A Strong Gross Margin
If you’re ranching for profit, there is one way to define “a good cow”. She has a strong gross margin. In much of my writing and speaking it might seem that I’m not a fan of cows. But I enjoy cows like most people. My family runs cows each summer for a long-time custom grazing client, and we love having them around. For us, it makes sense not to own them. In working with hundreds of ranching businesses each year I see a lot of businesses struggling economically who run cows. I also get to see a few businesses having great success running cows. I often get asked, “What’s a good gross margin for cows?”. The quick answer to this, is that it should be better than custom grazing rates in your area. After all, if you can make more money taking care of someone else’s cows and you have little risk and no capital outlay, then it is a tough economic argument that you should own cows.
So, what does a cow herd look like with a strong gross margin? There isn’t a recipe for a profitable cow herd. The formula for Gross Margin is: Gross Product – Direct Costs = Gross Margin. There are a few ways to produce a strong Gross Margin. It can be done with a strong gross product and moderate direct costs. Or average gross product and ultra-low direct costs. I rarely see it work with a very high gross product and high direct costs, but there are many chasing that model.
Let’s work through an example of what a cow herd might look like that has a strong gross margin. This isn’t a recipe to follow, and I’m not suggesting this is the gold standard that can’t be beat, instead it is a simple example of the many ways a cow herd might have a strong gross margin. For simplicity I’ve worked up a model based on starting with 100 bred cows that sells everything and buys everything to get back to 100 cows at the end of the year.
100 bred cows Jan 1st
2 cows die
92 calves at $850 = $78,200
12 cull cows, 10 of them sold as rebreds, all average $900 = $10,800
Total sales = $89,000
14 replacement breds (buying late breds from neighbors) @ $1,100 = $15,400
Gross Product = Sales – Purchases = $73,600 or $736/cow
Interest 100 cows worth $1,100 = $110,000 at 6% = $6,600
Feed: 50 tons of hay @ $125/ton = $6,250
Salt, mineral and protein @ $50/cow = $5,000
Total feed = $11,250
Vet @ $25/cow = $2,500
Marketing and trucking @ $25/cow = $2,500
Bull lease 3 x $800 = $2,400
Total Direct costs = $25,250
Gross Product – Direct Costs = Gross Margin
$73,600 – $25,250 = $48,350 or $483 GM/cow
A cow herd with a GM of $483/cow is a pretty strong gross margin. Custom grazing rates vary widely, but for this example we will assume $1/cow-calf unit/day or a $365 GM per year. If this is the market for custom grazing, then it makes owning the cows pretty attractive. Remember, your area might be much different from the example here. What I’ve presented above isn’t a recipe to follow. You have different resources, different skills, and different markets. The point of this example is to find what you can do that works for your operation and is profitable for your business.
Now is the time to put together your economic plan for the coming year. You should already have your projected gross margins for the coming year in hand. If you’re an RFP alumnus who would benefit from support and coaching to get your projections done for the coming year, we still have a few slots left in our Economics Intensive this coming February in Denver, we hope you can join us.