For the first time, EBLEX has produced its Business Pointers statistics as “cost/kg” figures to make them as relevant as possible to producers, but are sheep farmers really managing their costs on a pence per kilo basis, and are the benefits of this approach obvious in terms of better managing costs and improving net margins?
“Producers can no longer rely on gross margins a ewe or hectare as the main indicators of the returns from sheep, as this just encourages arbitrary cost-cutting and striving for higher lambing percentages and stocking rates,” says Lesley Stubbings, independent sheep consultant. “All farmers should be prepared to look more closely at their efficiency of production, and that means the cost of producing 1kg of carcass, which in turn means the factors which have greater influence on unit costs can be identified and focused on.”
Ms Stubbings advises farmers to make the time to produce a comprehensive spreadsheet and look at what would happen to their end margins if small changes are made to areas such as outputs, fixed and variable costs and of course price.
“Take the time to put in sensible figures and identify three areas where they are strong and three which are weak; this is a good starting point.”
“The strength of having detailed figures on the output of the sheep for each unit produced is that you can benchmark your unit cost performance against your peers in the same business, or use the EBLEX Business Pointers. Having the EBLEX figures to hand is a good way to prompt you to think about what your costs really are, so it makes it somewhat easier to start.”
“From the EBLEX published results and my own calculations it is still clear that output is a major determinant of profitability, this is output in terms of kgs lamb sold/ewe/year, not just lambing percentages. Invariably the most profitable flocks are those that sell the most kgs/ewe, not those with the lowest variable costs/ewe. Why is that?” she asks.
“To answer that identify areas of wastage, look carefully at the number of barren ewes, litter sizes, if there is a high perinatal loss of ewes or lambs and losses after turnout .
A key area to focus on is that of unproductive ewes, and by this I mean the percentage that fail to rear lambs in a flock, as this can have a major direct influence on profitability.”
“When pressure is applied to margins, the most natural reaction is to look at variable costs and see where these can be cut in the hope of increasing profit,” Ms Stubbings explains. “There will of course be flocks where costs are extremely high in some areas, for example unnecessary supplements and these can easily add £2-£3/ewe/year or 6-10p/kg to the unit cost/kg of carcass, and their removal is unlikely to affect productivity, so many flocks could turn this into reality. Better use and management of grass could also mean a reduction in the use of bought-in concentrates.”
Ms Stubbings agrees that fixed costs are more difficult to determine in a lamb enterprise, however, these must be established as accurately as possible, and suggests one way of doing this “is to imagine that you no longer have any sheep and make a list of the costs that would disappear with them”.
Of course, maximising price is a key factor. However, this is not about chasing the top classifications and prices, but about minimising the number of under and overweight carcasses, and those falling outside the EUR3l category all of which represent reduced income.
Duncan Sinclair, agricultural manager for Waitrose, encourages sheep producers to take this step. “The more detailed information a producer has on his/her enterprise the better informed they will be from a business perspective. There is no doubt those farmers who have already opted for this approach are reaping the rewards as a result of the detailed information they have on their businesses.”
“For farming businesses to move forward in times of recession, this is the type of information that producers should know in order to support a comprehensive business plan, the best projects are still those with a sound business base that will stand the test of time,” says Mr Sinclair. “Current higher lamb prices should not lull producers into a false sense of security, as at the same time input costs have gone up – it is the net returns that matter.”