Calculating Success

By Robert McKinlay, BFO Producer Relations Liaison • www.ontariobeef.com

Ontario beef producers can take control of their operation’s profitability this year. Instead of fearing what might come, you can plan how to manage it. This year, fluctuating hay prices due to drought and an unpredictable market place are complicating decisions. As a result, producers may be purchasing more feed, using different feed sources or contemplating a herd reduction. The Ontario profitability calculator offered by the Beef Farmers of Ontario on their website, ontariobeef.com, can give producers a structure to evaluate these decisions.

Profitability is gross income minus cost of production. With gross income varying from year to year, profitability assurance can be accomplished by minimizing your cost of production. To do this, it’s important to fully understand where costs are incurred on an operation.

Adding up the Numbers

The complexity of most operations can cloud the ability to identify areas of improvement. The Beef Farmers of Ontario profitability calculator helps producers who want to improve their bottom line. It is a step-by-step tool for producers to follow, inputting their herd information and historical marketing information. Producers can then input their operation’s feed, bedding, fuel and veterinary costs. Producers can add in their cow herd size, number of culls, mortalities, replacements purchased and bulls. With this information, they are able to calculate gross income of an operation by outlining past marketing experience. Herd replacement costs are then calculated into the operation’s cost of production.

Crunching the Cost

When feed costs are input for an operation, producers are encouraged to look at their farm as two businesses – one business is responsible for the production of all the feed and the second business owns the cattle, purchasing the feed from the first business at market value to feed the cattle. Business one sells the feed to business two at market value. This ensures that the value of inputs to an operation isn’t discounted.

Operating costs include all day-to-day costs that are commonly overlooked. Expenses like fuel, utilities, veterinary, breeding, custom work and insurance expenses are all taken into account when determining cost of production. This part of the profitability calculator forces producers to dig out their books and review operating costs that are typically ignored in budgets.

The summary page of the profitability calculator provides producers with an overview of the financial situation of their operation and breaks down various contributing factors to both farm profit and expense. Producers can then compare the different aspects of the operation to identify areas of improvement and areas of success.

Applying the Information

The profitability calculator is important for emerging and existing beef operations. The data generated by this tool can forecast an operation’s profitability for the upcoming year. This provides producers with the ability to identify financial issues before they occur, helping producers avoid problems by making management changes. The program also generates breakeven prices per pound for calves sold so producers can properly market their livestock.

For those interested in adopting new management practices, they can model a financial year under the new practice. This function allows producers to make informed decisions on new technology and expansion methods they may be considering.

The online tool also forecasts predicted profitability of an operation when cost of production (COP) increases or decreases by five per cent and when sale price increases or decreases by five per cent. This is especially important to producers during volatile markets. You can adjust desired management styles to reduce cost of production to reduce losses. This also provides the opportunity to analyze an operation’s profitability under worst-case and best-case situations.

If producers have to purchase feed, the profitability calculator can analyze an operation’s capability to remain profitable during drought conditions. Producers can establish a maximum price they are able to pay for feed based on their historical market data. They can also identify other large expenses that can help lower overall input costs despite increased feed costs.

As a young producer myself, this tool has been extremely helpful in making financial decisions about herd expansion and marketing. Our family’s operation has also used this program to identify our bottom line when marketing commercial calves and breeding stock. No matter the size of the operation, the profitability calculator offers a way to track expenses and make informed financial decisions.