Trade Talk: Making money feeding sheep

As a primary producer, and sheep feedlot operator, I am often reviewing the market for opportunities and seeing how they might fit into our farm program. Our feedlot allows us to feed sheep for performance, manage pasture feed availability and help boost our breeding flock as required.

Sharing my experience as a producer, not from the Department, is an important step for more dialogue between farmers. In telling real-life stories, I hope to share lessons learnt, and help producers improve or save time.

How do I assess the viability of feeding sheep for a profit in a volatile, high price environment?

I focus on what I can influence, determine the key variables, attribute a value to these variables, then analyse the trade scenarios before pulling the trigger. There is money to be made, but you need to know your numbers!

Don’t just take it from me, Matt Dalgleish from Thomas Elder Markets (TEM), recently ran the numbers showing a long-term trend of profit in feeding lambs. The article states a long-term gross margin­ of $38 per head from 2005 to 2021 and goes into seasonal volatility of returns.

Importantly, the figures in the TEM article are gross margins, and not representative of the actual net cash return. For example, I aim for a minimum $20 per head net profit including all overheads and finance costs. I’m interested in the net profit, as gross margin doesn’t tell the whole story. If the return isn’t there, I won’t do it as there are better things to do with the time and capital.

How do I calculate the profit in a trade?

I don’t worry too much about what the lamb market is doing, I just try to buy good quality sheep at a reasonable price, knowing what I have just sold others for. If you’re trading in and out of the same market, the price doesn’t really matter. I compare the sale price I have most recently achieved and forward contract prices, using somewhere in between for my assumed sale price, and then work out my re-entry purchase price. I contract sell some and take market price for others – then I’m 50% right. It’s a similar concept to the KLR Marketing principles which may be familiar to some.

I spend more time focussing on the factors and variables that I can influence.

Cost-of-gain is the single largest contributor to profit or loss.

Cost-of-gain is the total cost to produce a kilogram of carcass weight. The combination and corresponding value of the factors listed below make up cost-of-gain. My job is to positively influence these factors to create a profitable trade within a price market that I cannot influence.

  • Amount feed consumed – influenced by the quality and weight of the animal
  • Feed cost – influenced by commodity prices and quality
  • Liveweight gain – influenced by quality of management and animal
  • Carcass yield – influenced by the quality of the animal
  • Operating and overhead costs – influenced by management

How do I accurately work out cost-of-gain? I developed the AMC Feedlot Calculator specifically for this purpose and to forecast the actual net cash return of a sheep trade. I use the calculator to forecast the trade, then put the actuals in afterwards to assess performance vs. budget and the accuracy of my forecast.

Want to learn more? Register and join me for a FREE webinar on the 18th of November (register here).

What will I cover in the webinar?

  • Feeding sheep for performance and managing cost-of-gain
  • How to analyse the profitability of a sheep trade using confinement feeding or feedlots
  • Common mistakes to avoid when running the numbers

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