SPA 10: Marketing Culls and Calves

By Lorie Woodward Cantu

Editor's Note:  This is the tenth installment in a 12-part series on cow-calf Standardized Production Analysis (SPA) that was developed by the IRM Committee of the National Cattlemen's Beef Association. This series has been created in partnership with Dr. Damona Doye, Regents Professor and Extension Economist at Oklahoma State University/Oklahoma Cooperative Extension Service, and Stan Bevers, Professor and Extension Economist at Texas AgriLife Extension Service/Texas A&M University.

In last month's installment, we began calculating production ratios using the information that we've collected throughout the year. This month, we will complete the remaining production-related calculations involving breeding stock sales and death loss.

"A cow-calf operation has two primary revenue streams: selling calves and selling culls," says Stan Bevers, professor and Extension economist at Texas AgriLife Extension Service. "While culls do not generate a large percentage of an operation’s income, they are too important to ignore."  

Calf sales usually occur during a specific two-month period, but cull cattle can be sold throughout the year, he says. SPA is designed to analyze a 12-month period; therefore, it is important that producers record all the income, including cull sales, generated during that 12-month period.

According to Bevers, some of the more successful ranches with which he works merchandise their cull breeding stock instead of just hauling them to the auction market. One seedstock producer, whose herd genetics are in high demand, places ads to draw attention to his cull breeding-age females, Bevers says As a result, he realizes up to $800/head instead of the $400/head that he would have earned at the auction market.

Females are generally culled for two reasons: 1) they are old (past their breeding prime) and/or have a physical defect, or 2) they are open.

The aged cows, with or without physical defects, are generally sold for the slaughter market, while the open cows are sold and may re-enter another breeding herd. Cull bulls are usually slaughtered.

The end use of the culls is important within the SPA system because the end use determines what information a producer needs to collect. For those culls that go to slaughter, producers should record the number of animals sold, their total weight and total value, then use these figures to determine the average weight/head; average price/cwt. (hundred pounds); and the average price/head. Females and bulls are figured separately.

For culled breeding females, producers should record the number of animals sold and their total value.

From an income standpoint, there is a difference between selling calves and selling breeding stock. For calves, the entire revenue is counted on the income statement, he says. When it comes to selling breeding stock, the operation is selling a productive asset so the operator must calculate whether a gain or a loss occurred on the asset's sale. (Remember, purchased cattle are assets that are used and depreciated over time, just like a pickup.)

Obviously, the answer has significant tax implications as well as ramifications for the operation's bottom line, he says.

"In most cases, ranchers have their accountant take over at this point, but it is important for ranchers to understand what is happening to the net income," Bevers says. A gain or loss is calculated by subtracting the sale value from the "book value" of the asset, he explains. Book value is simply the asset's original purchase price minus the deprecation claimed since the asset was purchased.  

"All of this is fairly simple if the breeding stock was purchased," Bevers says. "However, many operations raise their own breeding stock and there is no purchase price to depreciate."          

As such, it is important to note whether the animal was raised on the ranch or whether it was purchased.

"Purchased cattle have an identifiable purchase price, giving them a concrete value for analysis. Except in the rare instances where ranches rely on accrual accounting, raised cattle do not have an identifiable cost; therefore, producers must assign a base value," Bevers says.

To be effective, the base value should reflect as closely as possible the actual cost of raising an animal from birth to a first-season breeding-age adult, Bevers says. While $800 historically has been a widely accepted base, the current actual figure is closer to $1,100, he says.

"Regardless of the base value that producers choose, they should be prepared to use it over the long term," Bevers says. "Remember, the base value is a reflection of accumulated cost, not market value. While it may be tempting to alter the base value to influence your operation’s bottom line, that one action would defeat the purpose of SPA, which is to help you identify strengths and weaknesses."

Breeding stock death losses can also affect an operation's bottom line, because each death removes a unit of the operation's productivity, Bevers explains. Producers should identify the number of raised females and purchased females and the number of raised bulls and purchased bulls that die during the 12-month analysis period.

For additional information on marketing culls, producers can access this paper http://pods.dasnr.okstate.edu/docushare/dsweb/Get/Document-5148/AGEC-613web.pdf by Damona Doye and Derrell Peel.                        

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