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Do you know your cost of ‘Production’ – or ‘Cost of Carry’?

Grahame Rees - Tuesday, April 03, 2012

Richard & Victoria Moffatt

DO know how much it actually costs to own your livestock?

A Central Queensland couple has found that the ability to calculate and know this figure for their cattle business has helped revolutionise the way they operate.

Richard and Victoria Moffatt, “Muldoon”, Marlborough, say they experienced a paradigm shift after attending a two-day KLR Marketing School at Emerald in 2009, and came away with real strategies to take their business forward.

“When you do an educational course, you often come away wondering how you’re meant to use what you've learnt but when we did the KLR school we came away and just knew how we could implement it into our business,” Mr Moffatt said.

“We could see straight away how we could use our Cost of Production in a trading or breeding environment to maximise the profit in our business.”

The trio of men behind the KLR Marketing system – Jim Lindsay, “Landsborough Downs”, Hughenden, Rod Knight, “Kooramilla”, Tamworth, NSW, and Grahame Rees, Bathurst, NSW – don’t like to use the phrase ‘Cost of Production’, opting instead for ‘Cost of Carry’.

Mr Lindsay said it was “vital” to know your Cost of Carry.

“Sometimes you can have a Cost of Carry incurred that may not be associated with any Cost of Production of a commodity such as kilograms of beef or wool,” he said.

“You can buy a 300kg steer in, hold it for a month, and it may not have put on any weight in that time, but you have still incurred costs such as transport."

“It’s all about how we view the exercise."

“It’s extremely important to know the Cost of Carry to a reasonably accurate degree because then you can complete the Sell/Buy formula we teach at KLR, to know whether a trade is profitable or not.”

In any livestock business, there are direct costs associated with a particular mob or flock, such as transport in and out, drench, shearing, interest on money borrowed to buy the livestock, and so on.

Then there are overhead costs that come irrespective of what number of type of livestock you have on-hand, including shire rates, interest repayments on land loans, labour, and so on.

“One of the other things that people are getting breakthroughs in using KLR is the ability to make a decision to sell and create cashflow into the business,” Mr Lindsay said.

“Cashflow is something that people need to generate on a regular basis so they don’t get caught wondering how they’re going to pay the next bill.”

Mr Lindsay emphasised that cashflow and profit were different, with cashflow incorporating Cost of Carry and profit being the ‘cream on top’ after costs.

For the Moffatts, the KLR Marketing School fit into their overall belief in the power of self-education, and they were now also part of KLR’s Mastermind Group, where graduates networked and accessed further resources for implementing their new-found skills.

“Because your margin has become so tight these days, you need to maximise profit however you can,” Mr Moffatt said.

“By knowing our Cost of Carry, we have a margin from where we can determine whether a class of animal is underpriced or overpriced in the market.

We've really broken down our Cost of Carry to a per head basis and really understand what it means.

“Being able to look at our Cost of Carry on an annual or per head figure basis allows us to use the grass we have on-hand to maximise profit.”

Mr Moffatt said he was not picky about what class of cattle he bought, so long as it came with the opportunity for profit.

“I buy anything that I can make money out of,” he said.

“I could go to a sale and any class of animal can come home on my truck, it doesn't really matter.

“At the moment, we feed a lot of cattle up to feedlot entry weights and for anything that blows out of that weight grid we see if we can carry it forward to a kill weight at a profit.

We've also got breeders at the moment and sell some as pregnancy-tested-in-calf (PTIC) and calve down others, depending on what’s most profitable at the time.

“If that animal is not paying its way anymore, then we look to trade that animal back into the market where that money is going to return us a positive gain on another class of animal.”

The Moffatts operate 3240 hectares (8000 acres) in a rotational grazing system, with pastures dominated by softwood scrub country through to River Bluegum, and Brigalow country to open Soft Bloodwood forest country.

Grasses include Leucaena, buffel grass, native bluegrass, black spear grass, and green panic. 

Mr Moffatt said he normally ran 1000 young cattle and 200 to 250 breeders.

“The one thing that KLR has allowed us to do as a young start-up business is to cashflow our business without jeopardising our inventory on-hand,” he said.

“Cashflow is everything, really, especially in the current environment we live.

“What banks really want to know about is cashflow - not equity.

“Whether you’re a breeder or whatever operation you run, understanding your Cost of Carry will help you to access cashflow from your livestock enterprise.”

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