4 Strategies to Improve Gross Margin per Unit
As a student in my very first Ranching For Profit School I was told to make sure I was shooting at the right target before taking aim. That’s common sense. But it’s not commonly practiced.
Livestock producers are great marksmen, but they are often shooting at the wrong target. The target most producers aim at is increased productivity. But businesses with the most productive cows are rarely, if ever, the most profitable. A herd with an 85% conception rate may be more profitable than a herd with a 95% conception rate. Cows weaning 450-pound calves may be more profitable than cows weaning 600-pound calves. Bigger isn’t always better.
Rather than aiming at productivity, we’d be smarter to shoot for improving gross margin per unit. Gross margin per unit measures the economic efficiency of production. The ranch with the highest gross margin per unit will always be more profitable than the ranch with the most productive cows.
Here are four effective strategies RFP grads use to improve the gross margin per unit in breeding enterprises.
1.Work With Nature by Fitting Enterprises to the Environment.
Fitting an enterprise to the environment means having the right enterprise, the right animals in the enterprise and the right production schedule for the enterprise. Miss one out of three and your gross margin will suffer.
Over the past few years, some producers, realizing that their production schedule has been out-of-synch with the forage cycle, have started calving later. Most have transitioned with cows they’d selected for their old production schedule only to find that they are not suited to the new production schedule. It’s not enough to have the production schedule right, you have to have the right animals in the right schedule!
2.Recognize That The Cow/Calf Business IS the Cull/Cow Business
…and the cull/cow business is the business of managing cow depreciation. Depending on market conditions, average annual depreciation on beef cows runs between $250 to $400 per cow. That’s something that profit-minded producers can’t afford to ignore.
There are several steps producers can take to reduce or even eliminate Cow Depreciation. The first is to sell animals before they depreciate dramatically. Commercial producers with herds of 300 cows or less should seriously consider buying their replacements. They should also think about buying replacement cows rather than replacement heifers. After all, it’s cows they need to replace, not heifers.
3.Let Cows Harvest the Hay Themselves!
Cows are perfectly capable of feeding themselves, even in winter, provided:
- they are not calving or lactating
- the snow isn’t too deep (>2 feet) or too crusted
- there is adequate forage under the snow to graze.
If the snow is too deep for prolonged periods, you probably ought to question the wisdom of having cows year-round.
Getting the hay out of the operation improves the gross margin per unit AND can make a big dent in overheads. The problem with hay is not just the cost of the hay, it is also the cost of the labor and equipment needed to feed the hay.
4.Market Your Grass Through Your Cows.
Most producers believe that they make their money from selling pounds of animal. The most profitable producers understand that, when they sell livestock, they are really selling their forage. So, rather than looking only at calf prices, they also calculate the value of gain. Projecting the value of gain often leads to much different and more profitable marketing decisions. For example, rather than weaning and selling big calves in October, it may be more profitable to wean lighter calves in August and preserve body condition on cows, especially if it enables you to carry a few more cows.
In 35 years of working with ranchers I have yet to see the ranch with the most productive cows be the most profitable. The target profit-minded producers should be aiming at is gross margin per unit, not production.
Note: We asked Ranch Consultant and RFP alumnus, Burke Teichert, to give an impromptu address on ranch profitability at our Ranching For Generations Conference. His keys to profitability include some of the points I’ve mentioned in this column. Here is a portion of Burke’s presentation: