How three 5% changes increase profit by more than 300%
A “precision rancher” is someone who, recognizing that agriculture operates on small margins, utilizes every technology, production practice and management technique that is appropriate for their climate, soil zone and production system in order to maximize their profits.
Producers make dozens of decisions every season to support the reproduction and productivity of their cow herd and the quality and yield of their forages, knowing that there are trade-offs with many choices. Incremental changes have great potential, both positively and negatively, to impact the bottom line. Monitoring and managing productivity, price and input costs can significantly increase competitiveness by helping ensure that valuable, incremental opportunities are not ignored.
The 5% Rule: Productivity, Price and Costs
In terms of net income, economists have found that the difference between the top 25% of agricultural operations and the average operation is typically small, as little as 5% on inputs, production or price. If you change input costs, productivity and price each by 5%, it makes a tremendous impact on the bottom line.
For example, let’s say there is a cow-calf operation selling 525 lb calves at $2/lb, and therefore has $1,050 in revenue per calf. If the annual maintenance costs per cow (adjusted for reproductive efficiency (RE), death loss, etc.) is $1000, that leaves a $50 per head margin.
Let’s see how a change in input costs, productivity, and price impacts overall profit.
- If this operation cut input costs by 5%, they’d have another $50 per head margin.
- If they add 5% more weaning weight (another 25 lbs sold at $2/lb), they’d have another $52.50 per head margin
- If they increase sale price by 5% (up $0.10/lb), they’d have another $52.50 per head margin.
- If they do all three of the above, margins would increase by over $157.50 per head. Rather than a $50 per head margin, they now have a $207.50 per head margin.
The three beneficial 5% changes equal 315% increase in profit. For 100 cows, that means $15,750 in additional margin for the year. On a legacy farm, with three generations operating for an average of 30 years each means that over 90 years, maintaining the three 5% changes results in $1.4 million in additional working capital per 100 cows.
Perhaps 5% is too rich to contemplate. What about 2%?
Using the same cow-calf operation with a base margin of $50/calf:
- If this operation cut input costs by 2%, they’d have another $20 per head margin.
- If they add 2% more weaning weight (additional 10.5 lbs at $2/lb), they’d have another $21 per head margin.
- If they increase sale price by 2% (up $0.04/lb), they’d have another $21 per head margin.
- If they do all three, margins increase by $62 per head. Rather than a $50 per head margin, they now have almost $115 per head margin.
The three beneficial 2% changes equal 125% increase in profit. For 100 cows, that is $6,242 in additional margin for the year. It may not seem like much for a single year but for a legacy farm, with three generations operating for an average of 30 years each means that over 90 years, that is $562,000 in additional working capital (for every 100 cows) that can be re-invested into the operation. Imagine the difference an additional half million dollars would make in keeping up with technology change or managing volatile times in the market.
In the same way that small, incremental improvements can compound into big gains, small things can compound into big losses. For example, three detrimental 2% changes equal an outright loss of over $12 per head:
Don’t allow your operation to have multiple small losses by ignoring hidden opportunities. Hidden opportunity costs are things unseen but built into management decisions, for example:
- 20% of your cows are a body condition score (BCS) of 2.0 at the end of summer. Not getting their BCS score up to the ideal 3.0-3.5 before winter means lost productivity and a higher per unit cost of production
- The decision to preg-check or not was made several years ago on a different winter-feeding system. Not re-evaluating with the current system means is money left on the table.
- Install a pumped water system for yearlings, but don’t aerate the water and therefore incur the cost without gaining as much productivity as aerated water would have.
It takes time, effort and expense to achieve small net improvements in cost, production and price, but the simplistic scenarios shown above demonstrate that adopting the precision rancher mindset, by continually taking steps and working day-by-day to make small beneficial changes, can have a big impact on profit.
How to make incremental changes happen on an operation is the question. What makes one producer competitive in one region may be very different in another region. Each production system will have its own set of limitations and areas where greater focus may be beneficial. Let’s consider cattle operations in different climatic conditions:
- An extensive year-round grazing operation in Southwest Saskatchewan may not need to own machinery, and therefore have minimal capital costs. It may graze cattle among adjacent pastures, resulting in minimal labour demand. Its limiting factor is land. Depending on its location, it may also compete for land with expanding urban centers.
- In contrast, an operation in Northern Alberta with heavy snow does not have the option to swath graze to reduce winter feeding costs. Because of their climatic conditions, they may use confined feeding for several months, resulting in higher capital costs and a set labour demand. But they may have access to silage or alternative feeds that reduce their feed costs and allow them to stay competitive in their region.
- An operation in eastern Canada requires housing during the winter. With higher capital costs, they may focus on productivity and animal performance through genetics and feed to compete.
- An operation in the interior of British Columbia with extensive pasture and ample land availability that can only be accessed by horse contend with economies of size, so larger herd sizes support margins.
