VM 577P Herd Production Medicine

Producer Enterprise Budget Exercise

Static out of date page for placeholding

Current version -  pdf

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Purpose: The purpose of this exercise is for you to begin developing the skills and knowledge to:  

Understanding the costs and returns in an enterprise budget is the first step to performing cost-benefit analyses for determining the economic value of veterinary interventions and procedures and for decision analysis of alternatives.

Task
:
Build a new or modify an existing livestock enterprise budget spreadsheet in Excel, Google Docs, Open Office, or other for doing ""what if's" on veterinary preventive programs

Livestock Enterprise Budget Spreadsheet

  • Goal: Create a new or modify an existing livestock enterprise budget spreadsheet to calculate annual costs and returns per production unit (e.g., calved beef cow or dairy cow) and per unit of production (e.g., hundredweight of milk or weaned calf), with professional veterinary service fees broken out from pharmaceuticals, biologicals and so on.

  • Background:

    Enterprise accounting is a method for determining if each "profit center" (e.g., producer herd, replacement rearing, crop production) of a farm is profitable on its own. It treats each major farm section, such as crop production and replacement rearing as well as the primary product production (milk in the case of dairy farms or calves in the case of beef cow-calf herds) as separate enterprises. If a market exists for anything transferred between these within-farm enterprises, then a producer could specialize in an enterprise, such as raising only crops or only raising replacements, rather than having an integrated operation. In an integrated operation, the crops are "sold" at local market price within the farm to the livestock enterprises and heifer calves are "sold" at local market price from the mature herd enterprise to the replacement rearing enterprise. The idea is that if one enterprise isn't profitable at least on paper when "buying" inputs from and "selling" outputs to the other integrated farm enterprises at local market prices, then the producer is likely better off closing down the unprofitable enterprises, expanding the profitable enterprises and buying those inputs, such as feed, from other producers or custom operators. Isolates those enterprises with which you as an ag animal veterinarian are concerned from those that you are not is critical.

    A unit of production is typically a hundred weight (cwt) of milk or feeder calf. The unit cost of production (UCOP), the cost of producing a unit of production, is the single most important summary measure a producer (and you) can use as a basis for making decisions. For producers of commodities, such as milk or feeder calves, selling into a cyclical market for long term survival an important goal  is to have a UCOP that is equal to or below the median value for the industry. Because the unit cost of production captures both the production and economic efficiency of an operation, it is a good measure for making benchmark comparisons between operations and for determining if a particular practice, such as adopting a new vaccine, is economically beneficial. If it lowers the producer's long run ucop, it is beneficial. If it doesn’t, it isn’t. If a producer’s ucop is high relative to market price or above the median benchmark for the industry, the next step is to determine why and to do "what if" scenarios for either reducing it, weathering the period of low price for an upturn or increasing the value of the product.

    Procedure:

    1) Read background material explaining enterprise accounting, the important measures, and their benchmark values. Examples of these materials are the following:

  • How to Farm for Profit: Practical enterprise analysis (DM Fedie, 1997)
  • Determining your unit costs of producing (UCOP) a hundred weight of calf (Harlan Hughes, pdf in Managing for Today's Cattle Market and Beyond (U Wyoming site TOC pdf))
  • Enterprise Accounting (GG Frank, 1997, pdf)
  • Idaho Enterprise Budgets (PDF & Excel spreadsheets - index)
  • Dairy Excel's 15 Measures of Dairy Farm Competitiveness, 2008 (Ohio State Bulletin 864 - pdf)
  • U.S. Top Dairies: Benchmarks for Success, 2001 (MW Stephenson, pdf)
  • Critical Control Points for Profitability in the Cow-Calf Enterprise, 2001 (AS R1750 Iowa State, pdf)
  • 2008 Estimated Costs and Returns for a 150-Head Cow-calf to Grass-finished Beef Production System in the Channelled Scablands Range Area of East-central Washington - html pdf
  • 2) Identify a region in which you want to practice (cost structures differ geographically), define the primary type of livestock enterprise that you expect will be your clientele (e.g. commercial beef cow-calf, commercial dairy, registered beef, feedlot, registered dairy, small ruminant, swine). If this identity isn't on your spreadsheet, enter it as text at some point.

