Productive But Not Profitable
North American agriculture could be described in one statement. “Productive but not profitable.” For decades the primary messaging to farmers and ranchers has been to become more productive. You see it everywhere, from the magazines, to the radio ads, to the messaging in our youth development programs. “It’s your responsibility to feed the world. Less than 2% of the population is involved in production ag. The growing population demands more food. Use this input to increase yields by X bushels. Wean more calves. Wean bigger calves.”
This messaging has worked wonderfully. Agriculture is more productive than we have ever been. However, on average our farms and ranches are no more profitable then they have ever been.
When considering all economic costs, most farms and ranches operate at a loss more often than they make an economic profit. Becoming more productive has not made our farms and ranches more profitable. I believe we are focusing on the wrong thing.
Chasing productivity is sexy. It is easy to brag about big weaning weights or impressive harvest numbers. But being productive doesn’t equate to being profitable. After all, isn’t profitability the end goal if farming or ranching is your business?
Let’s change the conversation from productivity to profitability. The best measure of profitability that I know of is gross margin per unit. Here are some definitions:
Gross Margin = Gross Product – Direct Costs
Gross Product = Value of Production
Direct Costs = Those costs that increase proportionally as units of production increase
Gross Margin/Unit = Total Gross Margin / units of production
Gross Margin/Unit tells you the economic efficiency of that enterprise. How much does each production unit contribute to covering the overheads and profit of the business. This measure is much more informative about how the enterprise is doing than a measure of productivity.
For example: Cow Herd A weans 600 lb calves from 95% of all cows, while Cow Herd B weans 425 lb calves from 87% of their cows. The owner of Cow Herd A might puff their chest out bragging about impressive production numbers but when we run the gross margins we might see a very different picture.
Cow Herd A might have a gross margin/unit of $100 per cow while Cow Herd B might have a GM/U of $450/cow. If a rancher were running 300 cows in Cow Herd A, they would only contribute $30,000 to overheads – not even covering the value of the pasture they grazed, much less making any contributions to cover labor. At the same time, Cow Herd B with the same 300 cows would contribute $135,000; likely covering grazed feed, labor and leaving something to contribute as profit to ownership.
Let’s change the business conversation in agriculture away from the largely meaningless metrics of productivity and towards the important metrics of profitability.