizer purchases if possible. This gives you a way to lock in at least a portion of your prices to protect you from a cost increase. Fertilizer markets are just like feed grain markets and fluctuate up and down. By contracting at least a portion (for example – 50 percent) of your needed volume you can protect yourself from a cost increase. The downside of this is that if the markets go down you will be locked into these contract prices. That's why I normally recommend only contracting a given part of this need. While the markets may go up and you'll pay more for uncontracted purchases, you still have some protection in place while allowing yourself some freedom to take advantage of declining prices as well. This is simply a method of managing risk.
B. Herbicide Costs -- Research has shown that in many cases, application of herbicide can have roughly the same effect as an application of fertilizer. By reducing or eliminating the weed load in a given pasture or hay field you reduce competition for the soil nutrients. Also, weeds, which for a reason I'll never understand, always seem to grow faster than grass. By eliminating the weeds shading effects can be eliminated to insure adequate sunlight is available to the grass. Several steps should be taken in making herbicide purchases as well.
1) Do your homework. Familiarize yourself which the types of weeds you are trying to control and determine which chemicals are the most effective against these types of weeds. Determine what the application rates are, the timing of applications, will there be a need for follow-up or reapplications for any reason.
2) If you will be making herbicide applications yourself, make sure your applicators license is current. Obviously if the herbicide is being applied by the dealer this is not an issue to contend with but with state and federal laws and regulations being what they are (you need to be familiar with these as well) a producer must have an understanding of the regulations, application methodology and restrictions and have the necessary permits. Because of current and emerging environmental legislation, producers must be sure to dot all the i's and cross all the t's to keep themselves legal and out of the firing line. This seems to be a problem that is here to stay. Your local extension office can provide you with much of this information and will probably sponsor applicator seminars which should give you the opportunity to renew or obtain your license.
3) As with fertilizer dealers and distributors, talk to several to get a feel for their insight, experience and abilities. Above all, make sure they know what they are doing, especially if they will be applying the chemical for you. This stuff tends to be too expensive for someone to waste due to lack of experience. Once again, bid these requirements out to several dealers to insure the best pricing.
C. Harvest Cost -- Whether you have forages custom harvested or if you do it yourself, several factors come into play in the decision making process that can help you keep costs down. This is especially true when having the work done by outside contractors. We'll mainly focus on custom hay baling here, although similar concepts are true for silage harvest and storage as well.
1) Familiarize yourself with who the custom harvesting individuals or groups are in your area. In most locales several individuals with be available that can perform this service for you. It may be your next-door neighbor who owns his own cutting and baling equipment. Visit with these folks in advance and determine who can do what. Find out what type of equipment they have and what size of “package” they put hay into. Determine what the typical size and more importantly the weight of the bales they produce with their equipment. Examine what kind of job they do when cutting. Do they cut at an appropriate height and cleanly and evenly across the field or do the leave a lot standing? Do they do a good job raking and baling, getting as much cut forage picked up as possible and put into densely packed, uniformly shaped rolls? Baling hay is not simply driving a tractor around, following a windrow. Even with the advanced technology found in many of the new balers, the operator still has to know what he/she is doing. Get references and talk to them. Is it obvious that they are conscientious and consistently do a good job. Finally, what do they charge and what is included? Does the cost include cutting, raking, baling and stacking or only part of these. Look at this based on what the normal weight of the bale they produce is and calculate what this will result in terms of cost per ton. A baler with a good reputation who produces a good heavy bale at the best cost per ton of hay is the ticket.
D. Follow-up Practices -- Once the harvesting process has taken place, take steps that will help you preserve as much of the forage dry matter as possible. Obviously, your best bet is to place it in a barn. Since this is not always feasible your next best bet is to stack the hay tightly outside, preferably on a higher area where the rainfall will run away from the stack. While many different stacking configurations can be used one of the simplest seems to be a pyramid with two bales side-by-side on the bottom and one on top of these two. Bales can be stacked in this manner in rows and then covered with polyethylene sheeting to protect from excess moisture. This not only aids in repelling moisture but also in maintaining freshness and color. Ideally we'd also like to stack the ground bales on poles or pallets or tires or something to get them off the ground. When we consider that in many cases 25 to 30 percent or more of the volume of a round bale can be lost in the storage and feeding process we can see how steps to minimize these losses significantly reduce costs.
Another follow-up practice you've heard me harp on over and over again is that of forage testing. I normally recommend to test at least each cutting of hay to know what the nutrient levels are so you know how it should be fed and if or how much supplementation is needed. It shows how supplementation may need to change as you go from cutting to cutting or field to field. It will also illustrate how effective your fertilization program is, as well as the timing of harvest. I consider soil and forage testing two of the most important yet under-utilized practices in cattle production. Without a doubt, these two management tools can save more money than virtually anything else that can be done.
We've started evaluating how we can cut costs and produce more efficiently. In the next issue, we'll continue this discussion on forage production expense management and then continue on to the other areas we've discussed.
Dr. Steve Blezinger is a nutritional and management consultant with an office in Sulphur Springs, TX. He can be reached at P.O. Box 653 Sulphur Springs, TX 75483, by phone at (903) 885-7992 or by e-mail at email@example.com