10 September 1999

New concept

offers surer profitability…

Are you wondering what the

next move is for your sheep

enterprise? A new concept,

looking at unit cost of

production rather than gross

margin, could help you

decide on future plans.

Emma Penny reports

IS your sheep enterprise profitable? Could it be more profitable? Do you know which areas are the biggest drain on profitability? Have you ever accounted for overhead costs such as labour, rent and machinery?

If you are keen to find the answer to any of those questions then looking at total costs of production rate rather than gross margins could help. This is possible using a spreadsheet-based computer program developed by independent sheep specialist Lesley Stubbings, which calculates profitability in p/kg of lambs sold from the flock.

"Producers are asking which way they should go with their sheep units; are they profitable; can they be more profitable? The problem with gross margin is that it takes no account of overhead costs such as labour, rent and machinery, which can amount to £25-£50 a ewe.

"In addition, it doesnt take efficiency of carcass meat production into account, so cost cutting becomes a fairly arbitrary process for many flocks," she says.

However, she admits that producers are usually reluctant to work out overhead costs. "Because they are notoriously difficult to calculate for sheep flocks, they are usually ignored. But its vital to work out overheads which are applicable to the sheep flock. Lamb prices are unlikely to be high in the near future, and those producers making profit will be those with low overhead costs – and to ensure that, you must know where you are.

"Overheads are a prime area for cost cutting. In general, cutting them means simplifying the system; complicated systems dont run on low overheads.

"Conversely, cutting variable costs which may have a direct effect on output either in terms of lamb numbers or value may not have the positive effect producers expect. Good examples are creep feed and vet costs, where a little spent can significantly improve profit/kg."

Besides overhead costs, the spreadsheet requires production figures, ewe and lamb variable costs, and an assumed market price for lamb in p/kg. The spreadsheet uses all the information to work out a break-even cost, profit margin a kg lamb carcass sold and profit margin a ewe.

"Changes can then be made to any factor, for example, carcass weight, number of lambs sold, land rental, market prices, and so on. This means the effect on unit costs and hence profit margin can be instantly calculated.

"This makes it easy to assess how changes affect profitability. For instance, increasing your shepherds workload to 1500 ewes, rather than 1000, will spread his cost, but it will also affect lambing percentage. The spreadsheet allows you to work out the likely cost-benefit of changes so you can see whether they are worthwhile."

She admits that some producers will not want to know how little they are making at present. "But theres no point in being an ostrich about costs – it will catch up with you eventually. Much better to face facts now and make sensible decisions for the coming year.

"I know profits are low, but there is some potential, and if you are staying in production you have got to make decisions on systems, inputs and costs savings – and you cant do that without good information."