Putting extra profits to work

07 October 2016

For many beef and sheep producers, it has been a long time since returns have been this good and the new challenge is not so much how to pay the bills but how not to waste the opportunity.

According to John Webb Ware, senior consultant with the University of Melbourne’s Mackinnon Project, livestock gross margins for 2016-17 are likely to be almost double the Victoria Farm Monitor Project average for the past five years.

“The five-year gross margin per DSE average for wool was $21/DSE, for prime lambs $28/DSE and beef $24/DSE,” he said.

“At the present prices we can realistically expect the gross margin for a beef enterprise to be in the high $30s to high $40s with similar results for self-replacing Merino, dual purpose and prime lamb enterprises.

“With good seasonal conditions, stock will generate more beef and lamb and costs will be lower with less supplementary feeding than recent years.

“All this will flow through to substantial increases in farm profit.”

Insights

John, who spoke at the MLA More Beef from Pastures forum at Alpine Angus at Rosewhite, Victoria this week, had some sage insights for producers.

In terms of capital tied up in enterprises, sheep producers are out in front with an estimated 50-70% marginal return on capital compared to 35-45% for beef.

“The message for producers running mixed enterprises – if the underlying profitability of your sheep enterprise is better than cattle and your situation allows it – is to consider reducing cattle numbers and increase sheep numbers to potentially increase profits in the longer term and free up extra capital,” John said.

“It’s generally accepted that producers make 40-50% of their profits in two out of 10 years. In two out of 10 years they break even and the remainder of years make up the difference.

“This year, with the fantastic season, and good commodity prices, producers will have the opportunity to make some serious money.”

Invest in the future

But, as they say, what goes up must come down and John warns producers not to get complacent and to use this opportunity to invest in the future.

“Managing the good times is equally important as managing the tough times,” he said.

“Well managed businesses are now in a position to reap the rewards of high commodity prices and good seasonal conditions.

“What people do with that extra profit will depend on their individual situations.”

Focus on farm

John said there are many options for investing on farm.

“A key feature of top producers is to constantly review options and invest in strategies that improve profits and the underlying strength of their businesses,” he said.

“For example, strategies that improve pasture growth such as fertiliser application and pasture improvement usually have a fantastic return on investment and, with current commodity prices, the return is even better.”

John said infrastructure improvements such as stock handling facilities that reduce labour costs, improve ease of stock handling and timing of operations are generally a good long-term investment but all options should be closely evaluated to ensure money is allocated wisely to strengthen the business.

“Many strategies that help drought-proof your enterprise are sound investments.”

Debt reduction

John warned while interest rates are very low it is tempting to ignore debt reduction in favour of other options, however, he said debt reduction should always be considered an important strategy.

“The current situation could strengthen many producers’ businesses so if you are unsure of where to invest surplus funds, now is the time to seek advice to determine what strategies you should adopt,” he said.

More information

John Webb Ware T: 03 9731 2225 E: j.webbware@unimelb.edu.au

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