Bison for Fun or Profit?
The level of investment into bison animals and the equipment necessary to operate a bison cow-calf production unit is a number that is sought by an almost limitless number of producers. At what point is the investment so great that the ability to repay it or draw a reasonable amount for operator labor is endangered? The understandable euphoria surrounding the onset of the bison industry has led to producers, particularly new producers, often investing in bison herds without a clear or concise profit picture in mind. This possible inability to service debt when it occurs places bison producers in a hazardous financial position and in turn may cast doubt on the viability of the bison industry. A better understanding of the relationship between total investment, investment per cow, production levels, operator draws, and interest rates is crucial for the continued operation and success of the bison cow-calf industry.
Investment, Profit, Production Levels, Operator Draws, Interest Rates
As commercial bison production continues to expand, both with new producers and with those producers who are already involved in bison production, there is a danger that the investment being made into the operation is greater than the ability to repay that investment. Producers and those lenders who work with bison producers need to identify a level of profitability that will enable producers to continue in their operations without financial danger or hardship. Producers will need to become more aware of how the total amount of investment they choose to make, will affect their opportunity for profitability and their ability to adequately repay long term and operating loans. This paper presents various budget scenarios based on actual herd performance and financial data from existing commercial bison herds. Various budget scenarios were developed by altering such things as the level of operating expense, operator draw, interest rates, and weaning percentages. This paper also presents information on what level of investment and indebtedness may be maintained under various combinations of these changing items.
Bison Herd Performance and Financial Information
The bison herd performance and financial information (Metzger and Anderson 1998) was gathered through the Carrington Area Farm Business Management Program and involved four member producers over a four-year period of time. These records detailed the production and financial information for 860 bison cows over that four-year period. The summary of these records indicated an average operating expense (minus all interest and depreciation) of $424.54 per bison cow. All breeding bull expenses are included as part of that amount and all replacement heifer or feeding enterprises are held as separate enterprises and are not included in the income or expenses for the breeding cow herd. A review of the category involving miscellaneous direct costs caused future budget projections to be done with approximately forty to fifty less dollars allocated to miscellaneous direct costs.
Early budget projections indicated lower weaning percentages of 64% to 67% (Anderson, Metzger, and Sexhus 1987). These lower levels of production were typically associated with bison herds that were new to the area. As the herds became acclimated the weaning percentages would increase. For the purpose of constructing various budget scenarios and after discussion with bison producers, a weaning percentage of 85% was selected.
Bison Budget Projections
The budget projections were completed using a range of expenses, minus all interest and operator draw, of $360 to $380 per cow. Interest was assigned on both operating and long term loans at the rate of 9 1/2%. The main investment loan was amortized over an eight-year period. At the end of eight years any remaining long-term debt was then carried over in the operating note at the same rate of interest. An operator draw of $200 per bison cow per year was assigned. This could be used for family living or taxes as the need warranted. A 5% depreciation rate was applied to the total investment. This amount would then be allocated for the replacement of facilities and equipment as well as bison cows and bulls. An income allowance of $40 per cow per year was made for culled bison. This allowance helped to greatly offset the amount needed and used in the budget for breeding stock and facilities replacement. It should be noted that the full five percent of depreciated capital investment was replaced each year, allowing the investment to remain level through out the 10-year period of the budget projections.
Measuring Growth In Net Worth
Bison budgets were constructed to show the implications for various prices of bison heifer calves and for the amount of total investment per bison cow over a 10-year period of time. The budgets constructed used an 85% weaning percentage and a 50-50 mix of weaned heifer and bull calves. The variation in planned operating expenses is due to varied amounts budgeted for insurance, increasing as the investment per cow increases. The budgets were run under a beginning borrowed investment of 100% (Table 1) and also under a beginning investment scenario of 50% net worth (Table 2), thus requiring only 50% financing at start up date. The bull calf price was fixed at $700 per head while the heifer calf prices ranged from $900 to $2,500 per head in increments of $400. The investment per bison cow (one cow and approximately 10% of one bull) ranged from $1,400 to $4,200 per cow in increments of $400 per cow. All budgets also carried an investment of $600 per cow for facilities and equipment.
