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Richard and Peggy Sechrist
on their Texas Ranch. Photo by Peggy Jones. |
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GROWING PROFIT
Factors that Impact Your Bottom Line
Written by Dan, Peggy & Richard Sechrist
What follows are some of the nitty-gritty details you need to consider
in your profit equation. While you probably want to consider these
options before launching a direct-marketing strategy, there is always
opportunity to revisit these costs at any stage of the game.
Production costs. If you want to truly calculate your profit margin
when direct marketing beef, you must include the full cost of production.
You may even want to treat production costs as a separate “business”
in your bookkeeping. Production costs are the total cost of the
raw material needed to create your packaged product. It is essential
to know if your gross profit covers the replacement value for the
animals you are selling.
Processing costs. Processing costs for individual beef producers
can vary a great deal and can take a big chunk out of your bottom
line. The easiest way to compute and monitor processing costs is
to calculate per head. The difference between your total cost and
the total price you receive from the sale of each animal is your
profit margin. The retail market price of beef is heavily influenced
by the large beef packers who process several thousand head of cattle
per day in their own facilities. This volume gives them a competitive
edge by lowering their processing costs per head, and allowing them
to set a low market price on beef. By contrast, individual beef
producers may pay as much as 800 to 900 percent higher costs for
processing and still need to price their beef within a competitive
range. So managing your processing costs is very critical to your
bottom line.
Market requirements. Who you are processing for is a related cost
that requires careful management. When you decide to market your
own beef, you may sell to three different markets:
• Distributors, who re-sell your beef to retailers
• Wholesale markets, such as retail food stores and restaurants
• Direct to consumers
The sales price structure for each of these segments is different.
You receive the highest price when you sell direct to consumers.
You receive a lower price for wholesale, and lower still for distributors.
The requirements for how you cut and package your beef may differ
among these market segments, too.
For example, the distributor may want each steak and roast “portion
cut,” meaning that each cut weighs exactly the same. Portion
cutting adds additional cost to your processing fees while generating
the lowest price. Wholesale customers may also make special requests
that add to your costs. Selling direct to consumers may require
you to use a USDA-approved label. You will need to discuss this
with the licensed inspector at your processing plant. All these
marketing options directly impact your profit margin. It pays to
research and analyze your markets before you spend much money on
your processing.
Carcass yields. It’s important to calculate the percentage
of each animal that returns to you as saleable beef after processing.
That percentage can either help you achieve your desired profit
margin – or wipe it out completely. There are industry averages,
but there is so much variance that it behooves a producer who direct
markets his own meat to calculate – in pounds – how
much beef is available to sell after processing, then calculate
what that available beef will return to see if the resulting profit
margin is acceptable. Each animal is a bit unique in its capacity
to finish.
Collecting data from each animal as it is processed – or
averaging each group of animals processed – is vital to determine
which slaughter weight leads to the highest yield of meat to sell.
Your yield from live weight to boxed beef is the yield you want
to track. If you process 100 animals, all at 1,000 pounds live weight,
your yield could vary more than you realize if you don’t collect
that data. If your yield of meat drops by as little as 3 to 5 percent,
you can lose a large portion or even all of your profit. For example,
a 5-percent yield deviation on 100 animals processed at 1,000 pounds
live weight could reduce your profit margin by $20,000. Tracking
this information as it occurs gives you a window of opportunity
to strategize how to regain some profit before your product is sold.
Storage and obsolescence risk. There is substantial risk to creating
a high number of different cuts to satisfy all the requests you
may receive. You could butcher a carcass into 20 or more different
cuts in pursuit of different customers. Yet, unless you have a guaranteed
commitment for a special cut, you could easily find yourself with
a stockpile of those cuts in frozen storage. The revenue that these
cuts represent, along with their storage costs, could easily wipe
out your profit margin.
A similar risk is to discount cuts that accumulate in storage.
Discounting also will reduce your profit. Eight to nine of the most
popular cuts give you the greatest flexibility to sell the whole
carcass within a reasonable period of time.
Management skills. Managing the sale of several beef cuts as opposed
to selling a live animal requires different management methods.
You’ll find it important to know exactly what your total cost
is in each animal as well as knowing exactly what your gross profit
is for each animal. Because small deviation in yields or accumulation
of a few cuts can so dramatically impact your bottom line, you will
want to track your return on each animal and be poised to make adjustments
before you find yourself somewhere in the red.
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