Since the inception of the Opportunity Index for Drovers, we have focused on understanding the concept of the opportunity cost (market value of calves or feeders). This value represents the greatest cost to determining the break-even from which to gauge your profit and loss decision, and it is the basis for the value-added consideration and assessing risk-reward. These are all closely related—whether in consideration of retained ownership in a post-weaning backgrounding program, a post-backgrounding summer grazing program, or in a feedlot to finish the cattle.
While market opportunity cost is the starting point for decision-making, it’s important to also consider other direct costs incurred in any of the retained ownership programs.
There is no one size fits all when it comes to the cost structure of a ranch. Location, size, organizational structure (family or corporate ownership), family members involved, mix of livestock and crops, etc., gives every operation a unique set of characteristics that create the cost structure. But there is one common aspect for all of agriculture—everything costs. In other words, the hay or silage fed to calves in a backgrounding program or the forage they graze still have cost even though the calves never leave the ranch. You must include those costs in your decision. It isn’t just pickups that are expensive, but rather, that new pickup will add X amount to producing a pound of beef on my ranch.
My rule of thumb is to keep it simple! If it becomes a burden, you’ll ignore that distasteful time-consuming task and quickly move on to other things. Cost analysis is also for cost control on the ranch. Bankers like that term and so will you if it makes your banker happy!
The sharp drop in the market definitely shook up the psychology in the cow-calf sector. However, these lower prices and lower breakevens enhance the opportunity to continue improving genetics and adding value through retained ownership.
John Nalivka, is the president of Sterling Marketing, Inc., Vale, Ore., and provides the weekly Sterling Beef Profit Tracker on www.Drovers.com. You can contact him at: firstname.lastname@example.org or www.sterlingmar-ketinginc.com or (541) 473-3266
Note: This story appears in the January 2017 issue of Drovers.