Gross Margin Inside the Cow Herd
We just wrapped up a full school in Oklahoma City. It was an amazing week where 54 people spent a week exploring the leadership of their businesses and making new friends along the way. Wally Olson of Olson Ranch and founder of Ranching FYI stopped by and discussed cow depreciation and how to make decisions by knowing value-of-gain.
Wally’s discussion of cow depreciation got some people excited to take action on selling one part of their cow herd to emphasize another. The question came up of how this fits with the Gross Margin Analysis we teach at the Ranching for Profit School. Let’s dive into that together.
The Gross Margin Analysis starts with a determination of gross product (the value of production). This is a combination of cash sales and purchases adjusted for inventory change. Most calculate a gross product for the entire breeding herd. Next, we determine total direct costs (the costs that increase as the units of production increase) and subtract those from the gross product to determine gross margin.
Gross Product – Direct Costs = Gross Margin
By dividing the gross margin by the number of units in that enterprise we now have gross margin/unit (this measures the economic efficiency of the production unit).
If you did this like most people, you will have the gross margin for the entire breeding herd. However, inside that gross margin is a gross margin for your heifer development, a gross margin for turning those first-calf heifers into cows now bred with their second calf, a gross margin for your middle-aged cows, and a gross margin for your older cows. What if you broke each of those age classes of cattle out and ran a gross margin analysis on just that age class? You would likely find that one class is much better at producing value than another. For example, the gross margin per unit of making bred heifers, or making cows bred with their second calf might be much higher than your gross margin per unit of running a middle age cow. Or, it might be just the opposite. This is exactly what Wally is talking about when he encourages cow-calf producers to find those overvalued cows. Where is your cow-calf business better at creating value? How can you emphasize that part of your business?
Strategies for managing cow depreciation, or better stated, improving the gross margin of your breeding herd, are not a one-size fits all approach. Look inside your cow herd and let the gross margin of each age class point you to where opportunities lie for your business.