Analysing an enterprise
Meat & Livestock Australia April 26, 2024
The following example relates to a mixed cropping and livestock business running 600 breeding does plus replacements.
- Weaning percentage is 120% meaning 720 kids are weaned and 120 doe weaners are retained as replacement breeders.
- 600 kids sold at 15kg cwt or 33kg live weight (lwt), 115 cull for age (cfa) does sold at 25kg cwt or 55kg lwt, three cfa bucks sold at 36kg cwt or 80kg lwt.
- Total turn-off is 10,500kg cwt or 23,000kg lwt.
Variable costs are $5.10 per breeding doe, supplementary feed costs of $4.15 per breeding doe and share of overhead and labour costs at $22.45 per breeding doe. Total costs are $31.70 per breeding doe or $19,020 in total.
Therefore, the cost of production is $19,020/10,500kg cwt = $1.81/kg cwt. This can also be expressed in terms of live weight as $19,020/23,000kg lwt = $0.83/kg lwt.
Using cost of production to make better decisions
Once the cost of production is known, more informed management decisions can be made, such as those relating to:
- Which enterprises have a commodity price that is consistently higher than the cost of production and therefore consistently profitable.
- What impact a range of commodity prices have on the profitability of the enterprise under the known cost structure. This is demonstrated in Table 3 using the example above.
Based on average over-the-hooks pricing data for goatmeat at the 12.1-16kg cwt range, this business would have been profitable every year since 2013 at a cost of production of $1.81/kg cwt.
How increased productivity will affect cost of production and profit margin
In this example, an increase in productivity in the form of a lift in the weaning rate from 120% to 150% will affect the cost of production through increasing the cost of supplementary feeding as a result of better nutritional management at kidding and joining from $4.15 to $4.80 per breeding doe. Variable costs stay the same at $5.10 per breeding doe and fixed costs remain the same at $22.45 per breeding doe. Total costs are $32.35 per breeding doe or $19,410 in total.
The cost of production in this scenario is $19,410/14,600kg cwt = $1.33/kg cwt. This can now be used to assess the profit margin of the enterprise under the same pricing circumstances considered in Table 3, as shown in Table 5.
The higher productivity increases the profit margin at all pricing levels by reducing the cost of production. Based on this analysis, the decision to incur the increased cost of supplementary feeding can be justified as the increased production more than offsets this cost, resulting in an overall decrease in the cost of production per kilogram of carcase weight.