What determines risk and profitability?
A feedlot is an intensive animal production system where a number of financial and production risks can be manipulated and controlled to a more or lesser extent. Internal risks at the feedlot, can be controlled much easier and external risks, largely enforced onto the feedlot, are more difficult to manage.
INTERNAL RISKS
Internally the most important risk is the skills of the manager. The success of the production process in a feedlot is determined by the day in and day out implementation of correct decisions by everyone involved in the management. The following aspects will have the biggest impact on internal risks:
Operational risk: Every activity at a feedlot must be carried out by personnel. The quality of personnel is therefore critically important. Poorly trained and unreliable personnel significantly increase the risk of particularly intensive production systems. Various duties have to be executed accurately and routinely on a daily basis and every member of staff must understand the purpose behind every duty and must be able to execute it independently.
Design and maintenance of facilities: The design and maintenance of facilities and equipment to operate effectively, are essential. As soon as facilities are inadequate and function poorly, it is becoming more difficult to maintain or increase productivity and to manage risk.
Nutrition: The feeding of animals is a 24-hour responsibility and it is also the single largest cost in a feedlot. Various aspects relating to nutrition can vary and contribute to risk. The price of raw materials, particularly energy (grains), is of The correct decisions have to be taken to acquire the right combination of raw materials, to formulate and mix the correct feed in order to ensure maximum digestibility, feed intake and production of a carcass. A number of factors in this process can vary and contribute to risk.
Health: A feedlot uses live animals which have to be healthy to produce optimally. Sick animals do not produce well. Intensive production systems increase stress, which impacts negatively on immunity and therefore on the health of the animal. Animals must be vaccinated and deformed at the beginning of the feedlot period and also adapt to the intensive and stressful circumstances. Early identification and treatment of sick animals, effective adaption of animals to high energy feed and intensive social conditions, decrease the risk of poor health.
Productivity: The performance of a feedlot is measured in terms of growth performance(GDT), slaughtering percentage or carcass production, end mass or total volume of meat produced, feed conversion and grading or quality of carcass. The productivity has a direct and significant impact on profitability. The productivity of a feedlot can be manipulated by good and consistent management skills.
EXTERNAL RISKS
The external risks are determined by the impact of market forces of supply and demand on the both input costs and end product income. Over the longer term, market and price trends in the industry impact on profitability, which has to be taken into account when making management decisions. The external forces which mainly determine the profitability and risk of a feedlot is the following:
Cost of animals: A calf is necessary to produce a carcass, the end product of a feedlot. External market forces determine the general local price of calves. However, there are differences in the quality and value of an animal which will determine the productivity and profitability of carcass production. Such differences are the genetic growth ability in terms of type or race, health, physiological age and gender. Animals with the best potential for productivity or carcass production must be selected.
Cost of feed: The cost of feed is determined mainly by the cost of energy sources. In South Africa maize and associated milling products, like Hominy Chop are the main, sometimes only energy feeds available. Other feed sources are necessary to balance the feed for maximum digestibility and feed intake to ensure maximum production. Energy sources contribute between 70% and 80% of the cost of feed and the feed price between 50 and 60% of the total production costs of a feedlot.
Meat price: The income of a feedlot is determined by the meat price, which is fluctuating according to market forces. The only responsibility for the feedlot is to ensure that the animals are marketed at the correct age, condition and class of carcass to ensure the highest price. The best quality carcasses are classes A1 to A3, which realize the same price in the market. The value of the fifth quarter of the animal can also make a significant contribution to the income, but is usually used as payment for slaughtering costs by the abattoir.
RISK MANAGEMENT
It is important for the feedlot management to be familiar with the risks of a feedlot as discussed above. A management strategy should be applied to accordingly. Although stability, or in other words, minimum risk, seems to be financially attractive, it does not create competition and does not distinguish between good and poor management skills and therefore business opportunities. The challenge therefore remains to be prepared for unavoidable risks by applying increasingly better management skills.
In order to manage risk effectively, the financial implications of typical variation that can be expected due to market forces should be quantified. Simulation models are appropriate tools in supporting risk management, but it can never replace the management skills which emanate from knowledge, experience, personal initiative, good judgement and wisdom.