Beginners question about profit

[Busterz]

Look at a Schedule F from an income tax return. That will be pretty close.

 

[backhoeboogie]

I think all of this is way too complicated for a small time guy starting out. You have accounting profit, tax profit, and economic profit. These are measured differently and have different purposes, all of which are very valid. For me as a part time farmer I look at things a little differently. Basically I consider it a profit if my checking account has more money with the cows than without. For example the property taxes on my farm would be there regardless so I don't consider that part of my cost but I do use it to reduce my profit for tax purposes. Same with interest on the farm debt. The land payment I am making now was a decision I made 10 years ago, to by the neighbors farm, and has nothing to do with my cattle operation now. Since I will never sell no matter what, that purchase is irrelevant to what I do now. Now if I were going to purchase new land specifically to expand I would include the taxes and interest in my projections on if the new land would be profitable. Once I figure my profit, I compare it to my opportunity cost of renting the land out and see which is the best.

I know this way of looking at things will result in more people raising cattle than would otherwise and will increase the supply of cattle above where it would be if everyone looked at profit the same way. I could also understand if the guys doing this for a living have some resentment against those of us who may be losing money with a more traditional calculation but keep farming. But it is a free country thankfully, for now at least.

Yes indeed my property taxes are less because of cattle. I too have a full time job elsewhere. But why not let the cattle earn their way?

Why not make a profit after fully pro-rating all costs across the herd? Why is it any different for us running cattle on the side versus those who run cattle full time?

I have had years where I was in the red. It is much better when I am deep in the black. There's too much work involved to not make any money at this.

 

[SRBeef]

There's the old joke about the TV newsman interviewing the winner of a large state lottery purse:

Newsman question: "What are you going to do with your new millions?"

Farmer/Rancher answer: "Farm (or Ranch) until it's all gone"

For those of us who have NOT won the lottery, it is important to turn a profit. Enjoyment and pleasure of raising cattle is one thing but if we (most of us) want to continue to do it, sooner or later we need to turn a profit. A real, more-cash-in-the-checkbook-at-the-end-of-the-year type profit. Depreciation, opportunity costs, etc aside, when all is said and done there needs to be a plus, not a minus, in the check book.

As HS points out, one of the very big, and maybe seemingly unfair, differences between us is that some start out with a paid up or near paid up land base. Others start out with a big mortgage. These differences do have an effect on the checkbook at the end of the year! But that's the way it is. And even though costs were maybe lower years ago when some started, it was probably just as difficult to get started in then current terms.

Not all costs however need to be fully paid the first year. Any business, including the cattle business, has certain start up costs (such as handling facility, water and fences) that will last several years or decades. These can be amortized over several years but that means initial investment to be paid back. I am using 7 years as the life of several initial facility investments and use 1/7th as a cash cost each year.

Still sooner or later we need to turn a checkbook profit.

 

[HerefordSire]

There's the old joke about the TV newsman interviewing the winner of a large state lottery purse:

Newsman question: "What are you going to do with your new millions?"

Farmer/Rancher answer: "Farm (or Ranch) until it's all gone"

For those of us who have NOT won the lottery, it is important to turn a profit. Enjoyment and pleasure of raising cattle is one thing but if we (most of us) want to continue to do it, sooner or later we need to turn a profit. A real, more-cash-in-the-checkbook-at-the-end-of-the-year type profit. Depreciation, opportunity costs, etc aside, when all is said and done there needs to be a plus, not a minus, in the check book.

As HS points out, one of the very big, and maybe seemingly unfair, differences between us is that some start out with a paid up or near paid up land base. Others start out with a big mortgage. These differences do have an effect on the checkbook at the end of the year! But that's the way it is. And even though costs were maybe lower years ago when some started, it was probably just as difficult to get started in then current terms.

Land only cost $24K per year. If the average net profit is $87 per cow, I would have to have 276 cows before I bought a can of beans to eat.

 

[SRBeef]

There's the old joke about the TV newsman interviewing the winner of a large state lottery purse:

Newsman question: "What are you going to do with your new millions?"

