Filetype PDF | Posted on 06 Feb 2023 | 3 years ago
Authentication
digital resources
320x Filetype PDF File size 0.66 MB Source: www.canfax.ca
Calculation Choices When Evaluating Cost of Production
Cost of production (COP) is the sum of resources that go into production, including land, hired
labour, and capital, along with cash and non-cash expenses (unpaid labour and depreciation).
Both financial and production records are needed to calculate COP (Larson, 2014). Financial
details required for COP analysis are mainly located in an operation’s accounting records. Go to:
http://www.beefresearch.ca/resources/recordkeeping/level-two.cfm for more information
about financial records. Production records required for COP analysis include: the number of
females exposed, calves born, death loss, calves sold, prices, cattle weights, grazing details,
winter-feeding program, etc. These production records will help calculate enterprise-specific
COP. The challenge arises when splitting shared costs across enterprises.
There are several choices made when calculating the cost of production. These choices will be
influenced by what you want to get out of the data. This fact sheet outlines several key choices
that practitioners make with their associated trade-offs.
What do you want to get out of a COP analysis?
• Break-even price estimate on weaned calves for market
• Cash cost and net income for bank loan application
• Compare breeding stock groups for profitability
• Benchmark total farm costs to better understand trade-offs between enterprises
• Understand competitiveness in your region or production system
• Understand the reality cow-calf and beef producers face
• An industry benchmark that reflects the financial health of producers with that enterprise
One should evaluate why they want COP analysis done and match the methodology to best suit
that objective. Historically cow-calf benchmarks and COP have been calculated by provincial
organizations to establish regional comparisons for producers. For a list of these provincial
methods, refer to Appendix A.
The methodologies used by Alberta Agriculture and Forestry’s AgriProfit$ and CDN COP Network
for COP analysis have some fundamental differences. AgriProfit$ uses an accrual adjusted COP
framework where the income statement for the whole farm has adjustments for product
inventory changes and accounts receivable in value of production. The variable costs also include
the adjustments for changes in supply inventory and accounts payable. AgriProfit$ primarily
reflects benchmarks for the industry at market value then uses economic costs methodology. In
contrast, the CDN COP Network reflects the producers’ benchmarks based on actual cost of
production for feed. These are calculated based on feed requirements from the rations and
animal inventories. Similar to AgriProfit$ the income statement for the whole farm has
adjustments for product inventory changes. However, the model assumes a stable herd and
heifer retention is adjusted to achieve that. Overall, the CDN COP Network will have relatively
higher opportunity costs, and AgriProfit$ will have relatively higher production cash costs.
Further discussion on the differences is in later sections of this fact sheet.
Whole Farm and Enterprise Analysis
Cost of production can be calculated on both a whole farm and individual enterprise basis
(Larson, 2014).
The whole farm analysis summarizes the operations’ total income and management return. For
producers, these values are often enough to summarize the farming operation cash flows and
profits. This whole farm perspective is important when considering the resilience of the operation
to demand or supply shocks in the market. Diversification, the use of multiple commodities as a
risk management tool, means that farms with more than one commodity may expect periods of
losses from certain enterprises. However, those enterprises are not necessarily removed if the
objective of financial stability for the family is achieved in the long run. Therefore, starting from
the perspective of the whole farm and the overarching objective of the operations is important
when starting cost of production analysis. Evaluating what percentage of revenue comes from
each enterprise can be informative if the farm is specializing in a single commodity, relying on
income from off-farm or other enterprises. However, there is so much variation in how farming
operations are set up that beyond basic information about net income, there is limited
benchmarking capabilities.
Enterprise analysis (e.g. cow-calf, backgrounding enterprises) allocates the whole farm expenses
and opportunity costs to the enterprises generating those expenses. Operations using enterprise
analysis can better understand the success of individual enterprises. The producer will then know
which enterprises are making or losing money and if they should then invest their capital in a
different enterprise. For further explanation of allocation, refer to the “Three Methods of
Allocation” section. In addition, enterprise analysis allows for greater ability to both benchmark
as well as understand the potential opportunities of a certain enterprise. There are many ways
that an operation or enterprise can be profitable. Many choices come down to producer
preference, environmental limitations and local opportunities to utilize resources close at hand.