    I've located many of the on-line resources needed for constructing the spreadsheets for the first two types of operations (commercial cow-calf or dairy) but not for the rest. You are free to select any type of livestock enterprise but you will have to track down example enterprise budgets for them or to develop your own from scratch.

    3) Find one or more livestock enterprise budgets and benchmarks for the type of operation and the approximate size (number of head) that apply to your selected region to serve as a model or to modify

    Livestock Enterprise Budgets produced by Agricultural Extension Services provide midrange estimates of costs and revenues (the cost structure) for typical producers in their region. You can locate these using Google.com search terms "enterprise budget" with qualifier terms such as "livestock", "cow-calf", "dairy", "feedlot" or "swine" for species, "pdf" for reports or "xls" for spreadsheets, and a state abbreviation if you like:

    General resources:

  • U Minn Ag Risk Education Budget library -  search    state websites
  • List of state enterprise budgets maintained by Ohio State University Extension (last updated in 2005)
  • Characteristics and Production Costs of U.S. Cow-Calf Operations (USDA ERS bulletin 974-3, 2001 pdf - 1996 data)
  • Profits, Costs, and the Changing Structure of Dairy Farming (USDA ERS bulletin ERR-47, 2007 pdf - 2005 data)
  • Regional examples:

  • Idaho Livestock Enterprise Budgets (beef, dairy, sheep, swine – pdf’s)
  • Iowa Livestock Enterprise Budgets (swine, beef cow-calf, stocker, feedlot, dairy)
  • Missouri Beef Resource Guide (extensive spreadsheet set) - Dairymen's Resource Guide - File Sharing (huge spreadsheet list)
  • Montana Farm Management (livestock – spreadsheets & PDF)
  • Nevada pdf list  - pdf
  • Oklahoma Livestock Enterprise Budgets (example reports for beef cow-calf, stocker – spreadsheets available for purchase)
  • Oregon Agricultural Enterprise Budgets  - (under the advanced search function - mostly pdf's and mostly from the 90's)
  • Utah Agribusiness Budgets
  • Texas Extension Cow-calf Economics Decision Aids Financial Planning Budgets
  • Wisconsin Center for Dairy Profitability Decision Making Tools
  • 4) Begin modifying or developing the enterprise budget for the type of livestock producer you selected above. Look at the layout of several from different sources to see how they are constructed and combine those that works best for you. 

    Generally, the printed version of a spreadsheet will be most convenient if it fits vertically on 8.5 x 11 pages from the top down rather than side to side. Sophisticated spreadsheet users may want to use separate sheets for feed and veterinary costs, carrying the summary values to the front sheet.

    To start from one of these as a template if you wish:

  • Save the spreadsheet to your flash drive or directory
  • As many contain Macros blocked for computer security reasons, you may have to enable Macros to open the spreadsheet
  • Enable editing
  • If the spreadsheet page is protected, you may be able to recover it by copying the entire block to a new page, keeping the formulas
  • So that you can keep rows and columns straight, bring back all the cell borders by clicking the upper left corner to select all the cells, right click, selecting "Format Cells," "Border" tab, clicking on both "Outline" and "Inside" and then "Okay"
  • 5) Modify or design the spreadsheet to provide "What if" flexibility. My ideas are the following:

    In the upper left area of spreadsheet cells, put:

    o The herd size

    o The average production

    § For dairies, put the herd's average days in milk and the average daily production in lbs.

    § For beef cow-calf, put the average weaning weight.

    § If the production is significantly different between groups, such as cows vs. heifers, split them out.

    o The important production profile rates (e.g., cow cull rate, cow death loss rate, heifer death loss rate, calving rate (number of calves / number of cows bred), calf death loss rate) for the type of enterprise.