Farmer/Rancher answer: "Farm (or Ranch) until it's all gone"

For those of us who have NOT won the lottery, it is important to turn a profit. Enjoyment and pleasure of raising cattle is one thing but if we (most of us) want to continue to do it, sooner or later we need to turn a profit. A real, more-cash-in-the-checkbook-at-the-end-of-the-year type profit. Depreciation, opportunity costs, etc aside, when all is said and done there needs to be a plus, not a minus, in the check book.

As HS points out, one of the very big, and maybe seemingly unfair, differences between us is that some start out with a paid up or near paid up land base. Others start out with a big mortgage. These differences do have an effect on the checkbook at the end of the year! But that's the way it is. And even though costs were maybe lower years ago when some started, it was probably just as difficult to get started in then current terms.

Land only cost $24K per year. If the average net profit is $87 per cow, I would have to have 276 cows before I bought a can of beans to eat.

In that situation then maybe one should look into doing something else. Or in a lower land cost area, or do something with a higher return per acre.

This is THE reason my goal is to raise the most pounds of beef that I can PER ACRE in my climate and conditions. Good soil testing and applying fertilizer as required, along with rotational grazing and good management, is a lot lower cost and better ROI than buying more high priced land and using it at lower intensity levels. It also helps us to sleep better than carrying a big mortgage to add more land which will not be used up to its potential. jmho. Jim

 

[HerefordSire]

What the net profit numbers don't show us...is the balance sheet and cash flow statement. Even though I lose money, my primary income is matched against the losses. This increases my cash flow on the cash flow statement and net worth on the income statement both go up because the land payments (mostly interest in the initial years) are amortized and the equity of the land is increasing not to mention the land price itself is increasing (hidden in book value). Therefore, in another 15 years, I will have a free and clear half a section likely worth three times what I paid for it with the government waiting until I die so they can tax me for estate taxes. But, I am losing money and can't afford a can of beans to eat. :mrgreen: :mrgreen: :mrgreen:

 

[Brute 23]

That asset is a double edged sword.

 

[Brandonm22]

That asset is a double edged sword.

ALL assets are a double edged sword to some extent. They either cost you in repairs, maintenance, upkeep, depreciation, management fees, and have to be insured or they increase your tax liabilities (both now and at the time of your death) or both and whatever asset class you are invested in, one of those pesky opportunity costs persons can look back with 20/20 hindsight and say you would have made much more $$$ invested in some other asset class.

 

[talldog]

This is all such great feedback. And I find myself understanding and agreeing with what most of you are saying.

I am certainly not getting into cattle for profit by any means, but I am hoping to have enough profit to sustain the family.

Here's a question: what percentage of you have a CPA? Does anyone do it themselves, or is that just foolish?

SUSTAIN THE FAMILY---Do your homework on profit---it's a STRONG word !!!!! :wave:

 

[Douglas]

I think all of this is way too complicated for a small time guy starting out. You have accounting profit, tax profit, and economic profit. These are measured differently and have different purposes, all of which are very valid. For me as a part time farmer I look at things a little differently. Basically I consider it a profit if my checking account has more money with the cows than without. For example the property taxes on my farm would be there regardless so I don't consider that part of my cost but I do use it to reduce my profit for tax purposes. Same with interest on the farm debt. The land payment I am making now was a decision I made 10 years ago, to by the neighbors farm, and has nothing to do with my cattle operation now. Since I will never sell no matter what, that purchase is irrelevant to what I do now. Now if I were going to purchase new land specifically to expand I would include the taxes and interest in my projections on if the new land would be profitable. Once I figure my profit, I compare it to my opportunity cost of renting the land out and see which is the best.

I know this way of looking at things will result in more people raising cattle than would otherwise and will increase the supply of cattle above where it would be if everyone looked at profit the same way. I could also understand if the guys doing this for a living have some resentment against those of us who may be losing money with a more traditional calculation but keep farming. But it is a free country thankfully, for now at least.

Yes indeed my property taxes are less because of cattle. I too have a full time job elsewhere. But why not let the cattle earn their way?

Why not make a profit after fully pro-rating all costs across the herd? Why is it any different for us running cattle on the side versus those who run cattle full time?

I have had years where I was in the red. It is much better when I am deep in the black. There's too much work involved to not make any money at this.

