Introduction Coping with the consequences of drought is costly for livestock producers.  This article focuses on beef cattle and other livestock that use pasture are the main source of feed.  Options will vary from farm-to-farm but in each case one of these options is likely to be less expensive that the others.  Options include buying various types of forages and feed, reducing animal numbers, or some combination.  The discussion that follows is intended to show how different options can be evaluated, using information from the NCSU enterprise budgets as examples.  These options include buying hay, using abandoned row crops or row crop residues, stockpiling, growing winter annuals, selling livestock, and selling the whole herd.  The examples used in this article are for beef cattle but these procedures apply to other pasture-based livestock such as meat goats.

Where to start?

 Begin by developing a feed budget for the current herd.  A feed budget is an estimate of the amount of feed that will be required to carry the animals through a feeding period of a certain length.  Feed requirements depend on number of animals, their daily forage intake needs, their daily energy, protein and mineral needs, and the length of feeding period.  The animal performance goals you have set (such as daily gain and body condition) affect these requirements.  In a summer drought situation it may be prudent to develop two feed budgets: Plan A if it rains and there is good fall grass growth, and Plan B if it stays dry and feed must be procured to carry livestock through until spring. The second step is to assess current feed inventories, if any, and then to determine additional feed needs, including forages and supplementary feeds.  The third step is to identify what feeds are available and the last step is to “run the numbers” and see which one is least costly.  The fourth step is to see if reducing livestock numbers is less costly than procuring feed to maintain current numbers.

Here is an example of a feed budget to carry a herd of brood cows through a fall and winter feeding period.  There are 50 brood cows with an estimated average daily intake of 25 lb. of dry matter per day.  The normal time spring pastures are available is six-and-a-half months away, 200 days.  So, if you maintain the herd at its current size it will take [50 cows X 25 lb per day X 200 day] / 2000 = 125 tons of dry matter.  In addition, the budget calculations should consider the daily nutrient needs of the cattle in terms of energy, protein and minerals.

Note this feed budget is calculated on a dry matter basis because that is the part of the diet containing the nutrients animals need.  All feeds contain some water, so an allowance must be made for this when thinking about the actual amounts of a particular feed on an “as fed” basis.  Some examples of typical dry matter (DM) content are: Hay ~ 85% DM; pasture ~ 20 to 25% DM, corn silage ~ 35% DM: ground corn ~ 88% DM.  Converting all feeds to a dry matter basis allows for a more accurate assessment and comparison of cost and value.

Some feed, whether grown or bought, will be lost and not eaten.  These losses may occur during harvesting, storage or feeding and they add to total feed costs.  Actual losses depend on the crop and type of harvesting, storage and feeding system.  Harvesting losses can vary from 5 to 50% of the amount of harvestable production, storage losses from 5 to 20%, and feeding losses from 5 to 15%.  Estimates of combined losses from all sources are from a minimum of 15% up to 50% of the initial amount of harvestable production.  So, for example, hay bought or made at $80/ton with a 30% loss effectively costs $115/ton for the hay actually eaten by the animals!

Considerations for bought feeds include the type, fiber content (usually from forage crops), content of the major nutrients -- energy and protein – and minerals.  The effective cost of alternative feeds include: The purchase price; harvesting cost if a standing crop, including losses; storage cost, including losses; feeding out cost, including losses; and dry matter content.  Some low quality forages may require supplementation.  The important cost to estimate is the total ration cost of what the animals actually eat, including forages and any supplements.

