Breedcow+ Assumptions

The concepts underpinning Breedcowplus

The Breedcowplus program generates its own structure around a starting number of weaner heifers retained. The size of the overall herd is adjusted by altering the starting number of weaner heifers. The final herd structure depends on the number of weaners produced plus death rates and sales for each age group included in the model. The outputs of the model are herd structure, herd value and gross margins.

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Gross margins in Breedcow+

Breedcow+ uses gross margins to measure the profit outcomes of a set of herd structure, turnoff and husbandry decisions. Gross margins are shown as an aggregate for the herd, per head, and per adult equivalent.

Typically, livestock gross margins comprise gross income from cattle trading (sales less purchases) less those costs that vary as herd size or herd composition change (variable costs) plus or minus the value of inventory change. The calculation of a livestock gross margin in Breedcowplus is simplified through the use of a steady state herd modelling approach that removes the need to value inventory change (since there is none). This approach does not reduce the validity of the livestock gross margin produced as a tool to quickly scan and rank the choices available for improving herd profitability. Indeed it should give a more consistent estimate of gross margin than the accounting approach.

The only costs used in the calculation of Breedcowplus gross margins are variable costs. The essential characteristic of a variable cost is that it changes proportionately to changes in enterprise size (or to change in components of the enterprise). Apportioning overhead or other costs to various production systems is likely to give a misleading comparison. The test for a variable cost as used in Breedcowplus is “one more animal equals one more unit of cost”.

A secondary profit measure, gross margin after interest on herd capital, is also calculated in Breedcowplus. This calculation includes a notional interest cost on herd capital and is one method of accounting for the differing capital requirements of alternative herd structures. Strictly speaking, this interest rate should be the “opportunity cost” of capital, i.e. what it could earn in its best alternative employment if it was not tied up in cattle. For example, a management change that leads to a reduction in herd capital could use the rate paid on the most expensive loan as the opportunity cost, since paying off some of that loan off would be an obvious use for surplus capital. If no loans are held by the business, the long term deposit rate could be the most applicable interest rate to use.

Using gross margins in comparisons Whether a cost is considered a husbandry or variable cost depends in the end on why gross margins are used as a comparison instead of net incomes.

For example, if the gross margin per adult equivalent is $90, substituting one adult equivalent at $90/AE for one unit at $50/AE will increase net profit by $40 per adult equivalent substituted, or running one less adult equivalent, where the gross margin per adult equivalent is $90, would reduce net income by $90 (ignoring any stocking rate effects).

Because gross income and variable costs (hence gross margin) change as herd size changes but fixed costs largely stay the same, specifying net income rather than gross margin per adult equivalent (or per head) can be very misleading, as net income will not vary by the same amount when more or fewer adult equivalents are run.

The total cost per head or per adult equivalent is also often quoted and misused. While an interesting historical figure, it does not tell us by how much total cost changes if we change the number of adult equivalents, since only the variable costs change when herd size changes. The “fixed” part of total costs – by definition – does not change for small changes in herd size.

When relating changing herd size to changing net income via gross margins, a stocking rate effect may have to be considered. If so, stocking rates may be compared by doing two or more runs of Breedcowplus with each run specifying rates, price and husbandry costs consistent with a particular stocking rate.

The definition of a variable cost is tied intimately to the meaning and use of the gross margin it is used to calculate. Gross margins are calculated first for a whole enterprise but then are usually expressed per some unit of input, such as per $100 of capital, per full time labour unit, per unit of land or, as in the Breedcowplus program, per adult equivalent.

Husbandry costs include items like vaccines and supplementary feed, where one more animal incurs one more units of cost and one less animal saves one unit of cost.

Gross margins are used in the Breedcowplus program to compare turnoff or husbandry strategies that use the same resources and therefore incur the same fixed costs. The difference in the herd gross margin will therefore be the same as the difference in net income when two or more options are compared. We use the gross margin because it is simpler to determine the costs and the outcome is the same.

Take the example of a herd with figures of $120 per adult equivalent for sales less purchases (and inventory adjustment) and $20 per adult equivalent for variable costs. The gross margin per adult equivalent is $100, telling us that if we ran one less adult equivalent we would reduce the gross margin and hence net income by $100.

