While the 50-head cow-calf operation in this case study in Western Washington appears profitable from a cash budget standpoint, it isn’t profitable from an economic standpoint when all resources are valued at fair market prices. When you use up your longer-term capital assets like vehicles and machinery at an unprofitable rate, you won’t have the funds to replace them when needed. An economic analysis includes costs associated with capital expenses like machinery, buildings, and breeding stock, as well as labor, vehicle, machinery, and repair costs associated with the enterprise. While it might seem daunting to accurately estimate all of these expenses, you won’t know where you stand in terms of your bottom line and long-run viability unless you do.
Enterprise Budget Details
Here we’ll discuss how we used an enterprise budgeting tool to provide a complete assessment of economic profitability for this case study. The spreadsheet includes two sheets, Cow-Calf Enterprise Budget, Western Washington, 50-Head and Fixed Cost Worksheet, Cow-Calf Enterprise Budget, Western Washington, 50-Head.
Gross Returns
The first section of the enterprise budget sheet is Gross Returns. It estimates all the revenue from the cow-calf operation, including calves and culled livestock. We then divide all these revenue streams by the number of mother cows, which is the unit of production in this enterprise. Our goal is to estimate costs, returns, and profitability per unit. In this ecase, the unit is a mother cow. The bottom line in the Gross Returns section has a total value of $43,253, or $865.05 per head.
| Weight Each | Unit | Total Number of Head or Units | Price or Cost / Unit | Total Value | Value or Cost / Head | |
| Gross Returns | ||||||
| Steer Calves | 575 | lbs | 24 | 1.70 | 23,460 | 469.20 |
| Heifer Calves | 525 | lbs | 15 | 1.40 | 10,290 | 205.80 |
| Cull Cows | 1200 | lbs | 8.5 | 0.70 | 7,140 | 142.80 |
| Cull Bulls | 1800 | lbs | 0.5 | 0.90 | 810 | 16.20 |
| Cull Replacement Heifers | 900 | lbs | 1.5 | 1.15 | 1,553 | 31.05 |
| Total Gross Returns | $43,253 | $865.05 | ||||
Operating Costs: Direct Production Expenses
The next section, Operating Costs, estimates the cash production expenses associated with raising cows each year, including hay, a per-head grazing fee for private range, salt, veterinary services, trucking, labor, and marketing costs. A producer might estimate costs based on previous years’ typical expenses, such as annual veterinary costs. However, especially in times of rapidly rising costs of production, producers may want to check with their suppliers for cost estimates for the coming year.
| OPERATING COSTS: Direct Production Expenses | |||||
| Alfalfa/Grass Hay (50 cows, 10 repl. heifers, 2 bulls, 5 months) | ton | 129 | 119.93 | 15,489 | 309.78 |
| Private Range (7 months per head) | AUM | 370 | 25.00 | 9,240 | 184.80 |
| Salt/Mineral | head | 52 | 30.00 | 1,560 | 31.20 |
| Veterinary/Medicine | $ | 1 | 1,530.00 | 1,530 | 30.60 |
| Trucking to & from Pasture | head | 50 | 8.00 | 400 | 8.00 |
| Trucking to Market | head | 47 | 10.00 | 470 | 9.40 |
| Hired Labor | hour | 0 | 0.00 | 0 | 0.00 |
| Owner Labor (2 hour per day for 12 months) | hour | 730 | 25.00 | 18,250 | 365.00 |
| Commission on culled cows | head | 8.5 | 22.92 | 195 | 3.90 |
| Checkoff Brand Inspection (for all calves sold + culls) | head | 47 | 2.71 | 127 | 2.55 |
Operating Costs: Annual Operating Expenses
The next section of Operating Costs estimates the cow-calf enterprise’s share of fuel and repair costs for machinery, vehicles, equipment, buildings and other improvements. In this case study, the farm also has a steer feeding operation, so the cow-calf operation’s share only represents 50% or 75% of these annual expenses. Finally, we include interest on operating capital in Operating Costs, based on an estimate of the average annual operating loan balance and interest rate. If you aren’t borrowing operating funds, this expense represents an opportunity cost of using your own money for this purpose.
