COSTING BENCHMARK HELPS FEEDLOTS MANAGE THEIR BUSINESS

Originally published on November 22, 2001

 

This fall, I was fortunate to meet a young farmer who had begun backgrounding calves.

While he knew his costs, he was hoping to internalize a costing benchmark that would help him manage his business.

Using the cost-per-head-per-day concept first introduced by Donald Fedie in How to Farm for Profit, published by Iowa State University Press, I think we found what he is looking for.

First let's look at the feedlot.

It holds 300 head and specializes in backgrounding calves.  In a backgrounding feedlot, weaned calves are bought at an average 500-pound weight and fed to an average of 850 lb.

These 850 lb. animals are then sold to a finishing feedlot that will bring them to an average finished weight of 1,250 lb.

The average daily feed cost is about $1.25 per day. The average daily gain, or ADG, is estimated to be 2.3 lb. per day.

 

It is important for the feed ration in a backgrounding feedlot to promote the growth of muscle and not merely fat. For this reason the average daily gain in a backgrounding feedlot is lower than that of a finishing feedlot.

To determine its cost per head per day, the feedlot must calculate the cattle-on-feed days.  Since the feedlot holds 300 head, we can deduce a maximum capacity of 109,500 cattle-on-feed days (300 head multiplied by 365 days per year).

This of course is not realistic, because we know that the individual pens cannot be filled with calves on the same day that the grown calves leave.  For our purposes, a better target for maximum cattle-on-feed days is 99,000 days, or approximately 90 percent of the maximum capacity.  Details of this target benchmark are provided in table two.

                       

In table one we see the variable and fixed costs on a per-head and per-head-per-day basis. In the example, the feedlot operator's variable costs are $34.61 per head, or 23.1 cents per-head day. His total cost, including feed, is $260.78 per head, or $1.739 per-head day.  His cost-per-lb. gain is 75.6 cents per-head day ($1.739 cost-per-head day divided by 2.3 lb. average daily gain).  This is our feedlot operator's cost of doing business.

 

 

In table three, we examine the profit per head. It clearly identifies the current "buy-sell squeeze" that is affecting most backgrounding feedlots. Using the cost-of-gain numbers from table one, we calculate a profit per head of $26.72. It is important to remember from table one that in our total expenses, we already deducted a management charge of  $18.94 per head.

                        

We have looked briefly at the consequences of not keeping the feedlot full. You can see from tables one and three that at 60 percent capacity, the cost-per-pound gain rises to 81.3 cents per-head day and feedlot profit drops to $7.08 per head. At 45 percent capacity the cost-per-pound gain rises to 86.9 cents per-head day and the feedlot is losing $12.35 per head.  This loss is a consequence of fewer cattle absorbing the fixed expenses.

In table one, we can see the fixed costs per head rise from 25.8 cents per-head day at 90 percent capacity to 51.8 cents per-head day at 45 percent capacity.

Many feedlot operators think that they can simply feed cattle when they want to. This is not true.

Good feedlot managers know their cost of business and do their best to keep their feedlots full. There is no doubt that our young feedlot operator will get his best education by running and managing his business. With equal certainty, I feel that he will be better able to apply sound management practices once he understands his business benchmarks on a cost-per-head-day basis.

 

Allyn Tastad, certified general accountant, is a partner in the accounting firm of Hounjet Tastad Harpham in Saskatoon at 306-653-5100, e-mail at allyn@hth-accountants.ca or website www.hth-accountants.ca. He is also involved in the family farm near Loreburn, Saskatchewan.  The opinions expressed in this column are for information only.