Knowing cost of production vital for cattlemen

SPRINGFIELD, Ill. — Identifying their business goal will help cattlemen determine where to allocate dollars in their operation.

“Are you selling pounds, are you selling genetics or are you selling grass?” asked Thad Tharp, senior loan officer for Land O’Lakes Finance Company, during a presentation at the Illinois Beef Association Annual Meeting & Awards Ceremony at the Illinois State Fairgrounds in Springfield.

In addition to lending money, Tharp also manages a 25-head cow-calf herd.

“But most of what I do now is graze stocker calves and place them into feedyards,” he said. “This year I decided to custom graze some calves and take a little safer route.”

Many cow-calf producers, Tharp said, are guilty of not knowing the grazing costs for their cowherd.

“Every day that cow can pack her own lunch and haul her own manure, I’m making money,” he said.

Cattlemen should track the day they put cattle into a pasture and what day they are removed from the pasture.

“Be honest with yourself on how many effective grazing days you had and about the expenses you incurred over those grazing days,” Tharp said.

Return on investment, or ROI, the loan officer said, is important for cattlemen, but there is also the return on enjoyment.

“There is value to return on enjoyment because we’re not here very long, so we want to have fun while we are,” Tharp said.

“Knowing your cost of production is arguably the most important factor in your operation for profitability,” he said. “I’ve seen guys figure cost of production 17 different ways, and if you’re selling genetics, individual animal numbers are important.”

However, for commercial producers, focusing on individual animal performance can cost cattlemen money.

“Individual performance in a commercial herd is far less valuable than we place on it, in the Midwest,” Tharp said.

He encourages cattlemen to divide their balance sheet into current, intermediate and long term.

“You want the assets side as heavy as you can get it and your current liability as light as you can get it,” he said. “If you have liabilities, put it on your long-term assets like real estate.”

Cattlemen should not buy any more machinery than is necessary.

“You have to have some, but depreciation is a killer,” Tharp said. “When this market turns, you’re going to have to do hard things.”

It is about determining the difference between need versus want.

“I’ve had to help people get out of agriculture because they frivolously spent their earnings and then some,” Tharp said.

“If your banker or tax accountant tells you to spend money at the end of the year, knowing that you have to borrow more than 50%, to avoid income taxes, don’t walk, run,” he said. “That’s a terrible idea — pay the taxes because that’s your best investment for the future.”

Unless that piece of machinery is needed to improve the overall operation.

“Depreciation on machinery is no big deal today, but in five years, it really hurts,” the loan officer said.

Tharp advises cattlemen to know their numbers as good or better than their accountant or lender.

“The numbers are no fun to do,” he said. “Everybody wants to run cows through the chute or check pastures, but this is becoming more critical every day.”

Owners equity is net worth divided by total assets.

“This number tells you for every dollar of asset you have, you owe the bank this much money,” Tharp said. “The goal is to be at 50%, but when you’re young and starting out, it will be closer to 70%.”

Cattlemen should be transparent with their partners.

“Numbers don’t lie, unless you’re lying to the numbers,” Tharp said. “There’s times when you don’t want those numbers to be real and if you tell yourself they are not, long enough, you’ll start to believe it.”

Crop farmers have experienced consolidation to fewer, larger operators.

“I think the high market for cattle is going to do the same thing,” Tharp said. “I’ve seen it in the West a little bit.”

Some of the family ranches in Idaho are worth six to seven times what they were 10 years ago, the loan officer said.

“When the generation transfer happens, the kids don’t want anything but the cash,” he said.

If there is a financial problem, Tharp said, it is important to face the facts.

“Then go ask your banker what to do about it,” he said. “Don’t put yourself in a corner and stay there because that’s when it gets worse, so make the changes.”

“Know your why,” he stressed. “The reason I changed a fuel filter on the tractor in the middle of a pasture at 8 p.m. is because I want my kids to be able to do it.”

There are opportunities in the cattle business, Tharp said.

“You need to keep your financial strength ready to capture those opportunities,” he said. “Bite off what you can and don’t bite off more than you should, because it’s not fun to dig out of the hole.”

Illinois needs more cow-calf producers, Tharp said.

“Cows are going to be expensive,” he said. “Identify the long-term goals for your operation because that will serve you well for many years to come.”