In today’s economy, we can no longer be successful ranchers without knowing where the money is going. Each enterprise, such as producing hay and raising replacement heifers, needs to be operated as a profit center. First, we need to determine if each enterprise is producing a profit and then analyze production costs to see if expenses can be reduced. If the analysis shows that an enterprise cannot be profitable, its operation should be discontinued.
Do you have good reasons for raising hay?
Dr. Curt Lacy, Extension Livestock Economist with The University of Georgia, poses the following three questions when analyzing whether cattlemen should raise their hay:
1. Why do you raise and put up hay?
2. What does it cost to put up hay?
3. If you weren’t putting up hay, what would you be doing?
Reasons for putting up hay will vary among ranches. They may include the following:
1. Our family has always raised hay.
2. I enjoy driving a tractor.
3. There is surplus forage in the pastures.
4. Haying keeps my employees busy during the summer.
5. My equipment is paid for.
6. If I produce my hay, I know it’s good quality.
Each of the above reasons should be addressed economically. When your family started raising hay, the economics were probably different than they are today. This is one of the situations where Dr. Lacy’s second question applies – “How much does it cost you to raise hay today?”
Raising hay because you enjoy driving a tractor is probably the worst reason on the list. How much is your recreation costing you, and how much can you afford for this type of fun? It might be cheaper to go fishing.
Economics should drive the decision on how to use the surplus forage. Would it be more profitable to buy hay and use the standing forage to graze stockers or use it to feed an increased cow herd? Another possible economical alternative may be to hire a custom baler rather than use your haying equipment.
Using hay production to keep your employees busy during the summer applies to Dr. Lacy’s third question, “If they weren’t putting up hay, what could they be doing?” Would it be more cost efficient if they spent the summer spraying pastures, fixing fence, and making other needed repairs on the ranch?
If your equipment is paid for, then it has probably been fully depreciated. There are other costs, however, for fuel and repairs. What are these items costing on an annual basis?
Quality can be a concern when purchasing hay, but weather may reduce the value of the hay you raise. In purchasing hay, you may be able to find a producer that is willing to sign a two- or three-year supply contract with the price based on quality and nutrient content. Hay samples can be taken upon delivery and sent to a laboratory for nutrient analysis.
What does it cost you to raise a bale of hay?
The big question to answer when determining whether you should raise your hay is: “How much does it cost?” Dr. Lacy, in his presentation at the Southeast Beef Cattle Marketing School in 2008, showed how to calculate the cost of producing hay. Before you can make an intelligent decision on whether to raise your hay, you must calculate your breakeven cost. You add your variable costs to your fixed costs and divide the total by the amount of production in bales to obtain the breakeven cost.
Breakeven Cost =
Variable Cost + Fixed Cost
Production (in bales)
Variable costs are typically production costs and would not be incurred if hay were not grown. These costs include money spent for fertilizer, herbicides, insecticides for grasshopper and armyworm control, fuel, equipment repairs and maintenance, labor, other incidental expenses, and interest on operating capital. If hay is produced on leased land specifically for that purpose, the rent is a variable cost.
Interest on operating capital is a variable cost that people tend to overlook. Operating capital is defined as cash used to pay for items needed to keep the ranch enterprise functioning. Regardless of whether operating capital is borrowed or withdrawn from a bank account, interest on this money should be listed as a variable cost. If you invest money in your hay operation, the enterprise should provide a return on your investment.
“Fixed costs reflect ownership costs,” says Lacy. “These costs occur whether or not a crop is produced – depreciation, insurance, interest and taxes. Being able to cover or pay for fixed costs indicates long-term staying power.”
Another fixed cost is the expense of planting and establishing the hay crop. It is considered a fixed cost because hay is produced for several years after the crop is established. Establishment cost is prorated over the number of years that the crop is expected to produce.
Ranchers tend overlook their time spent managing their operation when calculating enterprise costs. Collective management time allowances across the ranch enterprises are a good source for allocation of money for family living expenses. If the ranch enterprises cannot pay enough management expenses to take care of the family, you may need to consider working for someone who will pay better wages.
As mentioned previously, once you add all of the variable and fixed costs and divide the total by average expected annual production in bales, you know your breakeven cost per bale. If you can buy hay for less than your breakeven cost, it will be more profitable to buy your roughage. When hay is selling for more than your breakeven cost, the haying enterprise is earning a profit. Market value of hay you produce should be charged as a variable cost to your livestock enterprises as it is fed.
Regardless of whether you raise forage or buy it, a good investment is building a shed where hay can be stored and kept dry. A shed allows a producer to store extra hay when it is plentiful and reasonably priced so it is available for feed when forage is scarce. Stored hay that remains dry will last indefinitely.
If you are producing your hay, ask yourself why. Calculate what it is costing and compare your breakeven cost with market values. Are you making money by producing your hay?