Figuring Cost of Production

Since recently doing business numbers for tax purposes I was spurred on to figure out our cost of production (what it costs to raise one animal). Doing this each six months would be ideal but I seem to only manage getting it done once a year. 

I like to know COP out of curiosity and because it helps me figure out where I’m spending too much which is something I tend to overlook until I do the numbers. I can see areas to try to cut costs on (which is something I can control). If I know what it costs to raise one ewe I know what my break even market price is. If market prices head that low, I can be prepared to get out before I take a loss.

Besides, the way I figure it, if I'm not staying on top of what it costs me to raise sheep I can hardly complain about the consumer not paying enough to make me a living. After all, we are both part of the food equation.

So what goes into my cost of production figuring?

All of my direct expenses which I categorize as those expenses that rise or fall on a per head basis. So if I added ten sheep the expense would increase. If I sold ten the expense would decrease.

That said, there are always some expenses that are hard to peg down and then I get to decide where to put them. Like medicines and vet supplies. These are not always given to every animal but I include them and calculate them as a cost per head. Any expenses that don’t fit into the direct cost category are fixed and I put these into the overhead category which shows up later in my financial figuring. So you can see there is leeway and preferences when doing economics but as long as your expenses are being placed somewhere it will work itself out in the end.

So in my COP figuring are the following:

Hay feed (run both scenarios of making own and buying)
Grass grazing fee (set at 10 cents/Head/Day)
Mineral
Salt
Shearing
Vaccinations
Worming
Medicine and vet supplies
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Yes, I charge the ewes for grazing grass. They are eating on the land and the land needs to be paid for. Also, in case you're wondering, I put guardian dogs costs into my overheads category. 

In 2011 the cost of production was low, which I’m glad to see since I’m aiming for low input, grass farming. Two things helped it out. We didn’t pay for shearing in 2011 because we hosted shearing school. Shearing adds $4-$5 per head. We don’t worm the whole flock, only who needs it so that expense is minimal. Also my cost for making our own hay is probably low but we have a good arrangement that makes it that way. If I do the figuring with purchasing hay my COP rises by $12 per head.

Economics can be done in many ways and I used to fret that my numbers never matched the other guys. Now I realize the main point when doing numbers is to settle on a way that works for me and use that method each year. Then I have a benchmark from year to year. So it isn’t about what the other guys numbers are, it about using your own numbers as the valuable tool they are.

4 comments:

  1. Hi Arlette
    So do you count all your breeding ewes and add the lambs produced that year?
    Janet

    Another question....when I wanted to post this question it asked me for a URL...what is that? Went under anonymous because I am not sur ehow that works lol.

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  2. Hi Janet,
    I count ewes, replacement ewe lambs and rams. The animals on place on a 'permanent' (year round) basis.

    A URL is a web site address (www.....). Anonymous works fine. If you have a google account for any other reason you can use that instead.

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  3. Do you figure in the cost of breeding? Rams cost money and eat hay. And how about death loss % and the cost of raising a replacement ewe?
    We do this stuff once a year too. Hay prices have been up and down so I like to take an average over 5 years and then kinda make it fall to the more expensive side... just incase the price of hay goes up. Its fun to do on a snowy day but not so much fun in the summer when you could be outside soaking up the weather! :)

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  4. Rams and replacement ewes are included in my head count, yes. Cost of production is a small piece of the figuring that I do for my own benefit. There is more number crucnhing after that. I also do the economics for each enterprise and this is where we figure out gross margins, factor in opportunity costs, overhead costs etc and come up with profit or loss.

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