 Feeds with a high fiber content include hays, silages, row crop residues, and some of the higher fiber byproduct feeds.  Supplementary feeds include grains, oilseed meals, byproduct feeds and minerals. Depending upon the estimated expense of the various feeding options, it may be less costly to reduce animal numbers instead, including selling or removing animals. Selling calves early, selling off replacement heifers, reducing the number of cows, and selling the entire herd are all options to consider.  Animals may be relocated using contract grazing or contract raising arrangements.  Cattle may be grown out through retained ownership.  Selected options are discussed in more detail in the following sections. Buying or Procuring Feed Identify the alternative feeds available.  Compare individual feeds of the same type -- among forages and among grains & byproducts – and combine them to meet animal needs.  FeedVal is a spreadsheet that compares the value of the energy and protein content of various feeds relative to corn and soybean meal prices.  It is available on line at: http://www.ag-econ.ncsu.edu/ extension/Ag_budgets.html.  However, FeedVal, similar programs and rules of thumb for estimating values relative to the price of corn and/or soybean meal are only intended as screening tools to help identify the most promising alternative feeds.

The key factor is total ration costs, including losses and feeding out costs.  Losses and feeding costs are high for forages but vary by type.  Include costs and losses arising from harvesting, including grazing management; storing, and feeding out.

 Buying Hay

Costs to consider include the purchase price or cost delivered to the farm, storage losses, if any, feeding losses, feeding out costs. Convert costs to a dry matter basis for comparing alternative feeds.  For example:

·        If the purchase price, delivered, is $150 per ton, with an 85% dry matter content, the cost per ton of dry matter is $176 per ton of DM

·        If storage and feeding losses are 15% then the effective cost of the hay is $176 per ton as fed and $207 per ton of DM

·        If feeding out cost is $13 per bale, at three bales per ton, the cost is $39 per ton

·        The total cost of this bought hay is $215 per ton as fed, or $253 per ton of DM.

 Standing Crops and Crop Residues What is a standing crop worth?  A livestock producer would need to pay at least the value per acre to the crop farmer.  If it is a harvestable as corn, beans, etc. then, to the owner, it is the net income from harvesting and selling the crop (plus any insurance payments).  If the crop material is residue or an abandoned crop not worth harvesting, then, to the owner the only value is any cover crop or fertilizer value.  Crop residues are likely to have a lower feed value than a crop with some crop remaining (ears of corn or beans in the pod).  The maximum value of any crop material to the livestock owner is the cost of next best alternative feed, net of handling costs.  If the value of the crop to the crop farmer is less than the cost of the livestock producer’s next best alternative then there is room for negotiating a price acceptable to both. Hay Making Cost The NCSU Hay Making Budgets estimate the cost of small square bales at $76 per ton of dry matter, or $65/ton hay as made.  The estimated cost of large round bales is $64 per ton of dry matter or $54/ton hay as made.  The spreadsheet versions of the budget allow the user to modify these costs to suit their circumstances, including baling other materials like corn stalks.  The budgets only include the actual hay making operation.  Add the cost of the hay crop or the crop residue to get the total cost of the baled crop at harvest.  When planning, consider the risk of rain damage and field losses on cost. The NCSU Hay Making Budgets estimate full economic costs, not financial costs.  Costs include:

·        Operating costs of inputs -- fuel, fertilizer, chemicals, labor, seed, interest

·        Fixed costs  -- depreciation, interest, taxes, and insurance on machinery and buildings investments

·        Opportunity costs of family labor & equity at prevailing wage and interest rates.

These costs include moving bales off the field to nearby storage but not the cost of stacking, covering, etc. or feeding out. Yield estimates are included to derive costs per ton of dry matter.  A breakdown of the baling costs are shown in Table 1. Table 1.  NCSU hay making budget costs per ton of dry matter ItemLarge RoundSmall Square Operating cost $23   $27 Fixed cost $22   $26 Labor $19  $23 Total cost/ton DM $64   $76 Cost per ton as fed, hay at 85% dry matter $54   $65 Other forage enterprise budgets are available and may include harvesting cost. NCSU budgets do NOT include the cost of storage losses or feeding out the forage to animals, farm overhead cost or land charges. Forage Feeding Out Costs Feeding out costs should be considered when estimating total feed costs because these can be significant, particularly if a livestock owner places a value on his or her time or employees must be paid.  An example of the estimated cost using a 2006 model year 75 horse power tractor and bale spear for feeding includes annual ownership costs of $6.08 per hour and operating expenses of $10.50 for a total cost of $16.58 per hour.  Add labor at a cost of, say, $9.00 per hour and the total cost is $25.58 per hour.  If you use the tractor for 30 minutes to put out hay the feeding out cost is approximately $13. Table 2 summarizes the total cost of harvesting and feeding corn stalks on an as fed and a dry matter basis under three assumptions about the cost of acquiring the corn stalks.  Clearly, the cost is substantial and it would be prudent to consider alternatives, including grazing the corn stalks, fall stockpiling and winter grazing. Grazing Management Cost

