Clearly, a large rift is starting to appear between young cattle and slaughter
markets as reports continue to indicate that many restockers are among the
players in the store market buying spree.
Price, profit and margin
So what does this mean for profitability, and where is the break-even point for
those participating in the trading game?
The following case study takes a simplified look at the growing disconnect
between the markets, and what the differentiation means to a business’s
bottom line.
Case study
Given that many variables exist in both business and production models
employed by beef producers, this example is based purely on purchase at
feeder steer weight and sale in the grass-fed ox slaughter market, by a
better- than-average producer running a herd of 2,000 head.
Gross margin
According to MLA’s National Cattle Indicator Report, restocker yearling steers
for the week ending 12 February averaged $3.52 per kilogram live weight.
Based on an average steer weight of 325 kilograms, this equates to $1,144
per head.
In comparison, based on a sale weight of 600 kilograms live weight and
carcass yield of 52 per cent, the carcass weight would be 312 kilograms.
Based on $5.10 per kilogram this equates to an income of $1,591 per head.
This represents a live weight gain of 275 kilograms and gross margin of $447
per head.
There is no doubt that a gross margin of $447 per head is appealing to any
producer. What some producers do not consider however is that there is a
stark difference between gross margin and profit.
Cost of production is key
Price received is not the main profit driver in a beef operation. What is critical
to profit is actually cost of production, measured by dollar cost per kilogram of
beef produced.
The cost of production, which encompasses both expenses and productivity,
can explain more than 80 per cent of the difference in profit between
producers.
Research across northern beef herds indicates that first, very few producers
know their cost of production per kilogram of beef produced, and secondly,
that it costs an average producer up to 30 per cent more to produce a live
weight kilogram of beef than it does a top 25 per cent operator.
Long term performance measures have found that for a herd size of between
1,600 and 5,400 head of cattle — not accounting for seasonal or target
market effects — the cost of production for an average producer is around
$1.45 per kilogram of live weight. For a top 25 per cent producer the cost of
production is in the range of $1.10 per kilogram of live weight.
Considering that the producer in question is portrayed to be better than
average, but not a “top 25 per center”, we will split the difference and
nominate that on average, cost of production per live weight kilograms
produced for the example operation is $1.27.
Profit before interest and tax
Multiplying this by the 275 kilogram gain required to comfortably hit the grassfed ox market, earnings per head have now been eroded by $349 and the
profit before interest and tax is now $98.
Impact of debt
While recent rural debt figures are hard to obtain, some reports indicate that
rural debt is on average, around $900 per head and we adopt this for the
purposes of this case study. Based on a 6.47 per cent interest rate and 15
Clearly, a large rift is starting
to appear between young
cattle and slaughter markets
as reports continue to indicate
that many restockers are
among the players in the store
market buying spree.
Will Colwell
Partner
Martin Jones
Partner
Martin Lewis
Partner
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+61 417 789 205
+61 8 9214 1405
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+61 8 8100 7657
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will.colwell@fh.com.au
martin.jones@fh.com.au
martin.lewis@fh.com.au
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Partner
Ryan Eagle
Partner
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Warwick Yates
Rural & Agribusiness
Specialist
stewart.mccallum@fh.com.au
ryan.eagle@fh.com.au
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+61 411 599 882
warwick.yates@fh.com.au
Mark Perkins
Rural & Agribusiness
Specialist
Geoff Wormwell
Rural & Agribusiness
Specialist
Paul McKenzie
Rural & Agribusiness
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Campbell Gordon
Director
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+61 407 650 743
campbell.gordon@fh.com.au
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