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You achieve nothing financially by breaking even in back grounding or feeding cattle. Yet retained ownership and feed yard projections most often calculate break-even as if it were the ultimate goal. It’s extremely important to understand what is included in the cost to arrive at break-even or net returns. Most calculations only include the feed yard’s direct cost of production. Nothing is included in the cost to cover indirect or overhead costs, the owner’s labor and management (living withdrawals) or taxes. Your business will go broke if there is no income to pay overhead costs. Many producers must have something to live on. If you earn a taxable income, self employment taxes and income taxes have to be paid. Financial profit is properly defined as return to the producer’s equity capital at risk after all direct, indirect, and management costs (living withdrawals) are paid. Revenue minus direct cost is the gross margin.

When doing projections or evaluating closeouts always include the cost of a portion of the overhead and indirect costs (phone, utilities, accounting and secretarial services) of the business plus returns to owner management and labor. The latter can be arrived at by estimating how much it would cost to have a non-family member to do the labor and management activities. A review of your overhead costs and family living withdrawals in past years can provide good information for projections. Add these costs to the direct cost to calculate your break-evens. Consider these costs as a margin that must be covered to justify taking on the additional management responsibility.

In projections, establish your target net return and determine what sale price is necessary to cover total costs to justify taking on the additional risk. It’s good to consider at least three levels of possible outcome (pessimistic likely and optimistic prices). Calculate what the target net-return to risk (profit) and equity capital will be for each price situation. Always remember you achieve nothing by attaining break-evens that only include the direct cost of production.

Most cattle producers have sustained considerable equity loss in the past two years. Many need to use caution as well as risk management tools to avoid further deterioration of their financial position. Recovery of equity is a painful process requiring top management. Not only are margins narrow, but when income is generated that could rebuild equity, a good percentage first must be paid for self employment and income tax.

Many producers need a guideline to help them establish the value of their managerial services. The following is a suggested approach. Normal total farm or ranch professional management fees will run between 5 to 10 percent of the gross income for yearlong management. Beef cattle would be on the lower end of the rang whereas intensive crop production is on the upper end. Operational management activities are performed in the feedyard and the cost is included in fees paid. The marketing and financial analysis, and associated decisions are the responsibility of the cattle owner or manager. A reasonable goal would be to charge 5% of gross income adjusted for the average days on feed for owner management. For example, cattle on feed for 180 days would accumulate a management fee of 2.47% (180/365 x 5%). For a 1,150 pound steer at a $64/cwt price (or $736) this would be a management cost of $18.18 per head. On a pen of 100 head of steers, management would be paid $1,818. In order to generate a modest full time salary, more than two thousand head of cattle must be fed.

In the case of back grounding or preconditioning calves, the producer-manager must tame care of the operational activities as well as analysis and decision-making. This is an intensive activity in terms of management input. Suggestions are to use the 10% of gross income adjusted for days back grounded. For example, back grounding a 600-pound steer worth $420 for 45 days would cost $5.18 per head (45/365 x 10% $420). The returns to management would be $518 on a 100 head herd. Additional cost is added to management for labor provided.