REDUCING EXPENSES MAY NOT ALWAYS BE A GOOD THING

by: Stephen B. Blezinger
Ph.D., PAS


Here at the beginning of summer, it seems a little early to be talking about feeding and supplementation costs during the feeding season. But if you have followed the articles here over the years you know I have always encouraged producers to constantly research, consider and plan for the future production periods. This has been especially true given our ongoing economic issues and uncertain political climate in the United States. And while the beef industry is more profitable now than it has been, we all know these circumstances can change rapidly. It is always good to be evaluating your production costs.

Beef production costs center largely around the three F's – Feed, Fertilizer and Fuel. The costs of all three of these commodities are highly volatile and this does not appear likely to change. Similarly, they are all tied together and hinge, to a large degree, on fuel costs. With costs of transportation, feed and fertilizer changing as they have many producers are compelled to do everything they can to keep these costs down as much as possible in order to maintain their profits. While it is always important to keep input costs down, in some situations a producer will do this to his own detriment, i.e. cutting costs to the point that he goes beyond simply attempting to maintaining profits and actually reduces his performance to a level that actually hurts any profits that he might realize by making sure he was using a “best cost” and not a “least cost.” In many cases a best cost may be, and probably is, higher than a least cost at any given time. In many cases the reason that a given input is the lowest in price is because come key factor has been compromised. That is why it is so important to understand how to calculate the value of a given input as it affects your operation.

This article will attempt to discuss these issues at length and provide some guidance on making decisions regarding where corners can and cannot or at least, should not, be cut.

Major Production Cost Inputs

As alluded to above, in this day and time a cow/calf producer's major input costs include:

1) Forage – pasture, hay, silage

2) Feed – protein and energy supplements, full feeds, minerals

3) Transportation – hauling of forages and feeds, livestock transportation, basic day to day.

While many other costs are also involved in a given livestock program, the ones shown, and especially forages and feed are the ones that seem to cause the most problem to the average producer. These are also the areas where it is the most common to see an attempt made to cut costs the most aggressively.

Obviously, a major factor affecting forage and feed costs is the weather patterns that a given area has experienced. In many regions of the United States, dry weather conditions have a serious effect on forage availability. As such, producers in this area are short on forage supplies (and may have been for some time). This means that in order to continue their production program they will have to purchase significant amounts of forage and or feed to maintain a given level of production (dry matter intake, protein and energy intake). In these areas, in most cases the forages (hay/silage) have to be shipped in from some distance. If a producer is on the edge of an effected region then he may not be affected as greatly as those more to the center and thus farther away from an area that has adequate moisture and thus good forage production and product to sell. As circumstances would have it those hay sources near an affected area will be the ones to sell out first because they are closer and thus transportation cost is not as high. Conversely, last fall we saw the effects of excessive rainfall on many areas in the Midwest, delaying the harvest of an exceptional grain crop and significantly affecting the overall harvest level as well as grain quality. Mold and mycotoxin issues have plagued this grain supply creating more problems in performance and affecting costs.

If forage sources in a given area are short, many producers will feed more commodities or manufactured feed. This increased demand increases the cost of the feed or commodity in that region (and many others for that matter). The cost of commodities and feed is affected by this demand plus other situations in the marketplace. In recent years we saw oil prices continuously climb to unprecedented levels and with current governmental and environmental policies and mandates put into place, the demand for agricultural products for the production of ethanol or biodiesel once again continues to increase. The fuel production demand thus takes the primary product (corn, sorghum, soybeans, whole cottonseed, etc.) out of immediate availability as a feed source thus driving up the cost due to reduced availability. While it is true that these processes result in the production of a variety of by-products that can be fed, these by-products, in many cases, do not fill the gap left by the consumption of the primary grain source, at least not as a whole. And not without some potential complications.

Finally, transportation costs (primarily diesel) have a significant effect on the cost of a given input unit. Now and in the past most transportation (trucking and rail) companies have implemented a fuel surcharge to compensate for the rising cost of diesel. These surcharges vary quite a bit depending on the company but it is not uncommon to see a fuel surcharge ranging from 25 to 35 percent of the basic cost of hauling. To illustrate this let's assume the basic cost of hauling a load of feed from the mill to a given location is $20 per ton. This will largely be dependent on distance and truck type (it is commonly more expensive to ship a product by live-bottom/walking floor or auger than by hopper bottom – much of this related to availability of a given type of truck). If the trucking company uses a fuel surcharge (FSC) of 30 percent, this adds $6.00 to the cost of each ton of product delivered. Thus the FSC of a 24 ton load of feed is $144. In general, you will see FSC's increase with rising fuel costs much more rapidly than they will decrease with falling fuel costs.

The Cost of Cutting Costs

One of the first things the producer asks himself when economic circumstances develop as they have is “what can I do to reduce my costs?” For just about any producer there is some threshold he or she has for how much they will pay for a given item. After that threshold is exceeded, they begin looking for a cheaper source of the same item or what they perceive to be an identical or at least very similar item. Once they cannot get something similar purchased for what they consider an acceptable amount then they commonly start looking for alternatives – “is there some other way I can do this aside from how it has always been done?” Let's walk through this as related to a relatively common feed or supplementation cost situation:

1) Use the scenario that the owner of XYZ ranch has determined that, over the years, given his forage base (which he has tested religiously) his most effective manner of supplementation was feeding 4 lbs per day of an all natural, 20 percent protein range cube and that, by and large, the cost of the cube has been around $260 per ton. With this program he has averaged a 92 percent calf crop (conception to weaning) and an average weaning weight for his steers and heifers has been 525 lbs. Let's put some numbers with this to make it easier to visualize.

a. His cow herd is 100 head which means that annually his calf crop is 92 head, 46 steers and 46 heifers.

b. His cube feeding ran from November 15 to March 1, or 105 days.

c. At the feeding level shown he would provide 400 lbs of cubes to the cows per day at a cost of $.52 per head per day or $52 for the herd. For the feeding period his cube cost is $54.60 per head or $5,460 for the group for the feeding period.

d. His calf crop averages $1.10 per lb. at sale day. 92 head X 525 lbs average = 48,300 lbs X $1.10 per lb. = $53,130 gross sales. This is equal to a gross sale per cow unit of $531.30. Subtracting the cube cost the return after supplementation = $476.70 per cow unit.

