Key profit drivers
Income and costs influence return on investment and determine profit. Income is determined by the quantity of product and the price received per unit of product. For example, the higher the price you get for your livestock, the greater the income - but not necessarily the profit.
Successful producers aim to improve product quality (red meat) and evaluate selling options to maximise the price received or to minimise price fluctuations.
However, benchmarking studies consistently show producers have a much greater chance of improving profitability by managing the quantity of product produced and controlling their cost structures.
Factors that significantly impact on profit are called profit drivers, eg kilograms of red meat produced per hectare.
It takes less time and effort to reduce the cost of production than to influence price.
Fixed vs variable costs
Costs are either fixed (overheads) or variable (operating).
Fixed costs are incurred regardless of the number or quality of livestock run and include rates, insurance, infrastructure, loan repayments and interest etc.
Variable costs are associated with running an enterprise - they ’vary’ according to the size of the livestock enterprise or the number of stock and can include shearing, fertiliser, supplementary feeding etc.
The easiest way to reduce costs on-farm is to spread the fixed costs across as much product as possible. This is generating ‘economies of scale’.
Increasing production increases total variable costs, but fixed costs per kilogram of product should decrease and therefore the total cost of production per kilogram falls.
Marketing and risk reduction strategies (such as forward contracts, futures, reserve prices) require a solid understanding of costs of production.
Benchmarking studies show the most financially successful producers tend to do some or all of the following:
- have higher stocking rates than the district average, to generate economies of scale
- know their costs of production per kilogram of product and tend to be in the lowest 20%
- have a business management focus
- objectively assess and record pasture and animal performance (e.g. measure herbage mass, record grazing days, weight or fat scores, etc.)
- are prepared to spend a dollar to make two dollars
- run many more stock per unit of labour than the district average
- continually benchmark themselves against other similar producers to keep in front.