Archive for May 2013

Financial Effects of Volume

Newsletter No. 65 - Item 4

Newsletter No. 64 discussed the effects of low, medium and high production to demonstrate how efficiencies in production methods improve performance.  The article illustrated the impact on the overall profitability in money terms. The figures illustrate why so few currently make good profits from Ostrich production and why few who entered the industry have remained.  Note that whilst these are figures discussed in 2008, actual figures vary from region to region, and clearly will have changed in 2013.  The important factor when studying the details is understanding fully the principles of the discussion and how they impact on profitability.

Feed is the highest input cost of all livestock production and has the greatest control over production, product quality and profitability. In such a discussion we can only talk in general principles as costs do vary on location and are dependent on volume. Main ingredient prices are similar throughout the world; reasons for price variances are mainly volume related, but local transport costs, subsidies and duties can also have an influence. The following are some examples of variables influencing costs:

65-factors-influencing-ingredient-costs

The following tables illustrate the differences based on average feed ingredient costs at current world prices. They illustrate the impact of improvements in "productive performance" and how "productive performance" has a greater influence on profitability than costs per tonne of feed and other production costs. The Low, Medium and High relate to production levels as discussed in last month’s newsletter, which can be viewed at here.

Table 1 illustrates the production costs per Trio and the individual costs per chick. Other production costs include an allowance for incubation costs, labour, infrastructure, utilities etc. You will note that as production improves, although input costs are higher, the cost per chick on the ground is significantly lower. The impact of reduced days to slaughter, as can be seen, is significant.

Table 1 - Breeder Production Costs

Table 1 - Breeder Production Costs

Table 2 illustrates the gross margin per trio and assumes high volume production in the first section. The lower section illustrates the effect of the increased costs that come as a result of low volume. The revenue illustrates the price required per chick under the different production scenarios. Market conditions will determine the value of chicks if sold. Worthy of note is that the chicks from low production breeders are more challenging to rear and take longer to finish, adding further to their costs of production, with many slaughtering out with low meat yields, thus reducing revenue potential.

Breeder Gross Margins per Trio

Table 2 - Breeder Gross Margins per Trio

Costing slaughter bird production is challenging as economies of scale have a significant impact on processing, marketing and distribution, as well as market availability. Many markets are not available when working on low volume. Table 3 assumes high volume with the farmer slaughtering and marketing his own meat, as currently there are very few organisations purchasing birds off farm for processing. Meat price is average for all cuts, with processing costs allowing for packaging costs. Processing costs do vary from country to country and are volume sensitive.

Table 3 shows increasing values for the skin as days to slaughter reduce due to the reduced likelihood of scaring. These skins must be in good condition and produced in sufficient volume to enable meaningful sales. Tanneries purchase skins by the container load (min. 1200) and dealers providing a consolidation service are rarely interested in less than 200. Skins not removed correctly or not stored correctly will have little or no value. There are some low volume producers achieving excellent additional revenue from the sale of the oil, but that is a specialist area requiring specialist knowledge.

Meat yield is assumed the same, with the variable the number of days taken to slaughter. However, the current average meat yield of low production birds is below 30kgs, even when slaughtered in greater than 365 days...that will reduce the revenue potential by a further $80/bird. As processing costs remain similar, reduced yield increases the processing costs per kilo, increasing the production costs of that meat. An example of a high production chick achieving 40kgs of boneless meat in 200 days is included to illustrate the impact on revenue and margin of the additional kilos.

Slaughter Bird Gross Margins

Table 3 - Slaughter Bird Gross Margins

Low Volume Slaughter Bird Gross Margins

Table 4 - Low Volume Slaughter Bird Gross Margins

These figures illustrate the challenges when working in low volume.  They illustrate the need for collaboration, a move to precision agriculture and development of the genetic base. The higher the volume of turnover, the faster the genetic base can be improved. To date the industry has followed the low/medium production route and this is a major reason for the slow industry development.

Global Meat Trade Flows

Newsletter No 67 - Item 1 & 2

This newsletter opened with the dominating news in that week October 2008.   That news was the unfolding of the banking crisis.  The report went onto comment: At the time of writing there is continued uncertainty as to how these events will affect the global economy. As at April 2013 the full effects are still unclear.