2) Set these numbers aside for a moment. Now assume that the market situation has changed and cube prices have gone up considerably. The cube that he paid $260 a ton for now cost $320 per ton. Everything else is the same. With this increased cube cost, his cost per cow is now $.64 per head per day or $67.20 per cow per supplementation period. This, when subtracted from the gross sale price per cow now provides a return after supplementation of $464.10 per cow unit or a 2.6 percent reduction in returns.

Let's say that he finds what he believes to be a replacement, identical cube that costs $310 per ton. The cattleman thinks – “Hey, this cube is $10 per ton cheaper I can save a bunch of money” (400 lbs X 105 days = 42,000 lbs * $10 per ton = $210). The tag looks the same so he decides to go with this different cube. What he does not realize is that this cube is lower in energy than the other cube (hence the lower cost) he was feeding and in making this change he reduces his calf crop from 92 to 90 percent. Essentially, 2 calves. Plus his average weaning weight drops from 525 lbs to 500 lbs. This means the amount of marketable calf that he has to sell will total 45,000 lbs (90 head X 500 lbs). At the market price given his sales totals $49,500 (45,000 X $1.10). This creates an average gross sale per cow unit of $495. Subtracting the new cube cost ($310/2000 = $.155/lb X 4 lbs/day X 105 days = $65.10), the return after supplementation is $429.90 or a reduction in returns of 9.8 percent per head. Ultimately this is $3,630 less than his gross sales in the previous scenario. So while he saved $210 on his cube price, the decision cost him over $3,400 in performance in lost number of head and lost lbs of calf to be sold.

One of the main problems with this is that the potential for loss may not be apparent until well after the decision is made. As such, what looks like a good decision now (I can save $10 per ton on cubes) may be a bad decision farther down the line (conception rates are down, weaning weights are lower). For this reason it is VERY important to be extra careful when making decisions that can ultimately effect how the cow performs. Even small changes or compromises can have huge implications down the road. And it applies to other performance related components (hay quality, mineral program, fly control, etc.) This helps illustrate a point I have attempted to make in these articles for years – you must be careful in your decision making and use the best planning you can because it affects what happens tomorrow, a month from now a year from now and so on. Making a decision concerning your nutritional program requires careful research and planning since even small changes can have results as illustrated above. Some points to consider with regard to trying to cut costs on your feeding program:

a. Make changes very carefully and try to consider as many factors as possible – costs, forage program status, current performance, potential effect to performance.

b. Cheaper is not always better. In many cases, as shown above it is worse. When considering two or more products and one is considerably less expensive than the others but the labeling is very similar you have to ask yourself “why is this one product so much cheaper?” You need to determine the reason for the difference. Is it because the source of the cheaper product is closer so there is not as much freight cost involved? Is it because the manufacturer or seller has chosen to take a lower margin to help them be more competitive in the marketplace? Is it because the cheaper product is using lower quality ingredients or has compromised non-apparent nutrients (not clearly listed on the tag – an example of this is energy) in order to reduce the cost of the product. It is common, especially in these markets for feed companies to use “least-cost” formulation more aggressively and thus attempt to provide a product to the marketplace that is cheaper and thus more competitive. The widespread use of computer and formulation technology allows feed companies to take advantage of a wide variety of ingredients on the market in an effort to keep prices as low as possible. Care must be taken here because you can make a given product, that matches a given tag, literally hundreds of different ways. Some of the ingredients do not produce the same performance as others. ALWAYS ask – “why is this product cheaper?” And demand an explanation. If the answer is not easily provided, consider looking elsewhere.

c. If you make a change to a lower cost product or program and you recognize that compromises have been made you have to determine what you will potentially be giving up - breeding, gains, health? All of these at some level. As the old saying goes, “you can't get something for nothing.” This is very true in this situation.

d. The typical producer did not reach the level of production and profitability overnight or without considerable research and effort. In looking for ways to cut costs, plan on putting in considerable research and effort to make sure changes made will affect you positively. It is much easier to lose ground than it is to gain it.

e. Do not, under any circumstances, compromise your mineral program. The mineral program is the base of your entire nutritional program. Right now, as mineral prices have also increased, it is easy for the producer to switch to a cheaper product or eliminate use of minerals altogether. While you do not have to go out and buy the most expensive mineral product on the market it must be palatable and fill the gaps in your feeding and forage program.

Conclusions

While it is important to keep costs down during times like these it is also critical to be sure your program is maintained. Even relatively small, incorrect choices can have dramatic effects. Recognize and evaluate where all of your production costs are derived. Then ask yourself, “is this an area that I can truly afford to compromise or cut back?” In many cases the answer will be “no” and your overall profitability will be higher because you made, what initially feels like, a wrong decision.

Dr. Steve Blezinger is and nutritional and management consultant with an office in Sulphur Springs Texas. He can be reached at CR 4711 Sulphur Springs, TX 75482, by phone at (903) 885-7992 or by e-mail at sblez@verizon.net.







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