Money and management decisions: When to spend (Proceedings)

Aug 01, 2008
By staff

Most farmers and ranchers do not have an endless supply of money with which to run their business each year. Operational decisions should be made based on expenditures that offer a monetary benefit that exceeds its cost of implementation. Analytic techniques that assist a short-term (≤1 year) operational decision-making perspective include partial budgeting, decision trees, and standardized performance analysis (SPA).

Partial Budgeting

Partial budgeting is a tool that helps estimate the effect that the allocation of money to a management change for a current program will have on profitability to the farm or ranch operation. When developing a partial budget, only the revenue and costs affected by the specific change are considered. Consequently, this technique examines only a small part of business activities. If the proposed management change will affect the entire farm or ranch enterprise, a partial budget is inappropriate to use. Instead, a total enterprise budget is needed based upon a full cost analysis in which all variable and fixed costs are considered.

Typically, a partial budget assumes that the outcome of the analysis will occur exactly as calculated; thus variability in inputs and subsequently their effect on output of results is not considered. A partial budget is divided into two sections: added returns and added costs. Added returns include (1) the increased revenue generated by the proposed management change and (2) decreased costs resulting from the proposed management change. Added costs include (1) the increased costs associated with the implementation of the proposed management change and (2) the amount of revenue foregone because of the proposed management change. The difference between added returns and added costs determines if the proposed management change is more profitable (>$0) or less profitable (<$0) than the status quo. Only profitable management changes should be considered for implementation.

The following scenario is presented to illustrate the partial budget concept: A beef cow-calf rancher comes to your veterinary clinic during the early summer to enlist your help in determining why over the past few years he has averaged 12 bred cows of various ages (out of 200 breeding cows) that are thinner than herdmates heading into the winter feeding period. In addition to their winter pasture, he can usually get some back in shape after segregating and feeding them 5 lb of 20% protein cubes per head daily for 90 days. The feed cost ($300/ton; $0.15/lb) and associated labor to feed and care for them ($10/hr; 0.50 hr) are estimated to be $1.167 per cow per day ([5 lb X $0.15/lb] + [($10/hr X 0.50 hr) / 12 hd]). At the end of this feeding period, 6 cows typically remain thin and are culled because they do not breed back after calving. He buys young bred cows to replace these cull cows. He sold these cull cows last year at a loss of $675 ($1100 replacement cost and $425 salvage value per head) and expects these market prices to remain steady for the next couple years.

After a visit to the ranch and a thorough investigation of all the factors that can be responsible for a "thin cow" problem, internal parasitism is determined to be the root cause. You recommend that this producer institute a deworming program for all his cows this winter and again sometime during the spring months before turnout to grazing pastures. You believe this should essentially alleviate the reproductive failure observed in these problem "thin cows" and the necessity to cull them. Following anthelmintic treatment, body condition should improve enough to restore reproductive efficiency in these cows to that of the rest of the herd as well as follow their same culling pattern. His current weaned calf crop is 84% (520 lb average steer calf weaning weight; 500 lb average heifer weaning weight). He routinely keeps back around 26% (22 Hd) of the weaned heifers as replacements in order to keep his cow herd at a stable size (he shows you records that around 89% (178 Hd) of the cow herd calves each year). The owner is willing to spend the $5.50 per head (anthelmintic, labor, miscellaneous) to deworm the cow herd. A 20-lb increase in calf weaning weight will also likely be realized, presumably because the cows milk better after eliminating their internal parasite burden. The producer predicts that he will sell his steer calves next fall at $108/hunderweight (cwt) base price with a $8/cwt price slide. The heifer calves will likely sell at $103/cwt along with the same price slide as steers.