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Higher Costs and Lower Sales in 2008

Posted May 1, 2008

Since the fall of 2006, producers have experienced dramatic increases in production costs, especially grains, by-product feeds, fertilizer and fuels. Also, calf prices have seen a significant drop. The way in which producers do business may have changed forever; it has at least for the short term.

What can producers do about it? First, they can determine what their costs of production are and look at ways of lowering operating costs.

These activities are going to be extremely important in light of the market conditions that could be in place for at least the next couple of years. To survive, producers will need to take a closer look at their expenses and scrutinize all of their costs very carefully.

To remain competitive, it might be necessary to increase your expenses in an area or two. Historical data shows that the lowering of costs should not necessarily include reducing the money spent on bulls, veterinary services and medicines. Reducing costs in these areas could cause a significant decrease in the cow herd's performance.

There are several areas to critically analyze. One is the use of fertilizer. If a producer is spending $50 per acre for fertilizer, they could very easily have $200 per cow in fertilizer cost if stocked at four acres per cow.

Another area is the feeding program. If a producer is feeding one bale per head per month for four months, and the hay cost is $30 per bale, then total hay cost is $120 per cow. If 3 pounds of 20 percent cubes are fed for the same four months and the cubes cost $250 per ton, then another $45 per cow in feed costs is incurred.

When totaling up these costs, a producer has $365 per cow just in those areas. By selling a 450-pound calf at $116 per cwt (average steer/heifer price as of April 1, 2008), a producer would generate $461 per head in revenue with an 88 percent calf crop. That doesn't leave much ($96 per head) to pay for all other variable expenses, much less fixed costs.

Now is the time to consider all options for reducing cow operating costs, increasing revenues, retaining calves to put on cheaper gain, and looking at other enterprises.

If you need help analyzing these alternatives, please give us a call.