When creating an annual budget for a ranch, it is important to factor in all expenses, including the often-overlooked cost of depreciation. According to experts at Kansas State University's Beef Cattle Institute, some producers only document feed expenses, pasture rent, and veterinary costs, but miss out on accounting for depreciation of their equipment and cattle.
Agricultural economist Dustin Pendell explained that depreciation occurs when an asset loses value over time as it is used. For example, a tractor immediately loses value after leaving the dealership and as it is used, it requires maintenance, further reducing its value. The same applies to cattle, whose value depreciates as they age and their productivity declines.
Producers need to factor in depreciation when creating their operational budget, allowing them to build up the cash needed to replace the asset when its useful time has passed. Nutritionist Phillip Lancaster emphasized that cattle are not assets that increase in value like land, and at some point, producers will need to replace them.
Pendell pointed out that there are many ways to calculate depreciation, and it is important to differentiate between management or accounting depreciation and tax depreciation. The IRS tax code tells producers how to calculate depreciation for tax purposes, but that may not be the most effective method from a management perspective.
One way to manage cow depreciation is by implementing effective marketing strategies. Producers can control how long cows remain in the herd, which can impact their depreciation costs. Reproductive productivity is also crucial, as high fertility cows that are able to get pregnant every year have lower depreciation costs. Maintaining cows in good body condition also improves their fertility and sale value.
It is important to note that cow depreciation will vary between operations based on factors such as purchase price, salvage value, and the number of productive years. Pendell emphasized that the bottom line is that depreciation should not be overlooked when creating a ranch budget.
Depreciation is an important cost to consider when creating an annual budget for a ranch. Producers need to factor in depreciation of their equipment and cattle to effectively manage their operations and build up the cash needed to replace assets when their useful time has passed. Effective marketing strategies and maintaining reproductive productivity and good body condition can help minimize cow depreciation costs.