IBC2000-2 Economics 

Economics of Bison Production in Alberta

Dean Dyck, P. Ag.
Farm Management Specialist
Alberta Agriculture, Food and Rural Development
#301, 4920 - 51 St.
Red Deer  AB  Canada  T4N 6K8

The following article was originally presented at the International Bison Conference in Edmonton, Alberta in August 2000.  The conference covered a wide array of bison topics including production, marketing, genetics, history and much more.  This article has been reprinted with the permission of the IBC2000 Chairman.

Abstract

A Consensus Costs and Returns study was initiated by the author, a private consultant and a group of bison producers to develop a more complete economic profile of an established bison operation in Alberta.  Study data indicated that 100 head enterprises have the potential for good  profitability in both the short and long run, a reasonable return on assets and can be developed as the sole enterprise on the farm.  For those producers with limited experience, investing in bison cows and having an experienced operator care for the stock can provide a reasonable return on assets and a starting point to enter into the bison industry.

Introduction

Although bison production in Alberta is not a new phenomenon, cost studies have been limited.  The Peace River Region in Alberta conducted a Consensus Costs and Returns on a 100 head bison cow-calf enterprise and a 45 head bison bull feeding enterprise (Baier 1991).  In 1997, Alberta Agriculture, Food and Rural Development authored a fact sheet detailing the industry, regulatory, production, and economic information on the bison industry (Dey et. al. 1997).  The economic data utilized the aforementioned 1991 study and updated the cost figures for 1997.

With an increase in interest in bison production in the province, lenders and potential producers required up-to-date and accurate costs and returns data.  In 1998, with assistance from the Canada-Alberta Farm Business Management Program, Alberta Agriculture, Food and Rural Development undertook another Consensus Costs and Returns study in the Rimbey area (Kaliel et al. 1998 a,b).  This study focused on “entry level” operations of 20 and 50 breeding cows.  Results showed that profitability, both from an economic and cash flow viewpoint, was marginal.  Also, market prices and weaning rates would have to both be sufficiently high to ensure continued profit.  These operations were deemed “supplemental enterprises” to the main farm operation.  Subsequently, the Alberta Bison Association requested that another study be completed for “established” operations with higher breeding herd sizes.  This study was completed in 1999 with a group of bison producers in North Eastern Alberta.

Methodology

The Consensus Research Data (CRD) approach relies on group participation of interested farmers to arrive at the consensus of opinion on costs and returns.  The consensus relates not to area averages, but rather to typical figures for the group of producers who provided the data.  The distinction is important since different production practices carried out in small pockets within a larger area are not often truly reflected in the average figures (i.e. hay baling in an area where putting loose hay into stacks is more common).  Conversely, if within a given area there is a pocket of high livestock density where certain production practices (i.e. feeding) are different, then the specialized costs of that practice can bias the overall area costs and render them less useful.  For these and other reasons, averaged figures must be interpreted carefully.

Consensus figures are therefore associated with the level of investment, management and cultural expertise of the participants within a particular geographic area.  While care should be exercised when applying CRD data to individual cases, the greatest advantage of the technique is that it can be specific (i.e. to the breed, ration or crop variety), timely, locally oriented and based on the cumulative experience of farmers operating in the area.

A CRD can be useful for management decisions:

·        In selecting the enterprise yielding the highest returns.

·        In determining the amount of cash required to operate during a season.

·        In determining the amount of time expected to be spent on an enterprise.

·        For projecting the expense and income when considering new investments requiring credit.

·        In determining how the expenses and receipts should be shared in rental arrangements.

·        To compare actual costs incurred in your farming enterprises.

Source and Method of Data Collection

The information for this study was gathered from farmers in a district.  A day was spent with them discussing the direct costs involved, the complement of buildings and equipment, the investment and the management practices necessary to maintain the bison enterprise on a farm.  This information was compiled and costs calculated to determine the total cost of production for the enterprise.

