Recordkeeping identifies livestock profitability

by Deborah Jeanne Sergeant

You may process more animals than you did last year, but how can you know whether or not your operation is profitable? John Hendrickson and Jim Munsch from the University of Wisconsin-Madison presented “Livestock Compass: A Profit Management Tool for Livestock Producers” as a recent webinar hosted by Food Animal Concerns Trust.

Livestock Compass is a free downloadable Excel spreadsheet available at www.compasstoolbox.com from the University of Wisconsin.

The two have visited many livestock farms in their quest to help producers make more money.

“What we’ve developed is a method of instruction and a suite of tools to facilitate the management effort,” Munsch said. “These direct-marketing, food-producing farms are extremely complex from a management standpoint.”

Since they raise different types of animals, it’s more challenging to figure out if they’re profiting and from which parts of the farm.

“The people who get into these lines of work get into it because of their passion for producing food,” Munsch said.

They may need some help in the profitability side of the business. That’s why learning some business concepts can help them continue in their mission of producing food.

“A lot of people are four to six years into their endeavor and struggling,” Munsch said. “We’ve found if they adopt these skills and know how to use these tools, they can know how to navigate these issues. The first step in going somewhere is deciding you’re not going to stay where you are. The inability to make money is the motivator for change.”

He challenges producers to make touch decisions if the evidence points to them and to be ready to put in the work to discover the evidence.

Munsch listed decisions that could affect profitability on a multi-product, multi-sales channel livestock farm: sales price; value statement (why do people buy. This drives price and cost.); the product mix, adding or dropping market channels and methods; designing basket of goods and services; determining and managing what others will do; raising young animals or birds or buying them; producing feed or buying it; land use; and buying or renting land.

“I might say we have found the same thing with vegetable farms,” he said. “This is a good news story for these kinds of farms. It’s a part of agriculture that has an ability to set price. How you set price is hugely impactful whether you make money or not.”

He further added that farmers need to gather information to make informed decisions, including the profitability of each species; profitability of each marketing channel; cost of a weaned animal/layer pullet; the total cost of a finished meat animal/bird; cost of a pound of meat; full cost of a dozen eggs; cost of homegrown feeds; and marketing, selling and logistics costs in each marketing channel. Each “cost” should be “the true, full cost,” Munsch said. “This gets to the nasty subject of recordkeeping and financial data.”

Measuring can help farmers with their taxes, communication internally and management.

He views Livestock Compass as “a tool to provide information that supports management of the business of a livestock farm.”

The software is flexible shifting between similar species such as lambs and goats or ducks and turkeys because the inputs are similar.

The software also takes into account non-case expenditures, like depreciation.

“It is something that if you don’t account for, you will underprice your products,” Hendrickson said. “We ask the operator to put in how they spend their time and where. They should put in their labor payback rate they expect from their operation. If you don’t put this into the cost of your products, you’re underpricing. Later, it can direct you if you have a very high labor intensity.”

Farmers can analyze how much time they put into raising a crop or an animal.

“Learn how to estimate pasture yield by how many animals you have on it per acre per year,” Hendrickson said. “How much does an animal take to live per grazing season? You can use it later to find out how much it costs to raise each species.”

This information may help a producer decide to ramp up or scale back production of a species.

“If the cost of raising a calf is too high for too many years with no reason, you can say to yourself, ‘I’m not good at this and I’d be better off buying calves from someone else,’” he said.

Farmers can then choose to raise prices, lower expenses or both.

Hendrickson added that Compass also accounts for non-meat byproducts like sheep wool or leather from cattle.

“We have to look further in a channel to ask ‘Are we making any money?’” he said. “We must take into account the sales and marketing, depreciation expense and labor of the owner expense. Look at the channels and decide where you need to put your money and where you need to put your efforts. For those not into numbers, this may seem very daunting, but if you go step by step and use the knowledge you have as a farmer, like how much hay you feed each class of cattle on your farm, the info you get here will allow you to become much more profitable.”

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