Economics of raising sheep and goats
There are many reasons for raising sheep and/or goats, including several economic benefits which include: favorable tax treatment, land appreciation, and profit from production.
Agricultural Transfer Tax
When land is purchased, there is an agricultural transfer tax, to be paid at the point of sale. If the purchaser of the land signs a "declaration of intent" specifying that the land will remain in agricultural use for at least five consecutive tax years, the agricultural transfer tax is waived.
Agricultural Use Assessment
If land is "actively" used for agricultural purposes, its value is assessed according to its current use and not according to its current market value. Thus, agricultural producers pay lower property taxes. For land to be considered agricultural use, it should consist of least three (3) acres and the farming operation should generate a minimum gross income of $2,500.
Sales and Use Tax Exemption
There are agricultural exemptions for sales and use tax. Sales tax is waived for purchases and rentals of farm equipment, livestock, feed bedding and supplies used in the production of agricultural products The raising of livestock by members of youth organizations, such as 4-H, for agricultural educational purposes also qualifies for a sales tax exemption. It is not necessary to register with the state comptroller's office to qualify for the agricultural sales and use tax exemption. However, the vender may require a signed statement.
Like other forms of agricultural production, goat raising can be a tax write-off. Expenses from the goat enterprise may be deducted from your tax return to offset ordinary income. Expenses that can be deducted on your taxes include feed, veterinary costs, bedding, breeding fees, ram and buck replacement, land and equipment rental, hired labor, custom work, supplies, marketing and transportation costs, memberships, education, and depreciation. It is necessary to file a schedule F in order to deduct expenses from a livestock operation.
Depreciation is a cost of doing business. It is the depletion of capital assets. The value of sheep and goat breeding stock may be deducted utilizing two different methods of depreciation. The straight line method deducts 20% of the animal's value per year, while the accelerated method allows a more rapid rate of depreciation. However, you cannot depreciate breeding animals that you raised, because the costs associated with raising them are deducted as expense items: feed, medicine, etc.
Buildings, fencing and equipment may also be depreciated. The rate of depreciation depends upon the useful life of the asset, which varies from three (3) to forty (40) years. The Section 179 deduction allows you to deduct the cost (up to $24,000 in 2002; $25,000 in 2003 and beyond) of an asset in the year it was purchased rather than to depreciate it out over several years.
Farming "for profit"
To qualify for favorable tax treatment as a farmer or livestock producer, you must establish that you are in business to make a profit. A farming operation is assumed to be "for profit" if it has reported a profit in three (3) of the last five (5) tax years, including the current year (IRS code, section 183). If you fail the three years of profit test, you may still qualify as a "for profit" enterprise if your intention is to make a profit. The following "nine point test" is used to determine if an operation qualifies as "per profit,"after failing the initial "for profit" test.
1- You operate your farm in a businesslike manner. (As manager, do you have a business plan, have you set goals, do you keep records?)
2- The time and effort you spend on farming indicate that you intend to make a profit. (Do you spend sufficient time and energy on attaining that goal?)
3- You depend on income from farming for livelihood. (Here, full-time farmers have an advantage, but the income issue relates more to the farmer's need for deductions than his or her dependence on farm income. Farmers having off-farm jobs to supplement their income depend on their farm income, too.
4- Your losses are due to circumstances beyond your control or are normal in the start-up phase of farming.
5 - You change your methods of operation. (You could begin to winter calves rather than sell them in the fall or finish cattle to slaughter weights; the income could be delayed several months.)
6 - You and your advisers have the knowledge to carry on the farming activity as a successful business. (Attending continuing education classes can offset perceived weaknesses in this area.)
7 - You made a profit in similar activities in the past.
8 - You made a profit farming in other years and can document how much you made.
9 - You can expect to make a future profit from appreciation of the assets used in the farming activity.
In the farming and ranching community, land appreciation is a large contributor to increases in net worth (or equity). Purchasing land to raise livestock (or other agricultural products) can be a good investment, if the land increases in value. Many factors, including inflation, increase land value. Additions or improvements to the land, such as buildings and fencing increase the value of real estate. Using goats or sheep to clear land or brush will improve the quality of the land and may also enhance the value of your investment in land.