Definitions

Direct Costs include grain and supplements, veterinary fees and medicine, marketing fees, repairs and operating costs for buildings and equipment, the cost of purchasing replacements and interest on operating costs. These direct costs must be covered in the short run. Interest for buildings and equipment has not been included in direct costs. Feed used has been included in as a direct cost in this report. However, producers carrying grain in inventory may wish to examine the implications of including their own feed grains as a direct cost.

Gross Operating Profit  is the residual left to pay for the operator’s labor and his equity in buildings and equipment.

Total Indirect Costs include operator labor and depreciation on buildings and equipment.

Total Economic Costs include all direct and indirect costs as well as interest costs. These must be covered in the long run. Returns that do not cover total costs will force the operator to take a lower return for his investment and labor, or force him to shift his resources to more profitable activities.

Return to Management is the residual amount left to compensate the owner-operator for his risk and management after all the costs have been met including allowance for operator labor and interest on investment. To more accurately compare this figure to that of other enterprises, the operator should bring these returns to a common base such as returns per hour of labor and management.

Preamble

1.      In defining the “consensus operation”, the producer group identified that the primary focus would be related to the size and type of operation suited to an “established” situation.

2.      The operation developed through the consensus dialogue focused on producing and marketing weaned (heifer and bull) calves. It was felt that, for the bison business, this would be the most appropriate fit with the management abilities, resources and time availability of the new entrant.

Assumptions Specific to the Bison Cow-Calf Enterprise

1.      A bison cow-calf enterprise situated in the North Eastern Region of Alberta, comprised of 100 bred heifers and 8 breeding bulls. The breeding stock is valued at $4,500 and $3,000 per head, respectively.

2.      The production plan is to produce weaned calves, which would be marketed in the fall of the year.

3.      The bison cows have an expected life of 15 years. They are culled at a rate of 2% per annum.  In addition, the expected death loss rate is 1% (1 cow/year). In total, 3 cows from the 100 head basic herd will be replaced annually. Cull cows typically sell for $2,500 per head, although $700 was indicated as a selling price.  Breeding heifers (or cows) are purchased for $4,500 each, replacing the outgoing females.

4.      Bulls have a breeding life of 3 years and, therefore, 1 bull is replaced each year. Cull bulls would not be bought as breeding bulls by other operations, so their cull value would be 1,300/head). Replacement bulls are valued at $3,500/head.

The cows would be expected to calve in April, May and June. Reproductive performance rates are estimated at 85% for the calf crop (weaned/exposed). 

As a result, the operation would wean 85 calves per year, averaging 430 lbs. each at 170 days of age. An 85% calf crop assumes a reasonable level of management.

5.      Calf prices are affected significantly by the current market situation. Meat markets, where bull calves are destined, are generally lower and more stable. 43 bull calves would be sold into the meat market each year, averaging $2.10/lb. ($900/head). Due to the high demand for breeding females for developing herds, female calf prices are generally higher, and more volatile. 43 heifer calves would be sold each year into this market averaging $2,000/head.

6.      Marketing charges are based on a fee of 2% associated with marketing heifer calves through an auction market. Since bull calves are in demand, this fee will also cover advertising costs associated with selling bull calves privately.

7.      Custom charges will be required to plow snow and set out round bales.  This was estimated at $1,000.

8.      Regarding the feeding program, an advantage of bison is their low maintenance requirements.  In addition to pasture, bison will require some level of hay as winter feed, some grain for flushing prior to breeding, and a salt and mineral combination that is to be fed year round. Top quality hay is not required - first cut grass legume hay is fed. The feeding program is detailed below:

9.      Pasture management is a key management component of the bison operation.  The yearly management program is detailed below: 

10.  Veterinary costs include parasite control (via de-wormer and pasture crumbles), 8-way vaccine and other associated costs as listed below:

 11.  As the value of bison breeding stock is very high, insurance is considered essential. Premiums are set at roughly $500 per year

12.  Property taxes accruing to the bison cow/calf enterprise amount to $1,100 paid per annum.

13.  Key activities and estimated operator labour requirements are developed for a one-person operation at less than full time.  These estimates are as follows:

14.  Machinery and equipment investment for the bison cow/calf enterprise is minimal by purpose.  It does, however, reflect that the consensus operation is designed to be run by one individual.  Feeding and snow plowing would be contracted through a custom operator.  The operation as a whole will use a $20,000 pickup truck with bale hauler.  Mineral feeders, valued at $100 will be used 100% for the cow/calf enterprise. A $1,000 investment in hand tools is expected to cover all general maintenance, veterinary, tagging and de-horning needs.