Because you can make bad decision that way. If you allocate a bunch of cost to your cows, show a loss, and then exit the business, you would still end up with some of the cost anyway likes taxes and show a bigger loss. I want to make as much profit as possible, everyone should, but decision making should be based on relevant cost and revenues for that decision only. I learned this in college managerial accounting courses 25 yrs. ago and it works in all business the same. Marginal cost vs. marginal revenue. If i do something what are the added cost and added revenue. That is all that matters. You guys are way over thinking this. Now if you are in this business full time you relevant cost maybe different, you may be able to sell some equipment if you get out, or reduce land rent. I will still have a tractor to keep up for my garden, and mowing around the ponds etc. Depreciation on that tractor is meaningless in my cattle operation. Sure there will be repairs etc. but depreciation is an arbitrary irrelevant amount except for my tax return and should in no way affect decision making in the cattle business.

 

[backhoeboogie]

I think all of this is way too complicated for a small time guy starting out. You have accounting profit, tax profit, and economic profit. These are measured differently and have different purposes, all of which are very valid. For me as a part time farmer I look at things a little differently. Basically I consider it a profit if my checking account has more money with the cows than without. For example the property taxes on my farm would be there regardless so I don't consider that part of my cost but I do use it to reduce my profit for tax purposes. Same with interest on the farm debt. The land payment I am making now was a decision I made 10 years ago, to by the neighbors farm, and has nothing to do with my cattle operation now. Since I will never sell no matter what, that purchase is irrelevant to what I do now. Now if I were going to purchase new land specifically to expand I would include the taxes and interest in my projections on if the new land would be profitable. Once I figure my profit, I compare it to my opportunity cost of renting the land out and see which is the best.

I know this way of looking at things will result in more people raising cattle than would otherwise and will increase the supply of cattle above where it would be if everyone looked at profit the same way. I could also understand if the guys doing this for a living have some resentment against those of us who may be losing money with a more traditional calculation but keep farming. But it is a free country thankfully, for now at least.

Yes indeed my property taxes are less because of cattle. I too have a full time job elsewhere. But why not let the cattle earn their way?

Why not make a profit after fully pro-rating all costs across the herd? Why is it any different for us running cattle on the side versus those who run cattle full time?

I have had years where I was in the red. It is much better when I am deep in the black. There's too much work involved to not make any money at this.

Because you can make bad decision that way. If you allocate a bunch of cost to your cows, show a loss, and then exit the business, you would still end up with some of the cost anyway likes taxes and show a bigger loss. I want to make as much profit as possible, everyone should, but decision making should be based on relevant cost and revenues for that decision only. I learned this in college managerial accounting courses 25 yrs. ago and it works in all business the same. Marginal cost vs. marginal revenue. If i do something what are the added cost and added revenue. That is all that matters. You guys are way over thinking this. Now if you are in this business full time you relevant cost maybe different, you may be able to sell some equipment if you get out, or reduce land rent. I will still have a tractor to keep up for my garden, and mowing around the ponds etc. Depreciation on that tractor is meaningless in my cattle operation. Sure there will be repairs etc. but depreciation is an arbitrary irrelevant amount except for my tax return and should in no way affect decision making in the cattle business.

Okay. Somewhere I miscommunicated.

What is wrong with me being in the black, and being in the cattle business? My wife is an accountant who can speak all the managerial skills with you. Now conducting a business case analysis prior to asking for an expenditure is something I am very familiar with in the working world. It works just the same in the cattle world. If you can make money on it, buy it. If you can't, don't.

 

[backhoeboogie]

There's the old joke about the TV newsman interviewing the winner of a large state lottery purse:

Newsman question: "What are you going to do with your new millions?"

Farmer/Rancher answer: "Farm (or Ranch) until it's all gone"

For those of us who have NOT won the lottery, it is important to turn a profit. Enjoyment and pleasure of raising cattle is one thing but if we (most of us) want to continue to do it, sooner or later we need to turn a profit. A real, more-cash-in-the-checkbook-at-the-end-of-the-year type profit. Depreciation, opportunity costs, etc aside, when all is said and done there needs to be a plus, not a minus, in the check book.

As HS points out, one of the very big, and maybe seemingly unfair, differences between us is that some start out with a paid up or near paid up land base. Others start out with a big mortgage. These differences do have an effect on the checkbook at the end of the year! But that's the way it is. And even though costs were maybe lower years ago when some started, it was probably just as difficult to get started in then current terms.

