Gross Profit Analysis Excercise

The fall run of calves is just beginning. As we ponder what and when to sell in this lower market, the importance of financial planning becomes paramount. We picked numbers last winter when we did our plans that were hopefully conservative. I hope your plan will still allow for some profit even with these prices.

The following exercise helps me think things through when we get into the tougher spots. It is called Gross Profit Analysis. You calculate the revenue for one unit and then subtract the variable costs to produce each unit. It gets difficult at times to decide if it is a variable cost so you ask yourself will this cost change if I add one more unit of production. The gross profit will be your measuring device to help you decide if this enterprise will be profitable.

Scenario 1
You sell your calves at these prices. You will still be profitable. Excellent work

Scenario 2
If you are not pleased with your end result you need to go to re-plan mode. That means starting over with the 8 step financial plan.

  1. Beginning net worth (likely won’t have changed much)
  2. Plan Income (likely lower)
  3. Set profit (do you want to lower this)
  4. Define weak link (likely the same as original plan)
  5. Plan & sort expenses (will be limited but may make some savings)
  6. Do cash flow
  7. Ending net worth

After this exercise if the plan doesn’t meet your goal, we need to look at number 2 Plan Income. What can we do to increase the value of the calves we have to sell? Two ideas that come to mind are background them and then run them on grass the next summer and sell them as long yearlings. Several questions need to asked before we consider either of these options. Do you have the skills to background animals? Do you have grass for that many additional animals the next summer? Can your cash flow be adjusted to take account for a much later sale of these animals? Do you have time to do this extra work? If you think the answer is yes let’s look at the numbers.

I am using Sask. Ag and Food statistics from Oct 14/16 report and from the Canfax website feeder cattle futures for Oct 18 You need to use your own numbers for this exercise to be meaningful.

  • 400-500 steers  $190.83          Feeder cattle May 2017 $110.95 USD= $1.44 Oct 18 exchange rate
  • 400-500 heifers $163.33          Feeder cattle Sept 2017 $110.90  USD= $1.44 Oct 18 exchange rate

 

Sell calves in fall:

$177.08  str hfr av @ 500 lbs  =  $885.40
90% of cows exposed have calves to sell  885.40 *90% = $796.86

Expenses

Winter feed 150 days 1300 lb cow= 39 lbs @ $.04/day        $234
Depreciation    $2400 – $1300= 1100/ 8 years                      $137.50
Bred heifer – cull cow price
Mkt & truck                                                                                     $40
Vet  CCIA vaccine                                                                          $14
Salt & mineral                                                                                 $ 5
Death 1% of $2400                                                                        $24
Total Expenses                                                                                $454.50

GROSS PROFIT                                                                            $ 342.36

From our financial plan we concluded this is not enough. We need to get more income.

 

Background calves use bale grazing and barley:

Gain of 1.75 lbs/day   Dec 1 to May 1  151 days
Income basis Oct 18 Canfax   760 lbs @ $1.44 =                      $1094.40

Expenses

Cost of animal from cow calf                                                       $796.86
Feed  av wt 630 lbs @.03%= 19 lbs @ $.04 for 151 days       $114.76
Barley  6 lbs/hd/day @ $.07 for 151 days                                 $ 63.42
Vet antibiotic                                                                                   $3
Death 2%  of $1341                                                                        $27
Total Expenses                                                                                $ 1005.04

GROSS PROFIT                                                                              $89.36

 

Long yearlings Graze from May 1 to Sept 1 @ 1.5 lbs/hd/day

Selling weight 940 lbs @ $144 ( Canfax  feeder cattle futures Oct 18 )=  $1353.60

Expenses

Buy animal from background                                                         $1094.40
Salt & Min                                                                                           $ 2
Vet                                                                                                         $2
Death 2%  of 1518                                                                               $30.36
Mkt & truck                                                                                         $40
Total Expenses                                                                                    $1168.76

GROSS PROFIT                                                                                  $184.84

Doing this we have taken our gross profit from $ 342 from the cow calf, added $89 from back grounding and $184 from grassing giving us a total of $615 per animal. Does this make your financial plan work better? You need to factor risk as prices do change. Livestock insurance is an option to look into if you have a low tolerance for risk.

Other possibilities with cattle are finishing, grass finishing, and direct marketing. Other enterprises that may be more profitable are chickens, bees, sheep and goats. All these options will add more dollars but require considerable skill. You need to look at your goal and decide if this is a good decision.

The message is there are lots of options. Each one may have merit for your situation. You need to have a good financial plan and do some research before you jump in. If you don’t like the results your are getting, you need to do something different. The definition of insanity is doing the same thing over and over again and expecting a different result. If you realize you will have shortfalls, be sure to chat with your banker. They appreciate having a heads up and relations will be much better.

If you are having trouble financial planning, get some help. Call one of the Certified Educators or the Farm Management Specialists with Sask. Ag and Food or get your group together and do a brainstorming session.

Good luck and I hope you meet your profit goal.

photo by benmillett via Flickr

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