Strategic Planning Column: War On Cost
When I talk or write about my "five essentials for successful ranch management,” I often get questions, and sometimes challenges, about my point of “war on cost.” The question usually is something like, “We’ve been cutting cost for a long time, and it gets more difficult. Why can’t we figure out how to get more income? Why do we have to keep cutting costs?”
We can increase income, but doing so usually depends on our selling price or the use of additional inputs to increase production; we’ll get to that in subsequent articles. However, for now, the best answer for why we must wage war on cost is “competition.”
Consumers don’t have to eat meat; and, if they do eat meat, it doesn’t have to be beef. (Actually, some of us really do feel we “have” to eat beef, and I hope it stays that way.) But, besides competing on price and value in the protein market, beef producers also compete against each other. All other things being equal, those who can produce a quality product at a lower cost, generally get to stay in business longer than those who can’t.
Because of the large number of producers in our industry, we’re an example of the classic economic definition of “pure competition.” This means that the average producer in the average year is just breaking even. As an industry, I don’t think we want to count on the market and weather giving us a continual string of good years. Using management abilities and ingenuity is a much better way to ensure our long-term sustainability.
In future articles, I will frequently return to “war on cost.” And, I’ll emphasize reducing overheads per unit of production and improving gross margin.
By the way, my definition of gross margin is different than that which I often see in other articles. I define gross margin as total revenue (that is, total cash livestock sales, minus livestock purchases, plus inventory increases, or minus inventory decreases) minus all direct costs. Therefore, the gross margin pays for the overheads with the residual being net income. This approach allows us to focus on overheads and direct costs per unit of production.
Overheads include labor, equipment, facilities and tools. Direct costs are those that go directly to the animals and vary in proportion to the number of animals we have in production.
Some might want to call these “fixed” and “variable” costs, but I don’t like the implication that “fixed” can’t be changed. All overheads can be changed – perhaps not immediately, but they can be changed.
Through my years of watching good ranchers in an effort to better myself, I’ve observed that the highly profitable ranches cut overheads to the bone. Their cows-to-man ratio is high. And, in relation to the number of animals they operate, they have few pickups, tractors, implements, buildings, horses, etc. What they do have is functional and dependable, but they want as little as possible to fix, paint, fuel, operate or store.
It amazes me how ingenuity and inventiveness have reduced the need for overheads in these well-managed operations. Some have eliminated hay making, opting to hire a custom operator to cut and bale hay, or simply purchase the hay needed. If the needed hay is purchased, the land previously hayed can be grazed, which typically allows an increase in carrying capacity. Thus, the remaining overheads are spread over more units of production.
Many of these operations have greatly reduced feeding harvested forage by allowing cows to do more of the work through grazing. Some changed the calving season to more closely match their animals’ nutritional needs to the quality and availability of their range and pasture, significantly reducing their need for labor and equipment.
Making big changes in feeding practices and calving season can result in short-term reductions in pregnancy rate. Because of this, some people choose to make the changes in incremental steps and allow the cows that can’t adapt to fall out over time rather than in one year.
When you reduce overheads by reducing hay feeding, you need to be careful not to spend the savings on feed supplements. If your calving season matches your forage resource, your need for supplementation will be minimized.
Resist the temptation to feed or supplement because the neighbor does it, because you always have, or because the feed salesman promised you more production. Do your own review of the science. Get good information from technical experts before you try to get more profit from more inputs. The marginal revenue could easily be less than the marginal cost.
Find ranchers in similar locations who have learned to take “fed feed” out of their operations, except for minimal supplementation. Learn from them. See if their ideas and methods can be adapted to fit your unique situation.
In my work with ranches in Nebraska, Wyoming, Montana, northern Utah and southern Alberta, we greatly reduced hay feeding. In some years, we fed no hay to mature cows, except perhaps some alfalfa as a protein supplement.
I’ve addressed only feed in this column because it’s an operator’s biggest direct cost. In future articles, we’ll discuss how cow size, milk production and heifer-development methods can affect your feed cost.
Strategic Planning Column: War On Cost