The newsletter went onto discuss a report on the World Meat Congress that took place  in Cape Town in early September of that year. Thepoultrysite.com has a number of reports published on their web site. This link http://www.thepoultrysite.com/articles/1153/world-meat-congress-2008 has access to a number of interesting articles commenting on some of the presentations:

  • Providing a Sustainable Industry
  • Call for Action on Food Prices
  • Livestock Industry Warned over Climate Change
  • Appeal for Trade Talks to Resume
  • Emerging Animal Diseases and International Trade
  • Traceability and Quality to Meet Consumer Expectations
  • China, Russia and Brazil Lead the Way for Pig Meat (on ThePigsite)

The presentations are no longer available for down load but did conatin some interesting data relevant to our industry if it is to become established as a major meat production industry. Following are a few examples that were reported in this newsletter..

The past decade has witnessed increasing consolidation of the meat supply companies as margins are continually squeezed by the major buyers. Figure 1 illustrates the top global meat companies and their growth through mergers and acquisitions (M&A). World Soya, Fats and Grains are also controlled by a very few companies, with Cargill also in the top 3 of both grain and fats. Tyson reported last week that it had purchased three poultry companies in Brazil and earlier this month concluded a Joint Venture deal in China.

Top 10 Meat Companies

Figure 1 - Top Global Meat Companies [source: Richard Brown - GIRA]

Richard Brown from GIRA gave several presentations. Figures 2 and 3, also from Richard Brown’s presentations, illustrate the trade flows of beef and sheep meat.

Sheep Trade Flows

Figure 2 - Sheep Trade Flows [Source Richard Brown GIRA]

Meat Beef Flow

Figure 3 - Beef Meat Flows [Source Richard Brown GIRA]

The importance of this information to our industry remains understanding the tremendous volumes involved within the meat industry, the efficient production systems they have in place, the quality of their genetics achieved over many decades and just how much work Ostrich producers need to do to become competitive suppliers in this market place.

Economics of Production

Newsletter No. 64 - Item 2

The Farm Management Pocket Book is a book published in the UK for farmers to use as a guide for production targets, costs of production and potential revenue to establish gross margins in the main agriculture sectors. In view of the significant increases in feed ingredient prices over the past 12 months, it has rendered it impossible to provide meaningful figures and highlights just how costs have changed in 12 months. Gross margins for the arable farmers have increased significantly while gross margins for livestock producers have been eroded. Input costs for both sectors have risen significantly.

Ostrich production in the UK, as in many other countries that started producing ostrich 10 to 20 years ago, is now confined to a few farmers that have their own breeding stock, incubate and raise their own chicks. These farmers are responsible for all their own marketing and nearly all working as individuals. There is no production carried out under contracts to supply wholesalers or larger retailers. Most of these small producers are not able to optimise production as a direct result of the small scale they operate. Several UK producers buy in meat, when available, to supplement their meat sales.

Table 1 illustrates the current range of breeder production here in the UK and throughout our industry at this time. The extremes in range are a direct reflection on the range of productive value of current rations, management systems and variable genetics.

Comparative Breeder Production

Table 1 - Comparative Breeder Production

The ability to achieve optimum production is dependent on the production design of rations fed and management standards.  When developing budget production costs and revenue, it is essential to know the production potential of the rations used as these have a very significant impact on farm output and overall profitability.  To put it simplistically rations can be split into 3 sections as defined below.

-    High Production Potential – High Nutrient Density with quality ingredients and high levels of vitamins, minerals and other additives from natural sources.   These rations support the full genetic production potential.

-    Medium Production Potential – Medium Nutrient Density with quality ingredients and medium to low levels of vitamins and minerals.

-    Low Production Potential – Low Nutrient Density with low-grade ingredients and low levels of vitamins and minerals.  A nutritional program that includes Grazing, Feeding Silage, Green Feed or vegetables of any type will fall into this category

Table 2 illustrates the current range in slaughter bird performance. The target of 45 kilos boneless meat in 180 days at a feed conversion rate of 2:1 is very achievable in time. To achieve that target requires feed of high production design, excellent management and good genetics. Poultry, pigs and other major livestock production has improved their performance using this same formula combined with aggressive improvements in genetics.

Comarative Slaughter Bird Production

Table 2 - Comparative Slaughter Bird Production

The former USDA Secretary, Mike Johanns emphasised the importance of optimising feed efficiency in April, at the 24th Alltech International Animal Health and Nutrition symposium.

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Finishing ostrich in less than 200 days carries many benefits and not simply improving farmer profitability.

If any reader is unsure of the definitions of the different measurements of performance, they are all defined in the Benchmark Targets that can be found at here.

[1] Feed Management May/June 2008, page 13