    § Be sure to include those that can be manipulated by veterinary interventions.

    § If the rate is different between groups, separate out the groups. For example, the death risk for the dam and calf due to dystocia is often higher in first calf heifers than in cows. The pregnancy rates of second calf beef cows is often lower than that of first calf heifers or older cows.

    In the main body of your spreadsheet enterprise budget put at least the following columns:

    o Per unit costs of inputs (e.g., cost per ton of hay)

    o Quantity of input consumed per cow (e.g., tons of hay per cow). If the quantity is different between age groups, you can make each one a different row.

    o Cost or revenue per primary unit of production (e.g., per cwt (hundredweight) of milk (dairy) or cwt of calf sold (beef))

    o Total cost or revenue per cow at the herd average production per cow.

    In this main body, each type of input cost (e.g., lactating cow hay) or one income (e.g., cull cow income) should be a row.

    Because feeds are the largest component of variable costs and are highly variable, break feed costs into sufficient detail that each ration component for each production stage is present as a row.

    Be aware of the volatility of feed costs, which occurs due to such things as drought in major production areas, crude oil price volatility (which affects fertilizer as well as fuel costs) and events in other industries consuming these inputs. Within this volatility lies opportunities for substitution as well as significant financial risk.

    Break veterinary costs into at least professional fees, prevention (vaccines), routine group treatments and procedures (e.g., worming, pour-ons, implanting) and "other".

    Be careful of the veterinary cost estimates in many of the livestock budgets because they often include biologicals (vaccines), pharmaceuticals (pour-on's as well as injectable drugs) and breeding costs (semen, synchronization drugs) under "veterinary costs".

    Due to the competition in the biological and OTC drug supply business, the gross margin for drug and biological sales is often as low as 8% for large ranch and dairy accounts. Thus, only a portion of these overall veterinary costs are a direct professional service fees and only a small portion of the balance winds up in your pocket even if you market these products to producers.

    For an example of broken out veterinary costs, see page 3 of Colorado 2000-01 Livestock Enterprise Budgets (beef cow-calf, no dairy) at <http://www.coopext.colostate.edu/ABM/abm32.pdf>.

    Include each routine item (e.g., vaccines, wormers) as a row by name and use per label recommendations (i.e., two shots for killed viral vaccines) in a typical prevention program that you would recommend your type of client and include per animal costs.

    To determine what producers are using, see the relevant NAHMS reports at <http://www.aphis.usda.gov/vs/ceah/cahm/>. As these reports are large PDF files, this is best done with a personal computer directly connected to the Internet rather than through a phone modem. Examples of the information in these are the following (PDF page rather than document page):

  • Beef cow-calf:
  • § Parasiticide usage - PDF page 8 of <http://www.aphis.usda.gov/vs/ceah/cahm/Beef_Cow-Calf/bf97des2.pdf>

    § Vaccine usage - PDF pages 19-24 of <http://www.aphis.usda.gov/vs/ceah/cahm/Beef_Cow-Calf/bf97des3.pdf>.

  • Feedlot
  • § Injections - PDF pages 10-22 of <http://www.aphis.usda.gov/vs/ceah/cahm/Beef_Feedlot/FD99des2.pdf>

    § Metaphylaxis usage - PDF page 8 of <http://www.aphis.usda.gov/vs/ceah/cahm/Beef_Feedlot/FD99des3.pdf>.

    § Parasiticide usage - PDF pages 33-34 of <http://www.aphis.usda.gov/vs/ceah/cahm/Beef_Feedlot/FD99des3.pdf>

  • Dairy
  • § Vaccination and preventive practices - PDF pages 5--59 of <http://www.aphis.usda.gov/vs/ceah/cahm/Dairy_Cattle/Dairy02/dairy_reportv3-rev2.pdf>

  • Swine
  • § Vaccinations - PDF page 43 of <http://www.aphis.usda.gov/vs/ceah/cahm/Swine/Swine2000/finalswoodes1.pdf>

    For approximate costs of vaccines, wormers, delousers, fly tags, vitamin injections, growth implants and so on, you can use the following or others:

    o American Livestock Supply

    o PBS Animal Health

    o Valley Vet

    Include the labor and facility costs.