Grazing is an alternative to mechanical harvesting and feeding a forage crop or crop residue if fencing and water are in place.  Managing cattle on grazing incurs cost too, however, in the form of time and equipment to move livestock.  For example, the estimated cost of owning and operating a ¾ ton pickup truck is $15.76 per hour and adding labor at $9.00 brings the total cost to $24.76.  If moving cattle takes 30 minutes, the cost is approximately $12 per move.

Table 2.  Cost of buying, baling and feeding corn stalks.

Item

Corn Stalks

Corn Stalks

Corn Stalks

Cost of crop residue

$0

$15

$30

Hay making cost

$54

$54

$54

Feeding out cost

$39

$39

$39

Storage & feeding loss

15%

15%

15%

Total cost as fed

$109

$127

$145

Total cost as DM,

at 80% DM as fed

$136

$158

$181

  Fall and Winter Grazing Other fall and winter forage options, weather permitting, include stockpiled fescue, a fall hay cutting and winter annuals such as rye and/or ryegrass.  Fertilizer is the only cost of producing grass from a perennial pasture like fescue.  If the fall growth is stockpiled and grazed there will be the added cost of managing the grazing.  If a fall cutting of hay is made there will be the added cost of making the hay and feeding it out.  Growing a winter annual will incur the cost of growing the crop and managing it for grazing.

Table 3 shows the estimated production cost for the three types of forage. Grazing management and feeding out costs are not included but are discussed below.  Stockpiling and winter grazing are both considerably cheaper to produce than the alternatives discussed previously but are weather dependent and may not be feasible for other reasons.

Table 3. Fall and winter forage production costs, per acre and per ton of dry matter.

Item

Stockpile

Fall hay

Winter

Annual

Operating cost

$35

$58

$127

Fixed cost

--

$22

$11

Labor

--

$19

$11

Total cost

$35

$99

$149

Production, tons of dry matter per acre

1

1

2.5

Cost per ton of dry matter produced

$35

$99

$60

   Total Ration Costs

The key question is what does the total daily feed ration cost?  Yields and quality are different for different forages so it is necessary to figure the nutritional needs of the animal to achieve desired level of animal performances and then figure the total ration cost, including supplementary feeds, minerals, etc.  In the previous example of 50 cows  needing 25 lb of dry matter a day for a 200-day feeding period required 125 tons of dry matter.  Table 4 shows cost estimates comparing  three alternatives based on:

·        Corn stalks at an initial cost of $15 per ton of dry matter, baled by the cattle producer and fed along with some supplementary feed like corn gluten feed,

·        Bought hay at $150 per ton that requires no supplement

·        A combination of one-third stockpiled fescue and two-thirds winter annual, grazed, with cattle moved twice a week.

 Table 4. An example comparison of the cost of alternative feeds Item Corn Stalks Bought hay Stockpile + annuals Forage cost$15,800$31,625$8,613Feeding out2,0802,600684Supplementary feed cost 3,50000Feeding supplement1,30000Total cost22,68034,2259,297Cost per cow454685186Cost per day 11317146Cost per cow per day2.273.420.93 Animal Performance

One final consideration is that animal performance affects production & income, for example, daily gain, milk production, body condition.  If animal performance is expected to be different on different rations, figure the differences in both income and cost, e.g., as income over feed cost.  In this situation, choose using a partial budget to determine the most profitable (smallest loss).  The change in profit is the sum of differences ( + or – ) in forage costs (operating & fixed costs), other feed costs, and income.  For cow-calf operations, look at whole-farm, year-round effects.

