One of the most useful numbers to know on a cow-calf operation is a cow’s Contribution Margin (CM). It is a number that most producers have a feel for but may not always formally calculate. While attending the King Ranch Institute for Ranch Management’s Managing the Cow-Calf Business program in March, this concept was discussed illustrating how it can help make practical decisions on the ranch. Decisions such as how much can I invest to keep a cow through drought? Or, what is the impact of increasing my numbers by a certain number of head?
The calculation is simple, but an understanding of different cost types is necessary. Calculating CM focuses only on direct variable costs. Costs that would immediately stop if a cow was removed (culled, sold, dies). Specifically, we would think about feed, hay, and vet expenses. Also, things that may be slightly more difficult to quantify like the depreciation of the cow, etc. There is a long list of other costs associated with running the ranch like machinery, equipment, fuel, and land, but those items won’t change much, if at all, in the production year based on the addition or subtraction of a cow in the operation. A revenue history or projection completes the other side of the equation.
The numbers used below won’t reflect your specific operation. Yet for discussion’s sake, let’s assume that we typically have an 89% weaning rate, 500-pound weaning weight, and expect our average calf price to be $3.49 per pound next year. The ranch records show that we have had direct variable costs of $500 per cow.
- What will a single cow contribute to the fixed costs of the operation? $1,053
- What extra could we pay to keep a cow in times such as drought? $1,053
- What does adding a cow to the herd contribute? $1,053
This number may seem alarming right now. The cause of alarm is likely because of historic calf prices. Refiguring this calculation with a calf price average of $1.85 changes the CM to $323 per cow. In times of drought where hay supplies tighten and the market price of hay increases, $323 does not go very far. Sustained high calf prices can- and have- altered what the math says about our decision making. High calf prices usually encourage expansion, but it also provides incentive to keep the existing herd intact.
Forage conditions in OK have suffered and could lead to tough decisions. From a 10,000 ft view on a spring calving herd, we need to have the working capital (or access to it) to support the investment until the next calf crop is ready to be sold. We might want to consider a form of price protection as well, like LRP. Go to work on your numbers and figure out what your contribution margin is on your operation and evaluate the ranch’s capacity to fund this through 2027.