15.  Buildings and improvements for the enterprise consists of a handling system with squeeze and scale ($20,000), fencing ($24,000), dugouts ($4,000) and grain storage ($3,000).

16.  The bison cow/calf facilities are centered on a 320-acre site, valued at $500/acre.

17.  Operating interest is charged at 8% on 1/2 of annual direct costs (excluding breeding stock purchases).

18.  Effective opportunity interest rates are set at 5% for all asset categories.

Table 1. Capital Investment Requirements - 100-head bison operation

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Table 2. – Enterprise Budget, 100 head bison cow/calf operation 

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    Table 3.  Cash flow projections, 100 head bison cow-calf operation, purchasing 225 heifer calves in Year 1

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Table 4.  Cash flow projections, bison cow-calf operation, purchasing 100 bred cows in year 1

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Table 5.  Sensitivity analysis - % ROA in Response to Changing Market Prices

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Interpretation

Ø      Profitability is achievable both in the short and long run. Since gross operating profit (short run profitability indicator) and return to management (long run profitability indicator) are both highly positive, staying in production is beneficial.

Ø      Cash flow projections show the ability to meet obligations in the seven-year horizon.  Depending on the type of investment decision made in the first year, growth can be gradual (100 bred cows in year 1) or accelerated (225 heifer calves in year 1).  The latter scenario is quite risky, since the plan is based on achieving both forecast prices and market for heifers in succeeding years.

Ø      A potential barrier to entry is the high level of investment.  In this enterprise, a $706,100 investment is required, with 67% devoted to breeding stock.

Ø      Maintaining an 85% weaning rate is essential to continued profitability.

Assumptions Specific to the Investing Scenario

1.       In this scenario, an experienced bison producer would manage a herd of 24 bred cows, valued at $4,500 per head.  The operation is situated in the North Eastern Region of Alberta, and comprised of  2 breeding bulls valued at $3,000 per head.

2.       The production plan is to produce weaned calves, which would be marketed in the fall of the year.

3.       The bison cows have an expected life of 15 years. They are culled at a rate of 2% per annum.  In addition, the expected death loss rate is 1%. In total, 1 cow from the 24 head basic herd will be replaced annually. Cull cows typically sell for $1,000.  Breeding heifers (or cows) are purchased for $4,500 each, replacing the outgoing females.

4.       The cows would be expected to calve in April, May and June. The estimated calf crop (weaned/exposed cows) would be 85%.  As a result, the operation would wean 20 calves per year, averaging 430 lbs. each at 170 days of age. An 85% calf crop assumes a reasonable level of management.

5.       Calf prices are affected significantly by the current market situation. Meat markets, where bull calves are destined, are generally lower and more stable. 10 bull calves would be sold into the meat market each year, averaging $2.10/lb. ($900/head). Due to the high demand for breeding females for developing herds, female calf prices are generally higher, and more volatile. 10 heifer calves would be sold each year into this market averaging $2,000/head.

6.       The operator would charge a custom rate of $1.80/cow/day for 365 days.  This charge would cover all costs involved in the operation of the enterprise – direct operating, indirect operating, interest on investment – and an allowance for profit.

7.       Machinery and equipment investment for the bison cow/calf enterprise is minimal by purpose.  It does, however, reflect that the consensus operation is designed to be run by one individual.  Feeding and snow plowing would be contracted through a custom operator.  The operation as a whole will use a $20,000 pickup truck with bale hauler, allocated at 25% to the investing enterprise.  Mineral feeders, valued at $100 will be used 25% for the investing enterprise. A $1,000 investment in hand tools is expected to cover all general maintenance, veterinary, tagging and de-horning needs.  This is also allocated at 25% for the investing enterprise.