Land only cost $24K per year. If the average net profit is $87 per cow, I would have to have 276 cows before I bought a can of beans to eat.

Can you lease good farmland? I have both owned and leased. Maintain/improve the land and make it pay for itself.

 

[Douglas]

What is wrong with me being in the black, and being in the cattle business?
Never said there was anything wrong with that. Good for you.
It works just the same in the cattle world. If you can make money on it, buy it. If you can't, don't.
The whole point of this thread is how to measure "making money". I just tried to present a different economic perspective on that. I guess I didn't communicate it well. Using a tax return type calculation is a bad idea I believe.

 

[HerefordSire]

Can you lease good farmland? I have both owned and leased. Maintain/improve the land and make it pay for itself.

Yes.

Another way to look at it.....

If the average net profit is $87 per cow.....

2 acres @ $1K per acre = $2K (enough to support one cow and her calf)
$1.5K over 20 years @ 6% APR with 25% down = payment $11 per month

98
11 (mostly all interest)
---
87

11.2% of gross is land payment not counting the 25% down stroke of $500.

 

[Fred]

How should the value of retained heifers be figured? Say you spent 1k more than you sold in calves and cull cows but retained 10 heifers.

 

[HerefordSire]

How should the value of retained heifers be figured? Say you spent 1k more than you sold in calves and cull cows but retained 10 heifers.

I am not sure.....but I think you capitalize all the purchases, depreciate them over a certain number of years, then cows sold reduce your capitalizations costs and depreciation. Retained heifers are a part of your capitalization costs. Calves that are sold are cost of goods sold line items.

The effect would be you are transferring the capitilization cost from culled cow to heifer, if any.

Douglas will know.

 

[hillsdown]

How should the value of retained heifers be figured? Say you spent 1k more than you sold in calves and cull cows but retained 10 heifers.

Fred, you move them over from calf to heifer, to bred heifer, to cow/calf etc. As the cow produces more calves her value actually goes up NOT down. They appreciate and depreciate all at the same time. The more calves a cow has raised successfully for you the more money she has made for you ,even though when you cull her she may only be worth 600 dollars, what she has brought in each year for you through her calf sales is attributed to her worth minus of course her daily costs that she is responsible for as well.

This is too deep of a topic and varies too much for each operation. Here is another question, whom makes your house payments and up keeps etc. Is that for you and you wives outside income or are the cattle responsible for that as well ?

It is each apples to oranges and every operation is different, especially since some like to live in a modest home and drive a 20 year old vehicle and others like to live in upgraded homes with all the bells and whistles and drive a new pick up. Plus our cattle setups are different, some like all the newest technology and fancy equipment and others like to get by with the bare minimums.

 

[Workinonit Farm]

Fred, you move them over from calf to heifer, to bred heifer, to cow/calf etc. As the cow produces more calves her value actually goes up NOT down. They appreciate and depreciate all at the same time. The more calves a cow has raised successfully for you the more money she has made for you ,even though when you cull her she may only be worth 600 dollars, what she has brought in each year for you through her calf sales is attributed to her worth minus of course her daily costs that she is responsible for as well.

That''s pretty much how I figure it.

every operation is different, especially since some like to live in a modest home and drive a 20 year old vehicle...... .........get by with the bare minimums.

When were you at my place? :lol2:

Katherine

 

[BeefmasterB]

How should the value of retained heifers be figured? Say you spent 1k more than you sold in calves and cull cows but retained 10 heifers.

I am not sure.....but I think you capitalize all the purchases, depreciate them over a certain number of years, then cows sold reduce your capitalizations costs and depreciation. Retained heifers are a part of your capitalization costs. Calves that are sold are cost of goods sold line items.

The effect would be you are transferring the capitilization cost from culled cow to heifer, if any.

Douglas will know.

That's about right Hfs! Retained heifers become a capitalized expense. Any sales, regardless, are income.

Fred, I think you simply assess a fair market value to the retained heifers and then depreciate as any other cow.
That 1k loss you mentioned, along with all other expenses, will figure in against sales. Your year-end taxes will be on net gain after all expenses and depreciation.

 

[dun]

I think you simply asses a fair market value to the retained heifers and then depreciate as any other cow.

You can only depreicate them if you bought them not raised them. I suppose you could sell them to your wife (sale) and buy them back (depreciatable).