Beef’s cost-price squeeze eases

Beef’s cost-price squeeze eases


Beef Cattle
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New independent report shows time is ripe to address barriers to profit.

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A NEW era of profitability in beef is dawning and the key to taking advantage will be directly addressing the key drivers of productivity: land, labour and livestock.

This is the message to come out of what is arguably one of the more valuable beef industry reports to be released, given its independence, focus on family-operated businesses and the experience of its co-authors, long-serving consultants Phil Holmes and Ian McLean.

The cost-price squeeze that has been a constant brake on profitability lifts is easing, providing a tailwind for producers wanting to address barriers to profit, the consultants say.

Their analysis, titled The Australian Beef Report, shows declining terms of trade - a familiar story across agriculture as production becomes more efficient - has levelled out over the past two decades and in is now in fact on a slight incline.

“Even if it is just a temporary pause, it means productivity gains made by industry right now can be added to the bottom line,” Mr McLean said.

At least 2 per cent per annum of productivity gains, which was previously required just to stay ahead of declining terms of trade, is now available to savvy producers, the report indicates.

Among quite a number of eye-opening findings in the report was the fact just 25 per cent of businesses were generating all the industry profit.

That top quarter, which the authors have called the Best, are generating healthy profits that, after a reasonable wage has been paid to the owners working in the business, are able to pay interest and have funds left over to repay debt, fund expansion, fund retirement and allocate for succession and future downturns.

Beef consultant Ian McLean, Bush Agribusiness.

Beef consultant Ian McLean, Bush Agribusiness.

So why have three quarters of producers stayed in the cattle business for so long if they are barely staying afloat?

“Not everyone is profit-motivated, some are happy to be just in it for the lifestyle,” Mr McLean said.

“Also, when we do this analysis we include a full value of owner wages - over $100,000 for two people working fulltime in the business.

“That means our reported position is often different to the cash position because people aren’t drawing the full amount as a wage.”

Thirdly, he acknowledges for many analysis of their business doesn’t go beyond an annual tax return so it’s possible some producers aren’t aware of their true business performance.

The good news is the time is ripe for individual businesses to improve their situation, particularly with that tailwind.

The authors identified two barriers to profit for commercial beef production - lack of operating scale and lack of operating efficiency.

They concede the first is very difficult to address through lack of capital but the second is within grasp and can be addressed systematically, they say.

Almost all the benefit will come through improved management, according to Dr Holmes.

Dr Phil Holmes, Holmes and Company in NSW.

Dr Phil Holmes, Holmes and Company in NSW.

“One area is genetics - management improvements can be leveraged up by the power of superior, objectively-described genetics working the background.”

That can come at no additional cost, the consultants say.

“Well-described bulls of good quality do not necessarily cost more than those with no objective data at all,” Mr McLean explained.

“Industry at the moment is not placing a premium on well-described genetics, which presents an opportunity for people who want to seek out objectively-described, superior genetics and source them without paying more.”

The Australian Beef Report has been reviewed and endorsed by leading industry figures including Don Heatley, Angus Hobson and Lewis Kahn.

It is available at www.bushagri.com.au/abr.

Cost per kilogram big profit driver

WHAT it costs a beef business to produce a kilogram of beef is the major determinant of profit in the long term.

This is the case presented in a comprehensive and independent report released this month by leading beef industry consultants Ian McLean, Bush Agribusiness in Queensland, and Phil Holmes, Holmes and Company in NSW.

The factors which separate the top performers are consistent - higher income per animal as a result of better herd productivity and the three drivers there are higher reproductive rate, lower mortality rate and higher sale weight, the report says.

The top performers also have better targeted herd expenditure, better labour efficiency and more operating scale.

Higher cattle prices obviously improve returns but through the full price cycle, the price received is not a profit driver.

Asked how this fits in with the industry push to produce a more targeted article, Mr McLean said: “Our view is that beef is a commodity, and commodities are, by their nature, hard to profitably differentiate at a producer level.

“What is going to sufficiently differentiate a ‘more targeted product' in the future so that the consumer will pay more for it, which will be required for it to lead to more profitability for the producer?

“Also what are the costs going to be for the producer to effect this differentiation - more individual animal records, not being able to use certain inputs, for example.”

The beef Industry as a whole can, and does, effectively differentiate its produce in the global marketplace as clean and green, disease-free and having lifetime traceability among other attributes.

That should continue, the consultants say.

“But this is very different to an individual producer thinking that they can profitably differentiate their product in the domestic market,” Mr McLean said.

“They can achieve much more by focusing initially on lowering their cost of production.”

As an example, among producers supplying the eating quality program Meat Standards Australia (MSA),  it will be those with the lowest cost of production that will be more profitable, he said.

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