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Q. My pastures are almost gone due to the drought conditions. Is it
more financial feasible to buy hay for my 120 cows or to sell them?
A. As drought conditions continue, livestock producers must make some
critical decisions related to their breeding herds. Should they move their
cattle to wherever there is available pasture? Should they buy hay (or
other supplemental feed)? Should they sell cows? If I sell my cows this
year, will I be able to find pairs to buy next year?
There is no single answer for any of the questions. Each manager must
evaluate his/her individual situation and make "best guesses"
as to issues like will it rain this fall and what will the price of calves
be next fall.
One way to compare the financial feasibility of the alternatives is by
using "partial budgeting." Partial budgeting is based on the
principle that changes made in the business will have one or more of the
following effects: 1) reduce costs; 2) increase income; 3) increase costs;
and 4) reduce income. The net effect will be the sum of positive economic
effects (reduced costs and increased income) minus the sum of the negative
economic effects (increased costs and reduced income).
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Option 1. Buy additional hay to feed 120 cows
for 4 months. Hay is available and can be delivered for $80 per
ton. Since this is otherwise a slow time, labor also is available.
|
| Reduced Costs |
$ |
Increased Costs |
$ |
| Pasture - Owned |
0 |
167 tons hay |
13,248 |
| Subtotal |
0 |
Subtotal |
13,248 |
| Increased Income |
$ |
Reduced Income |
$ |
| None |
0 |
None |
0 |
| Subtotal |
0 |
Subtotal |
0 |
| Total Positive Impact |
0 |
Total Negative Impact |
13,248 |
|
Net Effect = negative $13,248 or negative $110.40
per cow |
| |
|
Option 2. Sell 120 cows and buyback pairs next
spring |
| Reduced Costs |
$ |
Increased Costs |
$ |
| Pasture - Owned |
0 |
Marketing - 72,000@3% |
2,160 |
| Hay* |
29,808 |
Trucking - 500 miles |
1,000 |
| Salt/Mineral - 70 pounds |
1,260 |
Buyback Pairs 120@750 |
90,000 |
| Other Expenses |
6,000 |
|
|
| Subtotal |
37,068 |
Subtotal |
93,160 |
| Increased Income |
$ |
Reduced Income |
$ |
| 120 Cows Sold @ 600 |
72,000 |
None |
0 |
| Interest - 72,000@7.5%@270 days |
4,050 |
|
|
| Subtotal |
76,050 |
Subtotal |
0 |
| Total Positive Impact |
113,118 |
Total Negative Impact |
93,160 |
| Net Effect = positive $19,958 or positive
$166.31 per cow |
| *Assumes purchased hay. If
hay was home-grown and could be sold, value would go under "Increased
Income" instead of "Reduced Costs." However, it is
a positive impact in either case. |
In addion to answering financial questions, a rancher must think about
the genetics of the cow herd – are they irreplaceable or would this
be a good time to really upgrade the breeding? Will there be cow-calf
pairs available at a reasonable price next spring? Could the rancher use
a little break from feeding cows all winter?
At right is an example of how partial budgeting can be used to help a
livestock producer make the most informed decision. Assume that a ranch
is running out of grass due to drought conditions. There is enough stored
feed at the home place to keep the calves until the normal selling time.
The rancher wants to look at two options, although there are several others
to consider. Each livestock producer must answer all the questions given
his or her individual circumstances.
Information on handling taxes on income from unusual livestock sales
can be found here.
More information on partial budgeting can be found here,
along with a handy
form. Go to top of this page.
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