By contrast if we had calculated net income per adult equivalent after deducting all the fixed cost, the figure might be say $20/head. This has no relevance for estimating the effect on net income of running more or fewer adult equivalents. A corrupted calculation of gross margin that includes some enterprise fixed costs, such as yard and fencing repairs and vehicle costs, is no better.

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.

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Adult equivalents in Breedcow+

Another key concept underpinning Breedcow+ analyses is that of adult equivalents. The calculation of the total adult equivalents for each modelled herd structure indicates the relative grazing pressure exerted by the herd structure and, if herds have similar total adult equivalents, a meaningful comparison of relative profitability can be made.

The main calculation of adult equivalents is based on the total number of cattle carried for the whole year in all classes. The number carried is calculated as the opening number plus purchases less sales less spays. Cattle recorded as sold or spayed are no longer in the “number carried” and have an adult equivalent rating attributed to them separately.

What are adult equivalents?

Most planning in grazing livestock enterprises requires that track be kept of how much feed is used or at least of the “stocking rate”. Thus the comparison of herd structures, turnoff strategies or gross margins is undertaken whilst observing self-imposed limits on how much stock the property can carry.

An immediate problem encountered in herd modelling is that all cattle are not the same size and do not eat the same amount of feed, e.g. weaners eat less than bullocks. Likewise a herd of 2,000 cattle comprising breeders turning off weaners will most likely not eat the same amount as a herd of 2,000 comprising fewer cows but turning off older steers.

To ensure that herds are compared on the basis of consuming the same amount of feed when making predictions of relative profitability, feed requirements are estimated for each class of cattle relative to an adult equivalent.

For the Breedcowplus program an adult equivalent is taken as a non-pregnant, non-lactating beast of average weight 455 kilograms (1,000 lbs) carried for 12 months.

Animals of average weight over the twelve months of more or less than 455 kilograms are rated in proportion to their average bodyweight over the period. Thus a beast growing from 450 kilograms to 600 kilograms (average 525 kilograms) would be rated at 1.15 adult equivalents for twelve months. (525 divided by 455 equals 1.15)

Animals carried for periods less than twelve months, e.g. sale cattle carried three months into the budget year, are rated on the period of time carried as a fraction of twelve months. A beast carried for three months and growing from 400 to 440 kilograms would be rated at 0.23 adult equivalents (average weight 420 divided by 455 multiplied by three and divided by twelve equals 0.23).

In the calculation of total adult equivalents in the herd model an additional allowance of 0.35 adult equivalents is made for each breeder that rears a calf. This allowance covers the extra nutritional requirements of pregnancy, lactation, and incidental forage consumption by the calf until age 5 months. This rating is placed on the calves themselves, effectively from conception to age five months, while their mothers are rated entirely on weight.

Five months is an arbitrary age beyond which the former “calves” are rated purely on weight. This age may bear no relationship to the age at which they are actually weaned. Modelling herds where the feeding of supplements to some classes of cattle is undertaken may need to have the calculation of adult equivalents adjusted. This is especially so if the supplements (specifically phosphorus and non-protein nitrogen (e.g. urea)) work in part by increasing feed consumption and the comparison is of the pasture consumption of a herd that is supplemented and that of a herd that is not supplemented.

Therefore, when comparing herds with and without phosphorus or non-protein nitrogen (e.g. urea) supplementation, pasture consumption at a given weight will be greater for the supplemented animals at the same weight and may need to be taken into account in the allocation of adult equivalent ratings.

The increased consumption is likely to be only partly captured through the increased weight of supplemented cattle. One solution is to use a lower weight as the adult equivalent standard for supplemented cattle thereby calculating higher adult equivalent ratings for them. Alternately the comparison may be between say 4,000 adult equivalents that are not supplemented with 3,600 adult equivalents supplemented, thus acknowledging that a supplemented adult equivalent represents more forage consumption. There may also be issues with energy supplements such as molasses if the adult equivalents are being supported in part by pasture and in part by the supplement. These issues are especially important when assessing the economics of supplementation. Unfortunately, there is currently no scientific evidence to support how the adult equivalent ratings should be adjusted to cope with the impact of supplementation on increased intake, making the estimates of experienced livestock managers the best source of information available.

