Contrary to what most learned in elementary school, two plus two does not always equal four.
Instead, according to Robyn Paddison, research analyst with CanFax, small changes to a cow-calf operation can be much more the sum of their parts when it comes to the bottom line.
Why it matters: Small, simultaneous changes to production, input costs and the price you’re getting for your animals multiply off each other when it comes to profit margin, but that effect can also go both ways.
Producers may already be familiar with the “five per cent rule” of farm management, a phrase drawn out of work from Texas A&M University and rooted in an analysis of the U.S. ag sector going back to the ’80s.
The rule — which states that small improvements (such as changes of five per cent), made in several areas of the operation at the same time compound their benefit — has already made the rounds through the grain sector. In 2016, the concept made Canadian ag headlines, following material presented during Ag Days that year. The material, later picked up by organizations such as Farm Credit Canada, suggested that a five per cent increase to both yield and price, plus a five per cent drop of cost, could result in a 117 per cent jump in profit.
But while those conversations are often couched within a grain context, Paddison noted the rule is equally relevant when the yield in question is meat.
“You are your biggest asset,” she said during a Manitoba Agriculture and Resource Development webinar in early December. “Your mindset and determination to turn these dials of productivity, cost and price up and down will drive your farm into the future.”
One example, drawn from the Beef Cattle Research Council blog, models a cow-calf operation selling a 525-pound animal at a rate of $2 per pound (a total revenue of $1,050). The net revenue for that animal is $50, the model said, given a $1,000 input cost for maintaining its mother for the year.
Five per cent changes across the board, however, made for a much cheerier outlook. A five per cent drop in cow maintenance cost alone doubled revenue per head, while adding another five per cent onto the weaning weight of the calf and increasing market price by 10 cents a pound translated to $207.50 in final net revenue per head.
The key, according to Paddison, is a precision farming mindset, another concept perhaps more commonly tied to grain. A farmer in that mindset has a solid grasp of their cost of production, current capacity, expected market price and an understanding of where their market is going, she noted, and uses that knowledge to look for gaps where they might be leaving money on the table.
“The world changes, whether we do or not,” she said, “and someone with a precision farming mindset seeks out these new opportunities.”
A producer tuned into the five per cent rule will actively look for improvement, even to practices already done well, she argued. That farmer looks for innovations. That farmer runs in-house tests to monitor the impact of changes year after year, and uses those observations to plot out the next changes, she said. That farmer maintains consistent policies across the farm to ensure efficiency and makes sure the right person is doing the right job for best results.
“If you take one thing away from this presentation, I hope it’s the understanding that the opportunity cost to your business if you fail to optimize resources is a cost to your farm that results from you not giving yourself the time and space to manage it,” she said.
The result of the five per cent rule, Paddison and other proponents argue, is the difference between a growing bank account and struggling to pay the bills, given agriculture’s tight margins.
Feed, as one of the chief inputs for livestock producers, should be high on the list of potential cost savings, both Paddison and provincial livestock specialist Shawn Cabak noted.
Extended grazing, such as stockpiled forage, bale, swath or corn grazing, is among Cabak’s areas of interest, as well as an often-cited avenue for reducing costs by organizations such as the Beef Cattle Research Council.
“That’s a way of keeping the cattle off the winter feed supplies longer in the fall time,” Cabak said.
The rule also, unfortunately, works the other way, Paddison noted.
Small slips in production or price or slight rises in cost can also compound to chip at the bottom line. Unfortunately, she noted, that slip can be as simple as inflation.
“If you’re not growing, you’re falling behind,” she said.
“The flip side to the five per cent rule is when these interaction effects are present, farms can’t afford to fail at more than one business function,” she added.
Paddison used the same base example, only with a two per cent drop in price and productivity and two per cent increase to cost. The result, according to the model, was a $64.50 drop in margin per head.
Shift in thinking
It is, in many ways, easy to describe on paper, but harder in the field.
Opportunities must be teased out from a state of information overload, Paddison acknowledged, while producers may also fear that a mistaken change will end up hurting them financially or earn them criticism.
“We’re bombarded with information on a daily basis — commodity prices, trade information, currency news, new technology, robotics, data capture and storage, they’re all evolving and some are here to stay,” she said. “This can bring a lot of new ideas and a lot of excitement, but it can also create a lot of noise that’s not relevant to your operation, so one of the greatest challenges is figuring out if there is an opportunity for you that’s not just background noise.”
A solid understanding of industry trends can help filter that chaos, she noted.
“With the right strategy, the right relationships and people and processes in place to manage this risk, there really is little to fear,” she argued.
Cabak, meanwhile, noted the regular beef market reports put out by CanFax available to producers.
The farmer’s control of the market is also limited — although tools like forward contracts may help limit that volatility, and the profit margin on a calf can quickly sway depending on the time and method of marketing, Paddison said.
Cabak also earmarked market presentation — things like calf uniformity — that might help buffer against the disappointment of a bad day at the auction mart.
“The buyers want them within certain weight limits and certain breeding and genetics and frame size and all that,” he said.
Manitoba’s cow-calf producers will have their chance to punch their own numbers into the five per cent rule scenario.
New for 2021, the provincial government has added the rule into its Beef Cow-Calf Cost of Production, provincial farm management specialist Ben Hamm said.
“You can very quickly put in your own values and see what potentially you do have there,” he said.