Measuring profitability of livestock enterprises

Livestock producers make a lot of decisions that affect the profitability of their business. Stocking rates, feed purchases and fertiliser decisions are just a few. But when they decide to change these variables, how can they judge the effect on their bottom line?

Measuring profitability or business performance was the first topic discussed by a new Grazing Matcher group at their initial meeting near Harvey in April. The group consists of eight grazing enterprises from the South West that will meet regularly with two advisors over a 12-month period to improve grazing management, business decisions and profitability. This follows the successful completion of the program with two groups in December 2018.

But before discussing potential changes to management, local agronomist Dan Parnell outlined how they can measure the impact of change on their business.

“I think it’s vital to incorporate some measures into everything we do,” Dan said. “It puts a bit of critical thinking into the decisions we make and helps to continually measure performance over time. Otherwise we are just sailing in the dark,” Dan said.

There are several options to measure business performance, but one of the commonly used indicators is Cost of Production (CoP), which has a good relationship with profitability. Various benchmarking studies carried out in Australia have demonstrated that profitability relates to CoP more than market price.

CoP is the total operating cost of producing one kilogram of beef, and businesses that can maintain a lower cost of production over time are likely to have higher than average profitability.

“Cost of production doesn’t necessarily mean cutting costs,” Dan explained. “It means being more efficient. It can be lowered by either reducing unnecessary costs, increasing production to dilute fixed costs, or a combination of both. It’s about getting efficiencies with each cost.”

Profitability is also linked to overall production levels, but the relationship is not as strong as with CoP.

“Cost of production decreases as production increases to a point, especially if you are understocked and can change to a more optimal stocking rate without too much extra cost. But at some point, increasing production will start to increase the cost of production because of increases in things like expensive feed sources. This is associated with the theory of diminishing marginal returns.”

So, if producers are thinking of running more stock, it is important to consider how this affects the cost of production. What are they going to eat to achieve the required animal condition score, and can this be done without grazing too hard and stunting pasture growth, or causing erosion and excess pugging?

One question that CoP can help to answer is whether extra investment in pasture-based costs like fertiliser, or an investment in better grazing management, can either support more production or profitably offset a reduction in supplementary feed costs. Together, these “feed-base” costs represent the one of the largest costs to grazing enterprises. Finding the most efficient feed-base system provides a significant opportunity to reduce CoP.

“Analysis by agricultural consultancy Holmes Sackett shows the top 20 percent of farm businesses generally spend less per kilogram of production by achieving better utilisation of what feed is grown.”

Holmes Sackett found that better cost efficiency can be achieved by:

• Optimising calving date to best match feed demand with availability,
• Optimising livestock numbers,
• Minimising reliance on out-of-season production,
• Monitoring soil fertility and fertilising on a ‘needs be’ basis,
• Pasture manipulation, and
• Grazing strategy.

“The inherent thread of the Grazing Matcher program is to get more out of the pasture base, which is your cheapest feed source (compared to purchased feed). We need to build skills and confidence to grow quality feed cheaply and meet feed demand at the lowest cost.”

Meat and Livestock Australia have a CoP calculator at https://www.mla.com.au/extension-training-and-tools/tools-calculators/Cost-of-production/ that allows producers to benchmark against industry averages.

Producers were encouraged to start using the CoP calculator even if they have to initially estimate some costs.

“If you do it a certain way, be consistent so you can compare one year to the next.”

Given that some producers can spend three times more than others to produce one kilogram of beef, the CoP calculator is a great way to start measuring profitability and thinking critically, allowing better use of resources.

This project is supported by Western Beef Association Inc. and the South West Catchments Council’s Regional Agriculture Landcare Facilitator, through funding from the Australian Government’s National Landcare Program.

Tags: Cost of Production