Improving gross margin per unit is the second of the Three Secrets For Increasing Profit™. It is also the most misunderstood. Gross margin is the contribution an enterprise makes toward covering overhead costs and producing profit. Gross margin per unit measures the economic efficiency of that enterprise. It is a powerful tool for comparing enterprises and creating the ideal enterprise mix for your farm or ranch.
The unit you use in calculating gross margin per unit depends on what you want to know. Gross margin per acre can be used to compare the economic efficiency of livestock enterprises to cropping enterprises. Gross margin per acre inch of irrigation water can show you the best return when irrigation water is expensive. Gross margin per dollar of capital investment can show you the best place to invest your capital. But the unit most commonly used in livestock enterprises is an animal unit.
It’d be easy if we could use a cow as the animal unit in a cow/calf enterprise. But it’s not quite that simple, for two reasons. First, there are usually more than cows in a cow/calf enterprise. There are bulls and, usually, replacement heifers. They all use resources, they all contribute to the productivity of the enterprise, and they all need to be counted in the animal unit total.
The second reason is that big cows eat more than small cows. Wet cows require more energy than dry cows. Steers gaining 2 pounds a day have a higher requirement than steers gaining 1 pound a day. To compare one class of animal to another we need to use a standardized unit of measure.
In the Ranching For Profit School and Executive Link we use Standard Animal Units (SAU). Gross margin per Standard Animal Unit measures the economic efficiency with which an enterprise grazes forage. SAUs are based on the daily energy demand of an animal. Our Australian colleagues use Dry Sheep Equivalents (DSE) or Large Stock Units (LSU). You can use just about any unit that quantifies the relative energy demand of animals.
Don’t get Standard Animal Units confused with the animal units used in calculating Animal Unit Months (AUM). They are different. While widely used in North America, the animal units used to calculate AUMs aren’t precise enough to be very useful for calculating gross margin per unit for livestock enterprises.
By calculating gross margin per SAU you’ll compare the economic efficiency of enterprises and management options. You’ll be able to determine the impact of cow size, fertility and the bull:cow ratio on economic efficiency. (You’ll find that the most productive cows are not the most profitable!) You’ll be able to evaluate the economics of buying v. raising heifers. You’ll know what enterprise mix gives you the best return from your pasture and whether it makes more sense to own, lease or custom graze animals.
Gross margin per unit is one of the Three Secrets for Increasing Profit. But it doesn’t tell you the whole story. No single statistic ever does. Among other things, we need to look at market risk, the overhead costs needed to run an enterprise and the suitability of a specific site to support a particular enterprise. Still, gross margin per unit is a powerful tool for comparing economic efficiency of enterprises.