|Putting Budget On Paper Can Be Eye-Opener
month's column will look at the financial aspect of different sectors of
The examples shown are just that, examples. Every operation is different, and the numbers for your operation could look very different. Before making any decisions you need to go through the exercise for your own operation, and plug in the actual numbers that apply to your situation.
I have had to make numerous assumptions in putting together these examples, and in doing so I have used costs that are applicable to my area and other areas I am familiar with. Your results may be different.
In all the examples I assumed that the producer was buying land, putting up new fences, buying goats, and buying any required equipment. Everything would be financed. You will notice that payments for these items constitute the majority of the costs.
If you are lucky enough to already own some or all of these things then your costs would be reduced significantly. However, don't forget that if you own your land, equipment, goats, etc. free and clear, you have capital tied up that could be invested differently, and possibly generate more income from another source with less risk and effort if you were to sell those things and invest the proceeds.
For instance, if you own a 1,000 acre ranch that could be sold for $2,000,000.00, and you then reinvested that $2,000,000.00 in 10 year Treasuries currently yielding 4.15%, your virtually risk free income would be $83,000.00 per year.
In that case I would argue that even though you own the land free and clear, it is costing you $83,000.00 per year to use it for your goat operation. Obviously your costs could be much higher if you are an aggressive investor. Don't forget to charge your goat operation for the use of your own capital when you analyze whether a goat operation makes sense or not for you.
The first analysis I did was for commercial operations. The numbers tell us that in a commercial operation size and land cost are the major determinants of profitability.
Although, CO #1 and CO #2 are very close in size the profitability of the two operations is vastly different. The primary reason being that CO #1 is located in West Texas where land values are inflated because the predominant land use is moving from agriculture to hunting.
Now you're scratching your head wondering how $500.00 per acre land could be inflated while $2,000.00 per acre land isn't. The explanation is simple.
In my area that $500.00 per acre land will only support .5 goat per acre. The $2,000.00 per acre land is in an area that will support 4 goats per acre. Consequently, it will cost you $1,000.00 to purchase enough land in West Texas to support one goat, but in other areas the land to support one goat only costs $500.00. In other words the land cost for CO #2 is half that for CO #1 on a per goat basis.
Some areas south and west of where I live the land goes for $100.00 per acre, but those areas are so dry that you could only run one goat per 10 acres! The important thing is not the land cost per acre, but the land cost per goat.
All the commercial operations appear to be profitable, but if your operation is too small like CO #4 the profits will be so small that you will wonder why you are even bothering.
You will also note that none of the commercial operations are paying for feed. If you live in an area where you have to feed during the winter don't forget to add that expense.
I frequently get inquiries from people who want to feedlot goats. There are usually 2 scenarios. The first, FL #1, the producer wants to buy a breeding herd to intensively manage in a feedlot environment, and in the second, FL #2, the producer wants to buy 30 lb kids, feed them for a couple of months, then sell them when they get larger, and buy more kids. In the second scenario they might produce 3 or 4 crops per year.
I have run the numbers several times on both scenarios, and feedlotting goats has never made sense. The feed costs alone torpedo the idea, and that is using the cheap ration I have available which costs about $7.75 per cwt. Most complete commercial rations formulated for goats cost 50% to 100% more than that, which makes feedlotting an even worse idea.
The nice thing about the commercial and feedlot operations is that there is a large and growing demand for commercial goats. Prices, though cyclical, have been steadily increasing since I started tracking them 6 years ago, and I don't see them declining dramatically in the near future.
Demand is steadily increasing with the influx of immigrants from countries where goat meat is commonly consumed, and supply is decreasing as drought and hunting lease demand cause Texas ranchers to reduce or eliminate their goat herds. Both trends point to higher prices, not lower, for the foreseeable future.
Show goat operations are a high profile segment of the industry, and many believe that raising show goats is the best way for a small breeder to go. I have never understood this.