Reducing Livestock Numbers

 

As the feed examples show, coping with drought through feed procurement is an expensive proposition, so it is necessary to consider changes in livestock numbers in addition to, or instead of, this approach.  Reducing numbers economizes on available feed resources.  Options include removing some or all animals by selling or relocating them.  Selling animals might include market livestock, replacements, selected breeding stock, or the whole herd.  Relocating animals might be possible through contract grazing, contract raising or retained ownership.  The economic consequences of some of these options are evaluated below.

 Hold ‘em or Fold ‘em? Selling feeder calves earlier than normal reduces the pressure on feed supplies but may also reduce net income.  Projecting the net profit from keeping feeder cattle depends on estimated weight gain, changes in cattle prices and added feed costs.  For example, if you have 550 lb. steer calves and the current price is $1.15 per lb, an animal is worth $633 per head today.  If you keep this animal for two months and it gains 75 lb you now have a 625 lb animal.  Heavier animals sell at a lower price per pound.  Cattle prices usually (but not always) fall from early August until late October or early November.  There may be a general shift in cattle prices, up or down, that offsets or adds to this seasonal decline.  Current (August 23rd, 2007) futures prices for feeder cattle suggest prices will weaken.  Other factors that can change the cattle outlook include unexpected changes in significant supply and demand factors, such as weather, forage supplies and quality, crop and feed prices, cattle supplies, and government policy changes.  All of these affect prices and are a source of the volatility that cattle producer have always had to cope with.  If you expect 625 lb cattle prices to be, say, $1.08 per lb then this animal is worth $675 per head and you have added $42 in value.  The key question is whether you can make money from this projected gain under the current feed situation. A second option is to sell your replacement heifer calves.  The cost of raising replacement heifers is greater than many people think.  Even in normal times it may be more economical to buy rather than raise heifers.  Table 5 shows examples of heifer raising costs based on university enterprise budgets. Table 5.  Heifer replacement costs. ItemBeefMO, 2005BeefKS, 2006DairyNC, 2005 Start Weight540 lb550 lb90 lbValue of calf$599$681$200Operating cost$438$538$995Fixed cost$28$44$184Labor$50$54$224Total Cost$1,087$1,317$1,580

A third option is to reduce cow numbers.  The goal is to preserve the most productive animals as the basis for rebuilding.  However, this approach reduces revenue because there are fewer calves in the next calf crop.  It reduces some out-of-pocket costs but not all and it does not reduce fixed costs (asset ownership costs) or overhead costs.  It also reduces labor requirements, either the time spent by family members or wages paid.  Overall, net income likely will be reduced

 Table 6 is an example based on the NCSU beef-cow enterprise budget developed in 2006.  This budget is for a 50-cow herd.  Costs and returns were re-estimated for a 30 cow herd on the same land base, assuming feed is available to support this number of animals.  Operating expenses and revenue were reduced in proportion.  Fixed costs, by definition, are unchanged and labor requirement is reduce by 10 percent.  Feed prices were NOT adjusted from 2006 levels.   Profit, as measured by returns to land, management and farm overhead, is negative in both cases but the 30 cow herd situation has a $3,311 greater loss.  This change, $3,311, represents the “cost” of this strategy.  If the alternative is to buy, bale and feed corn stalks for the 20 cows then, based on Table 4, the cost would be $9,080.

Table 6.  Cow-calf costs and returns at two herd sizes.

Item

50 cows

30 cows

Revenue

$26,961

$16,177

Operating cost

$26,277

$18,961

Fixed cost

$9,222

$9,222

Labor cost

$2,250

$2,093

Total cost

$37,749

$30,275

Net Returns to land, management and overhead

-$10,788

-$14,099

  Selling the Herd and Ceasing Production

Cow-calf profit margins are slim on the average and are non-existent for some producers.  Table 7 shows actual financial results for a group of Minnesota cow-calf producers in 2005.  Comparable information is not available for North Carolina producers but there is little reason to expect the situation here to be much different.  This suggests that producers should assess the past and expected future profitability of their cattle operation as part of their drought management planning.  For some, selling the entire herd may be the most appropriate option.