In Table 1 for example, the ten-year projection showed that a $3,000 breeding stock investment combined with a $2,100 heifer calf price, produced a growth in the ten year net worth of $1,832 per cow. A heifer calf price of $1,700 per head produced a projected 10-year net worth of a negative ($832). In this scenario the initial debt of $3,600 (animals $3,000 and facilities/equipment $600) would actually have grown by $832 to a total of $4,432 per cow.
In Table 2, where only one-half of the investment is borrowed initially, the $3,000 breeding stock investment and $2,100 heifer calf price project a growth in net worth of $3,890 per cow. Even the budget with the lower priced $1,700 heifer calf would project a 10-year positive growth in net worth of $1,821 per cow.
Bison budgets were completed under a number of different scenarios (Table 3). While the weaned bull calf price remained constant at $700 per head, a number of other items were changed for the purpose of comparison. The weaning rate was fixed at 85% except when moved to 90% to show the impact from additional gains in production. Expenses were altered by subtracting $50 per head or adding $100 per head to illustrate the impact this would have. Operator draw was reduced to zero and interest rates were decreased to illustrate other changes in the ten year net worth projection. The ending 10-year debt to asset ratio was also calculated for all budget scenarios. In the last six budget scenarios the average breeding stock investment was raised to $4,200 per cow.
In scenario 2 of Table 3 it should be noted that increasing expenses by $100 per cow, caused the 10-year net worth to become a negative ($1,518) or a change of $1,626 from the number one scenario. It should be noted that when scenario five and six are compared, that the affect of a 1/2% reduction in interest rates is an increase of $213 per cow in the ten year net worth projection. The single greatest factor to influence gain in net worth can be found by comparing scenarios three and five. The 5% increase in weaning percentage constitutes an increase in net worth of $924 to a total of $1,844 per cow.
The affect of the constant operator draw can be seen by comparing scenarios one and four. Eliminating the $200 per head per year draw has the affect of increasing the projected net worth from $108 per cow to a high of $3,335 per cow. Although this represents an increase of $3,227 the feasibility and practicality of reducing the draw this amount would be seriously questioned. It does however illustrate the great impact that a constant draw has when combined with borrowed money and real interest rates.
The last six budget scenarios in Table 3 show illustrate how a breeding stock investment of $4,200 per cow appears when budgeted out for the 10-year period. It also reflects a beginning equity position of 50% in scenarios eleven and twelve. In both of these scenarios, the loan covering 50% of the investment was paid off in the eighth and final year of the amortization schedule resulting in a remaining debt to asset ratio of zero. It should be noted that in all budget scenarios no allowance for inflation was made and no earned investment rate was attached to funds earned and held above those expended in the budgets.
Cow and Heifer Calf Price Relationship
The relationship between what producers pay for cows and the price they receive for heifer calves is very important to the long-term survivability of the bison industry. Table 4 illustrates the various combinations of price paid and price to be received. The top line indicates those prices needed to merely maintain the investment at a debt level of 100% over a ten-year period. The bottom line illustrates the maintenance of a 50% equity position over the same 10-year period. It must be noted that this maintenance level does include all expenses, interest, and operator draw as outflow items but holds beginning equity steady with no additional gain in equity or net worth. As with the other budget items, bull calves are assumed to be 50% of the calf crop and they are again sold or transferred out at $700 per head.
The continued expansion of the present and future bison industry will rely greatly upon the profitability of the bison cow-calf producers. Determining profitability is not a simple task and demands that many items be considered, not the least of which is the investment in breeding stock. Other predominant items include the level of production, as measured by weaning percentage, as well as the level of operator draw, operating expenses and interest rates. The cost of production for each bison producer will be unique to their circumstances and to their ability to generate both capital and calves. The most profitable bison producers in the future will be those that know and understand the relationship between all these things and put to them to practice for their benefit and the benefit of the entire bison industry.
I gratefully acknowledge the Carrington Research Extension Center and Dr. Vern Anderson for their continuing support and assistance.
Anderson, V.L., Metzger, S.S. and D. Sexhus. 1997. Commercial Bison Production in the Northern Plains. Carrington Research Extension Center, North Dakota State University, Carrington, North Dakota.Metzger, S.S. and V.L. Anderson. 1998. Commercial Bison Production: Economic Analysis and Budget Projections. Carrington Research Extension Center, North Dakota State University, Carrington, North Dakota.