A successful show goat operation has very high overhead expenses for travel and advertising that would be impossible for a small operation to cover. Many show goat operators also choose to hire a professional fitter to show their animals. I have heard of breeders paying up to $80,000.00 per year for fitting alone!
To sell show goats you must show and win. This leads most to buy high dollar goats to start with. An average of $2,000.00 per head for top quality animals would not be uncommon.
Once you acquire the animals you must show them and win. This requires that you go to shows, many of which will be a long distance from home. You must continually do this so you have recent wins to use in promoting your genetics. Nobody cares who won National Grand Champion last year, it is this year's winner's genetics that everybody will want to buy. Your travel expenses will be the same whether you are taking one goat or entering every class.
Once you win shows, you need to advertise to let potential buyers know about it. The ads cost the same whether you are trying to sell one goat or one hundred goats.
All of this adds up to a lot of expense that would make it impossible for a small operation to turn a profit selling 10 or 20 goats a year even for high prices as the data for SO #1 in the example shows.
The picture isn't much brighter even for a larger operation such as SO #2. In that example the breeders are able to average $750.00 each for the buck kids and $1,200.00 each for the doelings they sell, but they still have a small loss.
If you are a large operation like SO #3 that can average $1,500.00 for each buck and $2,000.00 for each doe the picture is pretty rosy, but I'm not sure the demand for goats in that price range is all that great. If you are a small breeder like SO #1, even selling goats for those lofty prices would still leave you with a $15,312.64 loss for the year.
Given that most of the people buying high dollar show goats are starting small operations, I can only conclude that most of them focus on the eye-popping prices that the goats are selling for, and don't bother to look at the even more eye-popping expenses that go into running a successful show goat operation.
Anybody want to complain about the high prices the show breeders charge for their animals? Even at those prices many are still losing money.
Alternatively, maybe they are all just looking for tax write-offs. I've never understood that either. To save one dollar on your taxes you have to lose $3.00 or more depending on your tax bracket. Personally, I'd rather make $3.00 and pay the government one dollar in taxes, instead of losing $3.00 and having the government reduce my tax bill by one dollar. My way you're still $2.00 ahead, the other way you're still $2.00 behind.
The final type of operation is a seedstock operation. This is where many of the small show operations wind up when they figure out that they have not won the lottery and are not going to be the next big name show breeder. They start selling their show goats to commercial producers as breeding stock.
I don't really consider these breeders to be commercial seedstock operations because they don't typically raise their goats under pasture conditions, select for commercially valuable traits, and performance test, but they are selling their show goats to commercial producers for use as seedstock.
A commercial seedstock operation is probably the type of operation that makes the most sense for small operators because even if they do it correctly and spend the money to performance test their buck kids and cull the animals that should not be used as breeders, a small operator can still make a profit as shown in the examples.
The profit is not huge, but it is better than what could be had from managing a small commercial herd, and it isn't a money loser like a small show goat operation is.
When I did the example I assumed that the seedstock producer started with reasonably priced breeding stock from another commercial seedstock producer. If you start with $1,500.00-$2,000.00 per head show goats instead of $300.00-$500.00 per head goats then this too will be a money loser.
Seedstock operations should not be too large or it becomes difficult to sell the production for good prices. Your customers are commercial producers within a reasonable drive of your location since shipping costs quickly become an issue when you are shipping small quantities of goats any distance.
Because of this your market is somewhat limited so you don't want to be producing more animals than can be sold. Any excess animals will wind up being sold for slaughter, and then your profitability will be dramatically reduced. You will also be competing with every other small breeder in the area for customers, so take that into account when deciding how large of a herd you should have.
You can participate in the goat industry in many ways. If you have the land to support a large commercial herd then money can be made by raising meat goats. If your resources are more limited, then raising quality seedstock for commercial producers might be the way to go.
Whatever the case, it is a good idea to analyze the financial aspects before you invest in land, fences, equipment, goats, etc. It will be much less painful to find out that the venture will lose money on paper before the fact rather then after the money is gone.
|This page updated 01/19/04