Steady state herd
Breedcow+ is a steady state (stable) herd and as such there is no inventory change.
The value of inventory change is a vitally important component of the gross margin calculation in any accounting type historical or dynamic analysis. Given the seasonal variation in much of Australia, it is not unusual for this inventory change, when valued at market (not tax) values, to be at least equal in value to sales less purchases. Calculated gross margins will then vary according to the inventory values used, and the conclusions drawn from comparing such gross margins will also change according to the inventory values used.
Inventory valuations are much less of a problem with defined groups of turnoff cattle, as analysed for example in the Cowtrade or Bullocks programs. With a breeding herd the problem is that there is a multiplicity of groups, so overall changes in value depend on changing herd composition as well as on change in total numbers. Even with herd composition taken into account, decisions have to be made on valuing or not valuing changes in weight or body condition.
It was to avoid this problem of gross margins distorted by uncertainty over inventory valuations that the concept of the steady state herd was adopted for the Breedcow+ program. In a steady state (stable) herd there is no inventory change, hence no valuation issue. This simplification is satisfactory and desirable for comparing future management strategies where the objective is to compare the likely profitability of different turnoff or husbandry options.
Where a significant change in herd structure is shown in a steady state analysis, the criterion for comparison is the Gross Margin per Adult Equivalent after interest. In this case, the gross margin is adjusted for the change in herd capital between the two steady state models being compared thereby allowing for the opportunity cost of the change in herd capital.
In interpreting these gross margins users should remember that a gross margin is a profit measure that has both cash and non-cash elements. A herd undergoing build-up will show a cash surplus (sales less purchases less variable costs) which may be much less than the gross margin. The gross margin in this instance can be viewed as the total of the gain in cash and the gain in kind (cattle).
Given the problems of inventory valuation, a steady state model based on the known variables of weaning and death rates, sale values and husbandry costs will give a more consistent estimate of the underlying gross margin than the traditional accounting approach.