| Share¹ | ||||
| Machinery (Fuel, Oil, Repair) | 50% | 1,750.00 | 875 | 17.50 |
| Vehicles (Fuel, Repair) | 50% | 2,000.00 | 1,000 | 20.00 |
| Equipment (Repair) | 50% | 2,000.00 | 1,000 | 20.00 |
| Buildings & Improvements (Repair) | 75% | 1,200.00 | 900 | 18.00 |
| Interest on Operating Capital | $8,000 | 5.75% | 460 | 9.20 |
| ¹Share of this category's expense used by this enterprise | ||||
We divide all of these costs by the number of cows to get a per-head estimate as well. Using these cost assumptions, we estimate that the net return over operating costs is -$165 per head.
| Total Gross Returns | $43,253 | $865.05 |
| Total Operating Costs | $51,496 | $1,030 |
| Net Returns Above Operating Costs | ($8,244) | ($165) |
However, if the owner labor expense of $365 per head is excluded, net returns over operating expenses would average $200 per cow, which might be considered an acceptable outcome. Technically, this is net returns over operating expenses to operator labor, as operator labor is excluded.
| Total Gross Returns | $43,253 | $865.05 |
| Total Operating Costs | $33,246 | $665 |
| Net Returns Above Operating Costs | $10,006 | $200 |
Fixed Costs
The Fixed Costs section of the enterprise budget sheet includes more complex economic calculations, such as depreciation and interest on machinery and equipment. We provide the calculations for these estimates in the second sheet, Fixed Cost Worksheet, Cow-Calf Enterprise Budget, Western Washington, 50-Head. You can easily adapt these calculations to your individual situation. Just use your best-guess estimates for the current market value of these items, the number of years you’ll continue to use them, and their salvage value at the end of that time period. The interest rate can simply be one of your choosing, such as what you’d like for a return on your investment, or what you might earn on an alternative investment. You would then calculate annual depreciation and interest expenses as outlined in the main section of this publication.
The Retained Livestock Investment section estimates the opportunity cost of capital for the money tied up in breeding stock (mother cows, replacement heifers and bulls) that is retained beyond the period of the enterprise budget (one year). The total value of these animals is calculated here, then automatically transferred to the enterprise budget in the Ownership Costs section below the Depreciation and Interest sections by a link in the spreadsheet. This value is multiplied by an interest rate of 6%, which represents the opportunity cost of this capital. Basically, if you’re covering a 6% interest expense on the value of your breeding stock, it means your enterprise is earning a 6% return on this investment. It’s a non-cash expense, like depreciation and interest, in that you are not paying for it out of pocket.
| FIXED COSTS | ||||
| Depreciation: | Share¹ | |||
| Buildings & Improvements & Equipment² | 75% | 1,475 | 1,106 | 22.13 |
| Machinery and Vehicles | 50% | 4,700 | 2,350 | 47.00 |
| Interest | ||||
| ⁴See Fixed Costs Worksheet, Value for Retained Livestock Investment. | 75% | 1,683 | 1,262 | 25.24 |
| Machinery and Vehicles³ | 50% | 2,370 | 1,185 | 23.70 |
| Interest on Retained Livestock⁴ | $63,000 | 6.00% | 6.00 | 75.60 |
| Taxes & Insurance | - | 0 | 0.00 | |
| General Overhead | 250 | 250 | 5.00 | |
| TOTAL FIXED COSTS | $9,933 | $198.67 | ||
| ¹Share of this category's expense used by this enterprise | ||||
| ²See Fixed Costs Worksheet, Depreciation on Buildings, Improvements, & Equipment. | ||||
| ³See Fixed Costs Worksheet, Interest on Machinery and Vehicles. | ||||
| ⁴See Fixed Costs Worksheet, Value for Retained Livestock Investment. | ||||
Net Returns Over Total Costs
Economic profitability is defined as positive returns over all expenses, including opportunity costs on resources that are typically not paid, such as owner labor and non-cash expenses like depreciation. Based on the values used in this case study, this cow-calf operation isn’t profitable in an economic sense, with an estimated per-head loss of -$364. But, it’s also not a drain on cash resources because we’re covering all of our operating expenses except operator labor. Also, this operation represents a crucial part of several linked enterprises on one farm that ultimately produces grassfed beef.
