Let me ask you a question: Which is more important, production levels or profit? I bet most people would use their logical reasoning to say that profit is more important.
Therefore, my next question is: Why do most decisions made in agriculture put production first?
I blame ego. Ego combined with a lack of knowledge (see my previous article on ego).
One facet of ego defines success as ‘being/having the biggest or the best’. Most people have an element of competitiveness in their nature (some more than others).
Given this competitive nature, we have a conscious and subconscious desire to be better than our peers. Unless you are in a trusting environment, such as that created by boards in the RCS Executive Link program, we don’t talk about profitability. Why? There’s a couple of reasons. One – it’s considered ‘socially inappropriate’ to discuss it openly; or two – we don’t really know what our profit is, so we talk about productivity instead! That is much more sociably accepted and what we don’t know is made up anyway.
Who got the biggest yield?
What was your branding/marking rate (the most lied about number in ag!).
How heavy were your weaners?
How heavy were the lambs?
How big were your bullocks?
A consequence of this is that we inadvertently believe that the higher the productivity we achieve the more profitable we will be. And… the better the bragging rights!
Unfortunately, high productivity doesn’t automatically equal higher profitability. Our level of productivity is definitely a driver of profit, however it isn’t the only one.
Profit is a function of the difference between price received and your cost of production. You have very little influence on price received. Cost of production is a measure of the relationship between how much you produce AND what it cost you to produce it.
I’ll reinforce that point for you: profit isn’t determined by yields or growth rates, it is determined by how much your produced, what it cost you to produce and what you got paid for it.
For example, I just put these numbers into the RCS Cattle Trading Model to reflect a common question being asked by cattle producers at the moment.
I’ve got a 380kg PTE, freshly weaned cow. Worth $1.80/kg at best to sell to the open market = $684/hd. My feed budget is telling me that I need to reduce my stocking rate in order for me to get through my non growing period without impacting land health. So, what if I put her in a feedlot for a 100-day job and sold her to the works. I estimate that the cow would be worth $1,100/hd after 100 days in the feedlot.
Winning, right? Wrong.
Yes, we add $416 extra value per head (a pretty healthy increase in value of 61%). However, after looking at the costs associated with that gain we could be losing $323/hd. We have the freight in and out of the feedlot, vet and med costs on induction, interest on the value of the cows, some deaths, and currently a huge ration cost (I’ve assumed $430/t fed). The direct costs would add up to $727/hd.
It has taken me longer to write this then it usually takes me to enter these numbers into the spreadsheet with a client. An image of this example can be seen below. You only have to enter in the yellow areas.
The cost of production on this example is a whopping $6.33/kg! i.e. it will cost $6.33 to produce one kilogram of beef (liveweight).
The breakeven ‘purchase’ price is $0.95/kg (you are buying it off yourself). So, if you can only get paid $0.95/kg in the open market then you might not lose money. If you could only get $0.80/kg then you might make a gross margin of $62/hd – then it would be worth it.
Remember, this isn’t about the numbers, or cattle. It is about making sure that you are profitable. Don’t use these assumptions – crunch the numbers for your own situation.
Importantly, I’m not saying that feedlots are or aren’t profitable either, I’m encouraging you to work out the gross margin on your own enterprises. See what animals are going to make you money and pay you the most for your available grass (it is a precious commodity). Even if you are freeing up carrying capacity at home, it doesn’t make sense to make a loss on animals you send away!
Whatever enterprises you are running, spending $20 to receive an extra $10 income doesn’t work. Please remember that production is only one driver of profit. Profit is a function of:
- how much you produce times what you get paid; compared to
- how much it COST you to produce it.
Calculate and know your cost of production and profitability.
Don’t know how to confidently do this yourself? Give us a call to discuss option on how to get control in your business.
In the final article in this three-part series, I’ll discuss another thing in agriculture I’d like to see change – how to stop riding the unicorn.