Factors to consider include:

·        Past financial performance,

·        The estimated cost of coping with the drought,

·        Expectations of future cattle prices, cost of production and profitability.  In particular, it is likely that energy, fertilizer, and feed costs will cost more than historically.

·        Age, health and family circumstances.

·        Options for the farm if the livestock are sold and the financial implications of these.

Table 7.  Financial performance for cow-calf operations, Minnesota, 2005

 ItemLow

Profit

Average

High

Profit

Revenue

$463

$613

$742

Operating cost

$415

$371

$340

Fixed & O/H cost

$130

$81

$60

Total cost

$545

$452

$399

Labor & Management charge

$80

$72

$73

Net Return

-$161

$89

$271

  Selling the Herd and Restocking Later

How much would it cost to sell now and repopulate the herd next year?  50 cows sold now and bought back at, say, a $300 per head difference = $15,000 added cost.  Add to this any loss of income from calf sales, net of reduced feed and other cost savings.  Only the most profitable herds facing extremely high feed costs are likely to benefit from this option.

 Other issues

Other issues to consider include financing the cost of providing feed and income tax management.

Loans must be repaid.  Disaster assistance loans typically offer lower interest rates but these are still loans to be repaid.  Develop financial projections to ensure the cattle operation is financially viable and capable of repaying these loans from future profits and cash flow.

The IRS has two special rules covering unusually large sales of livestock caused by drought (or other weather disasters) that might provide some tax benefits.  These are described in a separate article by NCSU’s Guido van der Hoeven.

  Concluding Comments Coping with the effects of the drought are a balancing act involving feed options, livestock options and economics.  The discussion in this article tries to show how the economics fits into the farming decisions.  The examples are intended to show the process of evaluating the financial impacts of various alternatives and are NOT intended to represent recommendations or “the answer.” Spreadsheet versions of the NCSU beef and forage budgets are one tool producers and their advisors can use to “run the numbers.”  Enterprise budgets are guidelines only and farm situations vary widely.  They can be used as a template to figure cost of production.  For planning purposes, published budgets should be used as a guide and always modified with farm specific information.  NCSU beef budgets include cow-calf, backgrounding, summer grazing, pasture finishing, conventional finishing, and pre-conditioning.  Forage budgets include perennial and annual grasses, hay making, and silages.  There are nine dairy heifer budgets.  These are available as print and spreadsheet versions on line at:http://www.ag-econ.ncsu.edu/ extension/Ag_budgets.html In summary, cattle must be properly fed to achieve short- and long-term production goals. Land, labor and management resources vary from farm to farm, so there is no one-size-fits-all strategy. Develop a feed budget to figure animals’ feed needs in terms of dry matter and nutrients. Producers should consider all options, including:

·        Buying or procuring quantities of feed with adequate fiber, energy, protein and minerals. Evaluate the feasibility and profitability of alternatives including buying and harvesting standing crops or crop residues, growing fall pasture and winter annuals, and buying forages, by-products, or other feeds,

·        Reducing animal numbers, including selling the whole herd,

·        A combination of strategies.

 Evaluate the economic consequences of these options.  Measure forage costs at the animal’s mouth, including production, storage, harvesting and feeding costs and losses.

Estimate impact on total feed cost, including supplements.  Include any effects on animal performance and income using partial budgeting.  Similarly, evaluate the financial effects of reducing animal numbers.  The financial impacts of different options can differ widely – pencil it out!  There is a lot of money at stake here and taking short cuts on decision making could prove very costly.  This is work but remember “If it’s easy, fun or can be done from the seat of a tractor, there ain’t no money in it” (a quote from an anonymous cowboy).

Geoff Benson, PhD, Dept of Agricultural and Resource Economics, North Carolina State University