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Grouping cattle in Breedcow+

In the Breedcow+ program, cattle are grouped for most purposes by their age and class at the start of the year. Adult equivalent ratings, variable costs, weaning or death rates are then generally applied over a period of a year to a particular class of cattle.

Age groupings are identified for the various classes of cattle in the AE Calc worksheet. Here the overall peak calving time for the herd and the sale month for each class of cattle are declared.

AE Calc displays the age in months at the start and end for each group. This is a twelve month interval except for weaners and for sale stock in their final year. Adult equivalents and husbandry costs on sale cattle are defined from 12, 24, 36 etc. months until the sale month. Adult equivalents and husbandry costs are counted for weaners from age five to twelve months.

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How mating, calving and death rates are calculated in Breedcow+

The Breedcow+ program is based on a “steady state” herd model. This represents a constantly recurring pattern of calving, losses and sales from a stable herd of unchanging size. The precise timing of calving and weaning is not an issue, since all that is required is to determine how many breeders are mated and how many calves are weaned from those mated cows in a cycle which repeats itself year after year. Each year will see a certain number of breeders mated and a certain number of calves weaned.

Breedcow+ weaning rate entries refers to the calves that will be weaned from cows that were mated during a year and kept – the calves may well be weaned next year, but it is the mating year that specifies the weaning rate for the group. This definition is used for its mathematical convenience but is at odds with the true expression of weaning rate. This is usually calculated as the number of calves weaned divided by the total of cows mated. To satisfy the requirement for a true expression of weaning rate Breedcow+ also calculates and displays, beneath the breeder table, the ratio of total calves weaned to total females mated.

The equation used in the Breedcow worksheet of the Breedcow+ program to calculate the number of weaners produced is “the weaning rate (as specified above) multiplied by the opening number of breeders less any sales before or after mating less breeders spayed or set aside”.

Cows sold after mating are not included in the calculation of calves weaned but they are included in the calculation of bulls required.

Deaths for all groups, male and female, are calculated as the mortality rate multiplied by the opening number plus purchases minus spays minus sales. Spayed cows that are transferred from the breeder groups to spay groups have mortalities calculated separately as the spay mortality rate multiplied by the opening number plus new spays minus sales.

The term spaying in the Breedcow+ program refers to keeping any group of female cattle out of a mating group. Thus spaying includes both surgical spaying and just placing cows in paddocks away from bulls. Conversely, late spaying (or “webbing”) which will allow the cow to calve, or spaying after calving, should not be entered in the current year class as being spayed though these cows will certainly be “spays” in the following year and can be shown as being spayed then. Showing such cows as spayed in the current class will remove them from the calculation of weaner numbers and will understate the number of weaners produced.

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Cow culling assumptions in the Breedcow+ program

Cow sales in Breedcow+ may be before or after mating or they may be sales of spayed cows a year or more after spaying.

Sales before mating or spays are entered as the percentage of opening numbers for each age group. Sales after mating are expressed as a percentage of the number of cows mated. This is a change from earlier versions of this program.

Sales before mating will typically be a general heifer surplus, or cows reaching the nominated culling age, or breeders revealing faults such as bottle teats, bad temperament, bad calf, or failure to raise a calf. They may also be cows identified as non-pregnant the previous year but held over to fatten for sale.

Spays can be any of the above. Entering a spay percentage instead of a sales before mating percentage means that the animals will be kept for at least a year before being sold. If using the menu command to calculate balancing sales of surplus heifers, the percentage entered as sales before mating can be moved to the spaying line simply by moving the percentage entry from sales before mating to cows spayed.

If weaner heifers are to be spayed rather than sold, enter the percentage to spay alongside “Weaner % spayed =”. Spays are sold by default the following year, but can be held longer – e.g. the weaner spays may be held for sale at three years – by altering the sales of spayed cows percentage.