The cattle business is not for the faint of heart. It’s a wild ride full of unpredictability and volatility – especially when it comes to turning a profit. Some of these are within the cattleman’s control, and others are complete wild cards. But understanding what influences profitability, be it something within your control or not, is an important part of being a savvy cattle business professional.
Cost of Production
According to Jay Jenkins, a Nebraska extension educator, there are six general categories that affect profit. These are: number of production units, production per unit, direct costs, value per unit, enterprise mix and overhead costs. Your overall cost of productions covers multiple of these.
One of the most common is direct cost, which is basically anything you need to purchase or invest in to produce. These can be easily reduced – for example decreasing number of cattle purchased, changing feed ingredients and cutting back on non-essential products and services. However, cutting back too much is an easy way to decrease end profit or productivity.
Bear in mind that some of these are unavoidable. Unexpected vet bills, for example, are oftentimes not optional, but they do increase cost of production. If there are things like infectious disease, unsafe housing or human error at play adding to production expenses, this is a good time to re-evaluate some levels of your management.
Productivity can have a lot of different definitions depend on who you ask. It could be measured by rate of gain, value on the rail or by finances.
“When profitability wanes, it is natural to try to increase productivity. It is important to remember that production per unit is only one factor affecting profitability,” cautions Jenkins. “It is also hard to increase production without also increasing costs.”
This can be a particularly tricky profitability factor to discuss because it has lots of influences that are difficult to quantify. Overall herd health, for example, can seriously hurt performance. Likewise, feed quality and efficiency for cattle can also impact this.
Of course, it is impossible to discuss profitability without mentioning the beef market. Unfortunately, this is probably the most volatile and uninfluenceable components of the cattle business. The current and future state of the market can change at a moment’s notice. While you can’t change where it’s going, you can adjust your sails if you are aware of what is happening.
“The change in profitability over time is, of course, market driven. Yet, regardless of the market, there are nearly always individual lots that are making money and some that are losing money,” write professional cattle consultants Shawn Walter and Ron Hale in their paper Profit Profiles: Factors Driving Cattle Feeding Profitability. “We can also learn some lessons from the least profitable cattle. One of the most obvious is that underfeeding cattle – whether you measure that by out-weight or degree of finish – rarely pays off in terms of improved profits.”
“However, by studying the characteristics of high and low profit lots, we have learned that feeding cattle to an ―optimum‖ end point – which may be a little heavier, and a little more finished than is typical – tends to improve profitability. It is important to monitor performance and weight at the end of the feeding period because there are threshold levels at which profitability drops quickly.”
Margin Trax is a powerful asset to cattle feeders from this angle because it continually uses active hedge accounts to shift the profitability of a specific lot when married with performance data.
The Importance of Tracking
Tracking continual progress from purchase to loadout is a key in combining all the profitability metrics for maximal results. These aren’t merely for current decision makings, but also for the future. Learning from past records with all their nuances – both the successes and failures – is key to bettering an operation. Historic data can help determine what factors made one group of cattle more profitable than another at the same point in time.
This is a strength of the Margin Trax program – it records individual lots simultaneously. Data visualization helps managers see how the shortcomings and shifting of breakevens and margins.
Understanding not only what profitability is but the roadmap to getting there is important for feeders to understand. Fortunately, Margin Trax helps make it a little easier by illustrating the process in real time. Not to mention, it also takes into account past events to better project for the future.
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