A Strong Gross Margin

by Dallas Mount

cow with horns

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

Sales:

92 calves at $850 = $78,200

12 cull cows, 10 of them sold as rebreds, all average $900 = $10,800

Total sales = $89,000

Purchases:

14 replacement breds (buying late breds from neighbors) @ $1,100 = $15,400

Gross Product = Sales – Purchases = $73,600 or $736/cow

Direct Costs:

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.

7 Responses to “A Strong Gross Margin”

December 22, 2021 at 2:30 am, james coffelt said:

Dallas

I appreciate your thinking and work.

If I might add to this conversation:

Keep all heifers, and turnover the cows at 5 years plus-turnover matters.

Those heifers will increase in value by 50% after bred to a top bull. Raise our own replacments

Those bulls do not need to be expensive, we sell top bulls at a set price for $2500.

That 100 cow herd can live with 2 bulls, not 3. Deal with a bull provider which has bulls available at all time, in case of injury.

Salt and minerals: let them run out, skip a few weeks, I have noticed little difference in health on 1000 head.

Feed Hay: it depends on where it is possible to not feed hay. The 38th oarrelell is close to where, which is about 10 miles south of
I-70., Above that the goal is the shortest period of feeding.

There are no vet bills. We have observed we have a dead cow, or a vet bill and a dead cow.

We have cow costs of $293 per year

Sell into a premium market, all-natural, grass finished, at double the sale barn.

Some ideas.

Reply

December 22, 2021 at 7:53 am, Dallas Mount said:

Thanks for the example James. Just goes to show there are several ways to structure a cow business that has a good GM.

Reply

January 07, 2022 at 9:12 am, Sheldonna Zwicker said:

Interesting comment on the vet bill. I have developed a theory for my cow herd: if they need a vet, they need to belong to someone else. I simply don’t have time or manpower to accommodate those animals, or desire.

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December 22, 2021 at 7:24 am, C.J. McFadden said:

What about land rent or land opportunity cost?

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December 22, 2021 at 8:06 am, Dallas Mount said:

Overheads

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December 22, 2021 at 7:47 am, Adam Cline said:

You have hay cost but not pasture lease or value. I assume you are counting it as an overhead. If it is an AUM based lease should it be a direct cost?

Reply

December 22, 2021 at 8:06 am, Dallas Mount said:

We treat pasture lease as an overhead. It doesn’t matter if it is by the AUM or flat rent, it is an overhead. There are several reasons for this, beyond the scope of this article, but they include: simplicity, benchmarks, and practical decision making.

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