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The Cattle Connection

The cattlemen's connection to timely topics, current research, and profitable management strategies

Is cowherd expansion the best option for increasing profits?

Posted by Travis Meteer - Economics

One of the hot-button topics this fall has been expanding the cowherd. It seems as though this topic has been discussed in some capacity for the last several years. However, drought and increased feed costs have slowed cow/calf profits and therefore held a cap on cowherd expansion. Some projections look favorable for removal of this cap as moisture is more plentiful in areas and corn prices have moderated.

In my mind, there are some real incentives to adding to your cowherd if feed resources allow. However, I think it is important to realize costs are still elevated compared to past decades. Corn has not returned to $2/bu. and hay prices are still inflated.

So why all the push to expand the cowherd? Most farmers tend to draw a straight line from more cows to more profit. Yes, this can lead to more profit, but it's not always the case. I recommend before making decisions about herd expansion a producer should understand how profit is figured.

Profit is a simple equation. Profit = Income – Expenses. This equation includes only two ways to increase profit: Increase income or decrease expenses.

Increasing income is achieved by increasing number of units produced (# of head), increasing production per unit (more pounds per head), or receiving a higher price.

A herd of cattle that yields more weaning weight or a higher % calf crop can increase income. However, many times there are added costs associated with increasing these attributes (bigger mature cow size, creep feeding, supplementing cows, etc.).

A producer can increase the prices paid for cattle via pre-conditioning, marketing in load lots, niche markets, or by simply benefitting from an upward price cycle. There are a lot of people banking on the upward price cycle when they talk about adding cows.

Now let's talk about reducing expenses. There are two main kinds of expenses: fixed (overhead) and variable (operating). Fixed costs would be costs incurred no matter what you produce such as land, labor, machinery, utilities, taxes, insurance, etc. Variable costs would be costs that change with production level such as livestock purchases, feed, vet, some labor, fertilizer, etc.

To decrease fixed costs you must either eliminate them or use them more efficiently. Many times it is difficult to eliminate these costs, so we must spread them over more head.

On the other hand, variable costs are the low-hanging fruit of the cost equation. Of the variable cost list, feed costs will account for the highest percentage. Thus, focusing on reducing feed costs is still the best way to increase profit.

In summary, producers that focus on grazing management, increasing the grazing season, utilizing crop residues, and formulating balanced rations will be more profitable than those that simply go buy more cows.

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