SURERPROFITability concept

10 September 1999




SURERPROFITability concept

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.

Emma Penny reports

IS your sheep enterprise profitable? Could it be more profitable? Do you know which areas are the biggest drain on profitability? And 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 a 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," says Ms Stubbings .

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 financially.

"Overheads are one of the biggest areas for cost cutting. In general, cutting them means simplifying the system; complicated systems dont run on low overheads.

"Conversley, 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/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 wont 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."

OVERHEADFIGURE

WORKING out overhead costs can be tricky, but its essential if you are to find out how well your business is performing.

According to Ms Stubbings, the only way to work them out is to sit down in the farm office armed with accounts and bills. "You need to work out how much is being spent on rent, labour, buildings and equipment, and finance for the sheep flock."

Rent – or the rent equivalent when land is owned – should be calculated using the actual land used by the flock, and not as a proportion of rent for the whole farm. "Where you are working out a rent equivalent, consider how much rent you could get for that land if it was rented out for another use, for instance, as a grass let or for cereals."

Labour costs must also be worked back to the flock. Where a shepherd spends all his time with the flock, all his costs – including the cost of providing a house and clothing – should be included. "But if he spends some time driving a tractor at harvest, you could consider putting a proportion of his costs towards the arable side of the business."

Ms Stubbings is also keen that producers include their own labour in overhead costs. "How much are you worth? What do you want from the business?"

Building and equipment costs should also be worked out, as must finance. "In addition, running a vehicle for a large flock can easily cost £6000-£7000 a year, with finance charges on top of that.

"Use your common sense when working out overhead costs, but try to make them as accurate as possible."

PROFITSSHOCK

OVER the last few years, most sheep producers would assume that their early lambing flocks were the least profitable.

Thats what Northants producer John Matts thought too – until he used Lesley Stubbings spreadsheet program. Then he discovered that his November and January lambing flocks were far more profitable that his main flock, which was crippled by high rents – a factor which would not have been apparent when assessing performance using gross margins.

Mr Matts, who runs 2300 ewes and ewe lambs at Creaton, Northampton, ran the spreadsheet and discovered that November lambers left a profit this year of £19.27 a ewe, while January lambers made £6.31 a ewe. The main flock, lambing in March and April, however, made a loss of £2.60 a ewe.

According to Ms Stubbings, this illustrates the effect of including overhead costs. Variable costs for the January lambers are 66p/kg higher – which would make them seem a poor option under a gross margin comparison. However, lower overhead costs and a much higher lamb price – 265p/kg compared with 160p/kg for main flock lambs – means the January flock is more profitable.

"Many producers are giving up early lamb production without really looking at the costs. Looking at variable costs only is misleading. For instance, even though the main flock has variable costs of only 77p/kg it doesnt follow that it is the most profitable as overhead costs may be higher, and the end price is much lower."

Mr Matts admits he is surprised at how much overhead costs affect main flock profitability, and reckons rent is the biggest concern. "We have got to cut the costs of the grass fed flock, and rents must come down. Im having to compete on land which could be used for arable production, which has driven rents up. Im also paying a lot to rent buildings."

To tackle this, Mr Matts plans to be tougher when negotiating rents, but there are other steps he can take to help boost main flock profitability.

Currently, early ewes are scanned in October, and those ewes not in lamb move into the main lambing flock. This has, in the past, meant that teasers havent been put into the main flock ewes until after scanning. However, this year, Mr Matts plans to put teasers in before scanning ewes, allowing him to put rams in earlier, and bring lambing slightly forward.

"Creep feeding lambs born before mid-March should help us get them away earlier, so we should be able to sell them for a better price – hopefully about 200p/kg – which will boost profitability."

By considering the effect of creep feeding on the spreadsheet, Mr Matts can see that spending £5 a head on feeding half the lambs – and achieving a price of 200p/kg – will result in a profit of 31.8p/kg, giving a profit/ewe of £10.98 using this years prices.

Improving output would also help boost profits, and Mr Matts plans to do this by ceasing to lamb ewe lambs. This has been done in the past when ewe lambs which had lambed sold for more than those which had run for a year empty, but now the difference is very small. "Well continue to buy-in ewe lambs, but wont lamb them. This should increase the main flocks lambing percentage to 1.75 and help boost its profitability," he says. &#42


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