Rayner Reckons

Sep 11

Look beyond the hype

Posted on Friday, September 11, 2015

The Australian cattle market has certainly offered a lot of excitement in the past six months!  The value of cattle has steadily increased, and so to has the excitement and hype around beef prices.  Without doubt this is one the best periods I've ever heard of for producers looking to sell cattle!  Pretty much every type of animal is finding a ready demand, from restocking animals, to slaughter cattle.

I happened to have a look at the Eastern Young Cattle Indicator - the EYCI ending yesterday the 10th of September 2015.  The EYCI is a 7 day rolling average, that looks at the prices paid for young cattle (vealers, yearling heifers and steers) that are heavier than 200kg with a muscle and fat score of C2 - C3.

The EYCI has reached 584.50 c/cwt.  Thats an incredible figure!  

So its really hard not to be excited and not to be caught in the hype of a strong market, that continues to offer such great returns.

Having said that, there are some lessons worth paying attention to, and I'm encouraging my clients to remember those lessons despite all the hype!

The most important one is to never forget your customer!  Yes there is a demand for cattle, and there is good money on offer!  But, there are some producers who have been disappointed with the returns they have made.  Its important to remember your customer is looking to buy product for a specific purpose.  Thats why they have set specifications for the cattle they want! Its really important to remember that even though the market is strong, there are still discounts for cattle that aren't suitable for a customers needs.  

I reckon some producers are not thinking about this part of marketing cattle as much as they would have done in the past!  So just because the money is good, don't forget you still need to do some homework and send cattle to the right places!

If cattle don't meet a customers needs, then send them somewhere else, or prepare them to meet the customer. That way you won't drop your returns and you will get the rewards you have been working towards!

I've also noticed a recent article by Beef Central looking at the prices for grained cattle custom fed for 100 days.  Its a really good article that looks at custom feeding on a quarterly basis.  

The analysis done by the Beef Central team predicts a loss of $20 / head on custom feeding cattle.  There are various reasons for this outcome, one of the big drivers is the cost of feeding cattle, particularly in grain prices.  

There are a few things I wanted to touch on from this article.  The assumptions used to make this prediction are pretty standard across the industry.  However, the margins on feeding cattle are so slim, as seen in this analysis, that it doesn't take much to take a budget from a positive to a negative.  It could be grain price, it could be purchase price of cattle.  

In my experience the big variables are actually the performance of the cattle themselves!  A lot of producers over hype how good their cattle are! 

Not all cattle perform well in feedlots.  Poor growth, poor health, behavioural issues that make them unsuited to feeding through to lack of yield.  These are all issues that frequently occur in feedlots, and in the case of custom feeding, these issues impact directly on the profit of the activity. 

I reckon its important to do some homework and look into your marketing plans more closely.  Don't get caught up just on the cattle market and the value of the EYCI!  Just because the market is strong, it doesn't mean you can switch off thinking about ways to do things better, or to market your cattle to the most appropriate destination!

Personally I want to see producers receive as much return as possible, and not waste any opportunity to make a strong return.  But if you're going to make that happen, you have to stay switched on and not let the hype and excitement prevent you making the right decisions.

Aug 26

Hitting the Specs

Posted on Monday, August 26, 2013

Beef production should be profitable.  No matter how much we like working with cattle, without making a return no-one can stay in production for long. 

So what drives profit in a beef herd?  Most people think profit is driven by the average price you receive per kilogram of beef produced.  In actual fact, the average price received only accounts for about 20% of the variation in profit for most beef enterprises.  

The big driver of profit is the cost of production for a kilogram of beef.  Cost of Production is driven not just by costs, but by the kilograms of beef produced.  Across Australian beef enterprises, 80% of the average variability in Cost of Production is due to the variation in kilograms of beef produced by the enterprise.  

I reckon the most effective way of improving profit in a beef herd is to look at more efficient methods of producing beef.  There are lots of simple ways to improve a herds production levels without increasing costs.  

Now thats not to say that your shouldn't focus on ways to increase the average price per kilogram you receive.  Whats important is you shouldn't be spending a lot of money chasing a higher price!

I'm constantly surprised at how many producers overlook the importance of hitting market specifications. Its even more surprising when those producers tell me they want to make more money for their cattle.

Specifications define the weight, fat, age, sex or breed of cattle most suitable for a particular market segment.  Cattle which meet these requirements will be paid accordingly.

By hitting the specification you can budget on the price you will receive per kilogram.

However if cattle don't meet the specification, the price received will be lower.  And the further outside the specification the bigger the price drop.

So what does that really mean? Industry figures suggest the cost or the loss from cattle not meeting specification is almost $130m annually!  

At a farm level, around 25- 30% of cattle don't meet specifications.  Putting some value on this is a challenge.  However some work by the CRC for Beef cattle provides some good figures (http://www.agrifood.info/review/2009/Slack-Smith_Griffith_Thompson.pdf).

The estimates from this paper, and other industry studies suggest losses per head can be up to $60.  Over the average sale lot, these losses can mount up and become pretty savage towards the enterprises profits. 

Specifications are not just important for cattle sold to the processor.  Feedlot operators set requirements. Non compliance can result in deductions of up to $0.10/kg.  If you were working on a slim margin to start with, a loss of $0.10/kg can turn a slight profit into a loss!

I reckon the opportunity for producers to make a little more comes down to a few things.  Firstly addressing production.  Secondly, take the time to work out your Cost of Production and then start addressing issues which can improve your profits, like your market compliance rate.  Focussing on these areas might be the most efficient way to increase your profits without having to make huge changes to the way your run your business.

If you do want a hand to look at ways to do this, don't hesitate to get in touch with me.  I'd be surprised if we can't come up with a few new ideas.

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