Cost of Production
Cash Costs
Cash costs are the outlays over the course of the year, including machine and building repairs,
paid labour, veterinary products and services, costs of feed production, and purchased feed. The
CDN COP Network bases cash costs on actual cost of production for feed and land. AgriProfit$
uses the market value for feed and land, treating them as cash costs. In this way, AgriProfit$ uses
the market value for feed as a proxy for the feed opportunity cost.
Feed Costs
Feed costs can be reflected in two ways: using the market value of the feed (AgriProfit$) or based
on the cost of production (CDN COP Network).
The first method evaluates winter feed and summer pasture costs at a market value reflecting
the market value costs of the beef industry and treating them like cash costs. This provides a fair
market value back to the feed and land enterprises. It allows producers to evaluate if it is more
profitable to sell feed and rent out pasture or utilize them in the cow-calf enterprise. Some feeds
do not have a robust pricing system available such as silage, aftermath grazing, by-products, etc.
In these cases, an opportunity costs approach can be used for evaluating feed costs using the
market values as proxies. An example of an opportunity cost can be found by asking, “How much
does it cost me to feed a particular ingredient to cattle instead of selling it on the market?” or by
asking, “How much does it cost me to use my pasture to graze my cattle instead of renting the
pasture out to a neighbour?” An alternative for pasture is to use the pasture renting market
($/acre). These costs are then treated like cash costs in the analysis.
Winter Feed Costs: the cost of all feeds used by the cow/calf enterprise, purchased or
homegrown, based on the market value of these feeds (not the cost of growing the feed).
Pasture Costs: the value of grazing used by the cow/calf enterprise (exclusive of any other
retained ownership / backgrounding uses). Pasture is valued into the cow/calf enterprise
at market value (not cost) and is treated as a “cash” cost.
(AgriProfits, 2019)
Problems arise when mature producers have fully paid off their land and only have tax and land
improvement expenses. Using the market value of their pasture results in a higher feed cost
when, in reality, these costs can be lower due to the advantage of being produced on mortgage-
free land. AgriProfit$ can also calculate the cost of grown feed using in farm costs gross margin
for comparison if needed.
The second method uses the cost of producing the feed on-farm and the purchased feed costs as
used in that year to reflect the experience and situation of producers. Production inputs, land
and any purchased feeds utilized that year are included. Rations for each type of animal and
inventories are used to calculate total feed requirements. Any shortfall in production is assumed
to be covered by feed purchases at market value. Feed rations and yields are provided “as fed”
to balance the model. Below are the included costs for feed production:
Feed: Calculated as feed cost (purchase feed + fertilizer, seed and pesticides for own feed
production) + machinery cost (machinery maintenance + depreciation + contractor) + fuel,
energy, lubricants and water + land cost (land rents paid + opportunity cost own land)
Land: separated into owned and rented land, includes both crop and pastureland. Land
costs = Rents paid + calculated land rents for own land (opportunity cost).
By using the cost of land, the advantage that mature operations have is clearly shown as their
cost structure is lower when land has been fully paid off. However, the opportunity cost of not
doing something different with the land does not show. While the CDN COP Network can make
adjustments to use market value for feed, results are not shown that way.
Table 1. Pros and Cons of Feed Calculation methods
Method Pros Cons
Market Value Provides a margin back to feed and land Does not reflect the producer’s cash
enterprises. reality. As opportunity costs are treated
Shows true cost of production if like cash costs.
purchases were required in a drought
year.
It shows the economic results for the
specific year.
Cost of Production Reflects the producer’s cash reality. It does not account for the opportunity
Clearly shows differences between of selling those feeds into the market.
producers with land paid off vs. those Can inflate margins to the cow-calf
still making payments. enterprise by include margins that
Reflects timing of feed purchases belong to land and feed production
matching them to when they are utilized enterprises.
by the herd.
Timing of Bulk Feed Purchases
Timing of bulk feed purchases can become an issue if multiple years’ worth of supply is purchased
at once. In AgriProfit$, the feed cost will reflect the feed used that year. For example, if a
producer purchases two years’ worth of feed, the feed expenses will only be listed in year one,
and the unused feed will be counted as an asset in the operation and added to the feed inventory.
This removes the extra feed purchase cost from that years’ expenses. In year two, the value of
feed inventory used will be used with any adjustment for changes in market prices. This happens
no reviews yet
Please Login to review.
