By Scout Nelson
Higher cattle prices have brought strong returns for cow calf producers, but they also increase hidden financial costs. While producers see better income from calves and cows sold, the costs of depreciation and opportunity interest have also grown sharply.
Depreciation is one of the most significant non-cash costs. For example, a $4,000 bred heifer may later be worth $2,000 when sold as a weigh-up cow.
If she remains in production for five years, the annual depreciation is about $400, excluding losses from death. Adding an average 2% death loss per year brings the cost to about $460 per cow annually.
Opportunity interest adds to this expense. Using a 6% interest rate and an average cow value of $3,000, the opportunity cost is $180 per year. Combined with depreciation, this totals $640 per cow each year.
If the herd averages an 88% calf crop, that equals $727 per calf just in depreciation and opportunity costs. With calves selling at about $2,205 per head, nearly one third of revenue covers these two expenses.
Producers do not receive bills for depreciation or opportunity cost, but both are real and impact long-term profitability. Depreciation reflects the lost value of cows as they age or prices decline, while opportunity cost represents the returns that could be earned if the money invested in cattle were placed elsewhere.
To manage these challenges, producers can explore ways to lower replacement costs, maximize prices when selling cows, or consider the tax advantages of selling home-raised cows after two years, which may qualify for capital gains treatment.
Recognizing depreciation and opportunity costs is the first step toward better decision-making. By understanding these hidden expenses, producers can plan strategies to reduce their impact while continuing to benefit from strong cattle markets.
Photo Credit: istock-simplycreativephotography
Categories: Nebraska, Livestock, Dairy Cattle