Profit from production
Profit margins in agricultural enterprises tend to be small, but it is possible to make a profit raising goats, particularly if costs are controlled and returns from marketing are maximized. In the sheep or goat enterprise, "profit" is expressed in many different ways: income above variable costs, income above fixed costs, profit per head, profit per month, return on assets (investment), etc.
The three most important factors affecting profitability of the sheep or goat enterprise are feed costs, percent lamb or kid crop and market prices. Feed represents approximately 70% of the total costs of raising sheep and meat goats. Producers can control feed costs by maximizing the use of pasture and browse, producing their own harvested feeds, mixing their own rations, shopping around for feed ingredients, buying and storing feed in bulk, minimizing feed wastage and weighing all feed inputs.
The second largest cost associated with raising sheep and goats is veterinary care. While sheep and goat producers should work with a veterinarian on flock/herd health programs, they should learn how to perform most of their own veterinary tasks, such as docking, castrations, disbudding, vaccinations, deworming, injections, etc. Producers should maintain an appropriate "medicine cabinet" so that they may treat common conditions, instead of taking the sick animal to a vet.
Treating sheep and goats for internal parasites can be very costly on a per animal or per year basis. Producers should strive to minimize the use of expensive anthelmintics by employing pasture management techniques that reduce worm burdens and using fecal egg counts to pinpoint the need for anthelmintic treatment. Coccidiosis should be prevented rather than treated.
Percent lamb or kid crop or the number of lambs or kids marketed per female exposed for breeding will have a significant impact on enterprise profitability. The goal should be to wean two lambs or kids per female per year. Accelerated lambing/kidding – a lambing/kidding interval of less than 12 months – is a way to increase reproductive efficiency and reduce overhead, but it is only more profitable if the increased returns from lamb/kid sales offset the added costs of feed, medicine and labor.
Market prices vary according to the size and quality of the animal sold and demand in the marketplace. On farm sales of sheep and goats usually generate greater profit than sales at livestock auction barns or to brokers. Prices may be better at larger, more distant auctions, but the added transportation costs and sales commission needs to be factored into the price to determine where the best place to sell sheep and goats is.
While lamb is the primary choice for religious holidays, goat is popular at Easter and Christmas and can substitute for lamb at the various Muslem holidays. Lamb and goat sales should be timed to coincide with these periods of increased demand. To increase market prices, producers are encouraged to direct market their live animals to processors and consumers, network with other producers, participate in marketing pools, and work with livestock auction markets to develop special sales for lambs and goats and encourage market managers to sell goats on a per pound basis, as is the case with sheep and other livestock.
An enterprise budget lists the income and expenses and expected profit (or loss) for a specific agricultural enterprise. It represents one year's worth of production and expresses profit on a per unit basis. In the case of sheep and goats, profit is expressed per female (ewe or doe).
There are two types of costs associated with producing an agricultural product: variable costs and fixed costs. Variable costs vary according to the size of the enterprise, whereas fixed costs (overhead) occur regardless of the level of output. Examples of variable costs include feed, medicine, bedding, paid labor, buck replacement and supplies. Fixed costs include depreciation, insurance, repairs, taxes, interest, and land charge and can be difficult to allocate to among multiple enterprises on a farm.
It is difficult for many agricultural enterprises, including sheep and goats, to show a profit when fixed costs are factored into the budget. In addition, most sheep and goat producers are part-time and utilize existing resources, and do not charge land and labor to the goat enterprise. Profit is usually expressed in three ways: 1) income above variable costs; 2) income above fixed costs; and 3) profit plus a margin (return to management). In the long term, fixed costs must be covered, unless off-farm income is used to finance the farming operation.
It is also useful to calculate a breakeven price. This can be determined by dividing the total output (pounds of live animal sold) by total production costs. Producers can use the breakeven price to determine prices for onfarm sales, by adding a margin of profit to the breakeven price.
It is important to note that an enterprise budget is a planning tool and is only as good as the information that is entered into it. The best source of information for enterprise budgets is a producer's actual production and marketing data.
References and further reading
[PDF] Business planning and economics of sheep farm establishment and cost of production in Nova Scotia
[PDF] Can you make money with sheep - University of Wisconsin
Farmer's Tax Guide
[PDF] Sheep and goats economics of production and marketing - Ethiopian Sheep/Goat Project
This article was written in 2002 by Susan Schoenian.