Changing sheep systems to increase profit By Jonathon Tocker, Tom Jackson, Bill Malcolm, Janna Heard, Alex Sinnett
What did we do? We looked at some ideas that could be good ideas for improving the rewards from producing prime lamb.
What did we do #1? We looked at 15 areas of improvement in a lamb producing system that might be worthwhile researching further.
What did we do #2? We looked at 4 development options over a 7 year planning period for a real case study farm in south-west Victoria.
#1: The ideas for research were Increase weaning and stocking rate on same land area Increase ewe and lamb feed efficiency Increase weaning percentage Increase ewe longevity Reduce ewe mortality Increase lamb growth rate, 50kg turnoff First ewe mating at younger age, same and different prices Increase wool weight Reduced health costs
The winners were: (substantially better profit than the base case) Increase weaning rate and stocking rate Increase ewe and lamb feed efficiency and lamb turnoff Increase ewe feed efficiency Increase ewe longevity and reduce ewe mortality Increase stocking rate Increase weaning rate, same stocking rate
The less effective changes were: (still improved profit of the base case but not by a lot) Increase wool price/weight Increase ewe longevity no decrease in mortality Decreased ewe mortality Mating at 2 years, lower prices for ewes More lambs to 50 kg in same time Increase fleece weight Increase lamb feed efficiency plus turnoff Increase lamb feed efficiency/reduce age to sale Reduced health costs Mating at 2 years unchanged prices (was worse than base case)
What about Risk?
Lamb Directions analysis Analysing investment in changes in to lift profitability on lamb farm case study in south-west Victoria: #2: Whole Farm Analysis (ii)
Criteria: Profit, Cash, Wealth, Risk Operating profit/EBIT as Return to Capital Managed (economic efficiency) Net Cash flow before and after debt servicing (financial viability) Growth in Wealth (change in equity from farming) Risk (variability of these measures over time around their means)
Base Farm 1. Increasing stocking rate 2. Increase land area 3. Increase stocking rate and land area Case Study Farm 1 – Prime Lamb South-West Victoria 4. Increase lambing %
Good Investment? Return on the extra capital
Return on whole farm total capital after change
Increase in wealth by end of year 7 Increased stocking rate, increased lambing percentage and buying land and increasing stocking rate on it (no real gain in land value) all added around $400,000 to net worth above where the farmer would otherwise reach by continuing with business as usual (Status Quo). Buying the extra land and not improving it, and paying 9% interest on the lot, added next to nothing to wealth.
Risk and increase in wealth with each option by end of year 7
Risk and increase in wealth by end of year 7
Financing the changes; Cumulative net cash flow
How Financial Risk of the Changes (Gearing) adds to Business Risk (Prices, Yields) and increases Total Risk Capital investment Extra debt requiredProportion of financial risk to total risk Base farm$3,713,000$80,000 (98%equity)9% Increased stocking rate$4,146,750$433,750 (89%equity)36% Increased land area, same stocking rate $5,060,680$1,347,680 (73%equity)58% Increased stocking rate and increased land area $5,681,380$1,968,380 (65%equity)60% Increased lambing %$3,785,400$72,400 (98% equity)12%
Probability of servicing extra debt from the changes (if average conditions occurred) Option Fixed debt servicing obligations at 8% interest Probability of NCF being greater than debt servicing obligations at 8% interest Length of loan Base farm $15,36698%7 years Increased stocking rate $60,02194%7 years Increased land area, same stocking rate $166,79586%15 years Increased stocking rate and increased land area $239,31181%15 years Increased lambing % $29,27299%7 years
Probability of servicing extra debt from the changes (if average conditions occurred) Option Fixed debt servicing obligations at 15% interest Probability of NCF being greater than debt servicing obligations at 15% interest Length of loan Base farm $19,22998%7 years Increased stocking rate $87,86092%7 years Buy land/same stocking rate $244,15866%15 years Buy land/ increased stocking rate $350,30862%15 years Increased lambing % $36,63199%7 years
Time taken to achieve 100% equity (if average conditions occurred) Option Starting equityTime taken to achieve 100% equity Base farm98%1 year Increased stocking rate89%3 years Buy land/same stocking rate 73%7 years Buy land/ increased stocking rate 65%8 years Increased lambing %98%1 year