When looking at competitiveness and profitability, each region needs to evaluate the limitations and opportunities unique to them. Is land, labour or capital the limitation? Will the biggest impact for the operation be from reducing input costs, or improving productivity or increasing price?
Options for Small but Valuable Changes
The following options for changing productivity, price and costs may be beneficial on your operation, depending on your region, and may spark ideas for other small changes that are worth considering.
A lot of grain producers race to finish seeding because they know that more growing days equals more yield. They are willing to shift to 24-hour seeding because the extra expense of labour in the spring pays off at harvest. Similarly, having a higher percentage of cows calve in the first 21 days means more growing days and higher weaning weight. In addition, a shorter calving season can mean less days and less labour spent calving, contributing to efficiencies elsewhere on the operation.
Increasing productivity by 2-5% on your operation could happen with a combination of things, including:
- increase reproductive efficiency (from 83% to 85%, for example)
- changing bull power to take advantage of increased gains due to hybrid vigour
- adding forage seed to mineral to boost productivity of grazing lands
- reducing pre-weaning death loss (by updating your vaccination program for example)
- increasing the proportion of cows calving in the first 21 days (which studies show on average will add approximately 20 lbs of weaning weight)
- How an operation achieves this goal will vary depending on its production system: when they calve (February vs. May), where (on pasture vs. yard), how intensive or extensive their grazing system during the breeding season and use of community pastures.
- Ways of achieving this goal may include:
- year-round mineral program to improve fertility,
- artificial insemination,
- flushing (if in pens pre-breeding or through grass management),
- separate feeding groups to improve fertility and longevity.
Some investments in technology or equipment pay for themselves and add to future productivity. For example, adding a system to pump and aerate water for herds of more than 200 head typically can be paid off in less than three years. Know that research shows that yearlings perform best when water is aerated. Installing a pumped water system for yearlings without an aeration system would limit the productivity gains and therefore the system would take longer to pay-off than an aerated system. Be careful to get the most out of investments. Learn more about increased productivity in animals with pumped water rather than direct water access on BeefResearch.ca (http://www.beefresearch.ca/research/water-systems-calculator.cfm), and seek out on-farm trials if you’re considering new water systems.
While there is very little you can do to influence cattle prices, consistency in the cattle you sell determines your reputation in the market. Whether your cattle perform consistently with uniform weights, health, and genetics will influence whether they will be split up and comingled at the auction market or feedlot. This potentially exposes them to more disease and stress, which impacts their performance and therefore your reputation as a seller.
Years of consistent delivery of high quality builds a good reputation and may lead to buyers paying 2-5% more for your calves. Evaluating the various options in terms of marketing such as time, location and method of sales may increase sale price as well.
Different types of costs should be examined: overhead costs, fixed costs, variable costs.
Think creatively on how to cut the per unit (such as a pound of weaned calf) cost of production. Cutting costs does not necessarily mean cutting cash costs – consider how to increase profits.
Cutting costs per unit may require an upfront investment but result in higher productivity that ultimately reduces the per unit costs. For example, year-round mineral programs may increase total costs, but a higher reproductive efficiency could result in a lower per unit cost of weaned calf, which more than pays for the cost of the mineral.
To cut per unit costs by 2-5%, think about:
- Overhead: how to increase utilization of existing resources?
- What facilities do you really need? If cows are on pasture year-round do you really need permanent corrals? If machinery is only used seasonally, could it be rented out in the off-season, or cost-shared or rented from someone else? How does growing versus buying winter feed impact machinery needs and costs?
- Variable: how quickly (and accurately) do you diagnose disease in your animals?
- How much does that cost in time, treatment, and performance? Can changes in a herd health program reduce disease prevalence, treatment and improve performance? Again, think about cutting per unit costs, not cash costs.
- Fixed cost: how effective is your labour?
- Could other people could be trained to take on tasks that are currently done by owners or managers and free up their time to work on things that only they as owners/managers can do? Time is money – particularly if you work off-farm.
- Establishing and utilizing standard operating procedures (SOPs) to ensure tasks are done consistently and correctly, such as everyone looking for the same things when checking cattle, can help provide a level of comfort for those being trained and for the managers who want to spend more time focused on the business. A basic system or standard operating procedure ensures someone being trained is not missing things which requires time consuming work to be repeated.
- For example, when someone different checks cattle on summer pasture do they report on (1) water – clear and good footing and access (2) mineral availability, (3) cattle health and movement (4) grass condition, (5) fence.
As agriculture looks to the future, competition from alternative protein options is heating up. Beef cattle production needs to be competitive with other commodities to secure land, labour and capital resources. Part of that requires a mind-shift in how beef production is looked at as a business, examining every technology, production, and management practice that could benefit an operation. While there are no silver bullets that increase margins from $10/head to $100/head in a single year, several small changes can certainly add up to a big difference.
How will YOU use the 5% rule to contribute to your bottom line in the coming year?
Learn more about the 5% rule:
- Danny Klinefelter. Causes of Farm & Ranch Failure.
- Kristjan Hebert:
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