| Total Gross Returns | $43,253 | $865.05 |
| Net Returns Above Total Costs | $51,496 | $198.67 |
| Total Costs | $61,430 | $1,229 |
| Net Returns Above Total Costs | ($18,177) | -$364 |
Practical Application of Economic Profitability Estimates
Many of these cost estimates don’t represent actual cash costs. Fixed costs tend to be “sunk,” as in already purchased, perhaps at a much lower cost than replacement costs would indicate. Lifestyle factors are also important, such as how you value things like raising your own meat, living on a farm, and spending time taking care of livestock. However, estimating the true costs of production is important if you really want to know if your farm is profitable and sustainable. It also might prove useful if you’re justifying expenses when selling grassfed beef directly to the consumer, for example.
As noted above, the owner labor expense of $18,250 per year or $365 per head probably doesn’t represent an actual cash cost. Other expenses that contribute to this enterprise’s lack of profitability are the non-cash fixed costs. These include depreciation and interest (cost of capital) on fencing, vehicles, and other supplies and equipment used for raising cattle, such as squeeze chutes, feeders, and veterinary supplies. Another non-cash cost is interest on retained livestock. Assuming you haven’t borrowed money to buy them, this represents an opportunity cost for the capital tied up in breeding stock.
If we leave out owner labor and non-cash costs including depreciation and interest (everything but General Overhead in the Fixed Costs section), the operation appears profitable, with annual net returns of $195 per cow or $9,756 for the herd. While all operating expenses except labor are covered, there may not be sufficient profit from this operation to cover expenses when you need to replace a vehicle or piece of equipment. Using the cost assumptions in this study, assets are being used up at an unprofitable rate based on this year’s expected returns. If this continues to be the case year after year, your farm will not be generating sufficient profits to replace its capital assets, such as machinery and vehicles.
| Cow-Calf Enterprise Budget, Western Washington The first budget places a fair market value on all factors of production. The second budget places no value on owner labor. The third budget places no value on owner labor and no value on fixed property recovery, including depreciation and capital costs on equipment and machinery and capital costs on breeding stock. | ||||||||
| Gross returns $/head | Operating Costs $/head | Net Returns over Oper. Costs $/head | Fixed Costs $/head | Total Costs $/hed | Net Returns over Total Costs $/head | Net Returns over Total Costs $/herd | ||
| Cow-Calf Production | ||||||||
| Cow-Calf Production | Cow-Calf Phase, 50 head | $865 | $1,030 | -$165 | $199 | $1,229 | -364 | -$18,177 |
| Cow-Calf Production, no owner labor cost | Cow-Calf Phase, 50 head | $865 | $665 | $200 | $199 | $864 | 1 | $73 |
| Cow-Calf Production, no labor or fixed costs recovery | Cow-Calf Phase, 50 head | $865 | $665 | $200 | $5 | $670 | 195 | $9,756 |
Once you’ve created a template for your operation, you can fine-tune your estimates as time goes on. You can test some what-if scenarios, like trying to graze more and buy less hay, or increasing your herd numbers. This case study represents just one enterprise that interacts with several other enterprises on our sample farm: hay production, described in Case Study 2, and grassfed beef production, in Case Study 3. When we put these all together, we’ll have a more complete picture of whole farm profitability.
Note: In this case study from Western Washington, a set of producers advising on a working lands option for habitat preservation (SARE project SW18-103 led by Stephen Bramwell, Washington State University) provided data for a typical 50-head cow-calf producer in this region. Enterprise budgets were developed for the cow-calf operation, hay production and direct marketing grassfed steers. This set of enterprise budgets helped determine tradeoffs for removing animals from pastures at certain times in order to support endangered species habitat.