    Understanding the overall costs and cost per production unit of machinery and major facilities (animal housing, feed storage and handling, milking parlor) is important, particularly for making benchmark comparisons between herds.

    Pay careful attention to how labor and machinery costs are allocated between the farm's enterprises, particularly between crops and livestock.

    Be very careful how labor costs are established, particularly for family labor and for hired labor that often has housing, utilities and some food provided.

    Prepare to modify the spreadsheet to reflect the economic and husbandry conditions of your typical client.

    At this point, your spreadsheet represents the general cost structure for an average client rather than a particular herd. Due to supply and demand effects caused by weather and other factors, the prices of inputs such as feedstuffs and replacement cattle as well as outputs such as milk and cull cattle are quite variable. However, if set up well, you can enter a herd's information into the spreadsheet to examine "what if's" for various interventions against problems. For example, how much does reproductive performance have to increase to justify the cost of including a new vaccine in the vaccine schedule?

    If you have access to information from a particular herd, use it if the herd represents the clientele you expect to have in the future.

    Current prices within a region for feedstuffs, cull and replacement cattle are available from several on-line sources. One of the largest set of links is the USDA Livestock and Grain Market News Branch at <http://www.ams.usda.gov/LSMNpubs/index.htm>. Many local livestock markets are listed under the species and species class selections. Hay and other feedstuffs are also included, usually as FOB so you will have to add shipping costs to the farm.

    For pricing of feedstuffs that aren't traded, such as corn silage, see "Pricing Forage in the Field" <http://www.extension.iastate.edu/agdm/crops/pdf/a1-65.pdf>, "What is the value of a standing corn crop" <http://www.ag.ndsu.nodak.edu/aginfo/farmmgmt/pubs/Cornvalue02.pdf>, "An improved AUM for range cattle" (with feed equivalents) <http://jrm.library.arizona.edu/data/1965/186/15vall.pdf>.

    For pricing pasture, see documents such as "Determining Pasture Rental Rates" <http://www.ext.nodak.edu/extpubs/plantsci/hay/r1092w.htm>, "Computing a Pasture Rental Rate" <http://www.extension.iastate.edu/agdm/wholefarm/pdf/c2-23.pdf>, <http://jrm.library.arizona.edu/data/1965/186/15vall.pdf> or identify others by using the terms "pasture rental rates" in Google.

    Recent prices of livestock and commodities are also available in some farm trade magazines (e.g., Drover's for beef cattle, in print or at <http://www.drovers.com/>).

  • Discussion and Comments:

  • Veterinarian usage

    How are veterinarians used by your future clientele? What are the likely trends in this use? What is the "SWOT" for this aspect of practice?

    Cost of professional services

    Contrast the evidence on cost of professional services per production unit with your expectations from the professional services exercise.

    Preventive practices

    Why do significant proportions of producers likely use or not use particular classes of vaccines? What information do you need to justify this use or non-use? Where can you find this information or, if you can't find it, how can you develop it for your clients?

  • Other References:

  • Morris, DL (ed.). Standardized Performance Analysis of Beef Cattle Operations. Vet Clin NA Food Animal 11(2), July 1995.

  • Koontz, SR (ed.). Economics of the Red Meat and Dairy Industries. Vet Clin NA Food Animal 19(2), July 2003.

  • Producer Enterprise Budget Exercise Links

    What producers use currently:

    Example sources of product costs:

    Please note that this list is for teaching exercise purposes only and is not an endorsement. To find products you don't see listed, put trade name in search box on website.

    Feed costs