8.       Buildings and improvements for the enterprise consists of a handling system with squeeze and scale ($20,000), fencing ($24,000), dugouts ($4,000) and grain storage ($3,000).  All of these items are allocated at 25% to the investing enterprise.

9.       The bison cow/calf facilities are centered on an 80 acre site, valued at $500/acre.

10.   Operating interest is charged at 8% on 1/2 of annual direct costs (excluding breeding stock purchases).

11.   Effective opportunity interest rates are set at 5% for all asset categories.

Table 6.  Capital investment, investing in a 24 cow bison herd

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 Table 7.  Enterprise budget, investing in 24 bison cows

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Table 8.  Cash flow projections for bison owner, investing in 24 bison cows  

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Table 9.  Sensitivity analysis for bison owner, investing in 24 bison cows

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Interpretation

Ø      Investors can achieve a potential 10% return on assets with this scenario.  This is ideally suited to those individuals with limited livestock experience and investment capital.

Ø      As with the 100 head bison operation, profitability is influenced by market prices and weaning percentage.  Investors should seek out operators with the following key management criteria:

Ø      High weaning rates (85% or higher)

Ø      Breeding performance

Ø      Progressive pasture management

Ø      A documented feeding program

Ø      A proven veterinary program

Ø      Adequate facilities to handle additional head

Ø      Quality financial and production records

Ø      Investors should be prepared to pay between $1.80/head/day and $2.18/head/day to cover cash operating costs.

Summary

One hundred head bison operations can be profitable in both the short and long run.  Coupled with a reasonable return on assets and adequate cash flow, this can be a sole enterprise on a farm operation.  However, high initial capital investment may prove to be a barrier to entry into these businesses.  Potential operators may consider investing in “entry level” herd sizes of 20 or 50 breeding cows, and build up to a economical herd size.  These sizes are also compatible with existing farm operations and act as a supplementary enterprise to the main farm operation.

Another alternative to start into the bison business is to invest in a small number of breeding stock, have an experienced operator care for the animals, and capture the income from the sale of calves.  This option may achieve a reasonable return on assets and can benefit both the investor and the operator.

Acknowledgements

The author gratefully acknowledges the bison producers in the North Eastern area of Alberta and Saskatchewan who set aside the time to participate in the CRD session; Mr. Dennis Dey from Olds, Alberta who led the consensus session; and Mr. Gerald Hauer at the Bison Centre of Excellence (Leduc, Alberta)  and Mr. Dale Kaliel with Alberta Agriculture, Food and Rural Development who lent their expertise in reviewing the information.

References

Baier, B.  1991.  A Consensus of Costs and Returns for  A. 100 head Bison Cow-calf Enterprise  B. 45 Head Bison Bull Feeding Enterprise  C. Combined Bison Cow-calf/Bull Feeding Enterprise in the Peace River Region.  Alberta Agriculture, Food and Rural Development.  November 1991

Dey, D., J. Bunnage, P. Staden, D. Darby, L. Stegman, K. Bunnage, E. Van Haren.  1997.  Commercial Bison Industry.  Ag Ventures.  Alberta Agriculture, Food and Rural Development, December 1997.

Kaliel, D, D. Dyck, L. Stegman, D. Dey.  1998a.  A Consensus of Costs and Returns for A. 50 Head Bison Cow-calf Enterprise  B. An Associated Bison Grazing Enterprise in the Central Region. Alberta Agriculture, Food and Rural Development.  June 1998.

Kaliel, D, D. Dyck, L. Stegman, D. Dey.  1998b.  A Consensus of Costs and Returns for A. 20 Head Bison Cow-calf Enterprise  B. An Associated Bison Grazing Enterprise in the Central Region. Alberta Agriculture, Food and Rural Development.  June 1998.