How Many Beef Cows Do You Need?
How many beef cows you need to have a viable operation is an often asked question. It is also a tough question to answer since every farm has a unique set of circumstances, asset base and management style. That said, I'll try to shed some light on the subject here.
For the purposes of this discussion, the term Gross Margin will be used. Gross margin (GM) is sales minus your variable costs. Variable costs are those that change depending on the level of production, such as total feed required. Gross Margin primarily accounts for the direct cash costs in producing calves. GM is the money you have left over to pay the cost of owning your assets, both cash and non-cash costs like depreciation, and to cover your living expenses.
In this context, two pieces of information are key to answering the how many cows question;
To answer the first question, you need to know how many dollars of GM are needed to cover your fixed and living expenses. This is calculated as:
Gross Margin $ = Gross sales $ - Variable Costs $
Gross Margin percentage is your GM dollar amount divided by sales dollar amount. This is calculated as:
Gross Margin % = (Gross Margin $ / Gross Sales $) x 100
For example, a 20% GM indicates that 80% of your revenue from sales is needed to pay variable costs and 20% is the margin that is left after variable costs are paid.
Table 1 walks through an example and shows a range of cow herd sizes needed to meet different GM dollar levels at different GM percentages.
Fixed Costs are costs which stay constant when you increase or decrease herd size. Examples include taxes and insurance on your land and buildings, and mortgage payments. The 2007 results of the Cow Calf Benchmarking Project conducted by the University of Guelph showed the average Fixed Costs per herd for the high profit group were $9,500. For our example in Table 1 this is used as the minimum GM dollar amount needed. This amount is then increased at increments of $10,000 to provide a return to cover living expenses.
The average GM% for the top herds in the cow calf benchmarking project was 11%.
To read Table 1 you find the dollar amount of GM you need on the left hand side. You then match it with your expected GM percentage across the top of the table. For example, if you needed a GM of $9,500 and your GM percentage was 10% you would need to have 165 cows to get to $9,500. If in addition to your fixed costs of $9,500 you needed $30,000 to cover living expenses, you would now need 687 cows to achieve it. If, through different marketing channels or better control of your costs, you could attain a GM of 15% or 20% those herd size requirements start dropping.
Table 1. Relationship of Gross Margin $ and Gross Margin % to number of cows required*
*Assumptions: 600 lb weaned calf; $1.05/lb average market price; 95% birthing percentage; 4% calf mortality rate to weaning
These cow herd sizes are dependent on the assumptions made to create the table. The assumptions are spelled out at the bottom of the table; changes to any of these assumptions will of course change the herd size requirements.
If you start working backwards using these assumptions and a 10% GM, variable costs would need to be equal to $567 per cow. Here's how I arrived at that figure:
The high profit herds in 2007 had variable costs of $600 per cow.
When evaluating the economics of your beef cow herd, questions beget tougher questions, starting with:
These become your starting point, and your next questions are:
If the answer is no then:
How many cows you need depends on your margins: what you can get for your calves and how much will it cost you to get that market price. What your fixed and living expenses are can be a starting point to working backwards to what your cost of production is and how large your herd needs to be to achieve those targets.
Author: John Molenhuis - Business Analysis and Cost
of Production Program Lead/OMAFRA
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