Feedlot Profitability

Four distinct factors affect feedlot profitability:

• The buying price of store cattle
• The selling price of finished cattle
• Cost of the diet
• Cattle performance, as influenced by management.

Each factor is important and requires consideration. Feedlot management influences cattle performance through its effect on feed intake, weight gain and herd health. Feedlot margins are often marginal. This reinforces the value of checking the economics, securing contracts and selecting cattle which perform well and consistently meet market specifications.

Profit Margins in Feedlots

Factors affecting the profit margin of a feedlot operation include the price margin, feed margin, management, cost of feed, the buying price of feeders and selling price, which is usually quoted as a carcass price.

Price Margin

The profit or loss that the feedlot makes as a result of an increase or decrease in price from the time the animal is bought (the cost price) to the time the animal is sold (sale price), is called the price margin and is calculated as follows:

Price margin = Initial live mass X (sale price/kg - cost price/kg)

Price margin includes the difference between the purchase price and selling price resulting from beef price fluctuations as well as improvement in carcass quality due to feeding. The feedlot cannot control price fluctuations and must therefore rely on a prediction of what prices will be when stocks are sold at a future date. Making use of a positive price margin is what is commonly called speculation. Although profits are potentially high, the risk is high and people lacking experience often lose money with speculation.

When buying livestock, most feedlots make use of the price per kg live mass for their calculations. They must therefore know the dressing percentage of the animal. Dressing percentage varies, and feedlots base the value they use on experience and knowledge of the type of animal and its body condition. Lean animals have a dressing percentage of 49%, which increases to as much as 60% at a high level of finish. However, at a fat score of 2 to 3, the mean dressing percentage varies from 54 to 56%.

Feed Margin

The profit or loss a feedlot makes as a result of live mass gain in relation to the cost of feed consumed, is called the feed margin and is calculated as follows:

Feed margin = Live mass gain X (sale price/kg - cost/kg gained)

A feedlot can influence feed margin by ensuring, through good management, that optimal growth rates are achieved and by taking steps to obtain the best feed at the best price.

Other Expenses

Other expenses incurred by feedlot include the following:

• Agents commission
• Slaughtering costs
• Carcass condemnations
• Transport
• Interest on capital
• Salaries of management and labour
• Machinery costs
• Mortalities and veterinary costs (disease control, medicines, vaccinations, veterinarian) and pre-treatment (growth stimulants, dipping, dosing, vaccination)

Feedlots can improve production profit by manipulating some expenses, but others, e.g. agent's commission, are fixed. Mortalities must be monitored carefully to ensure that a high loss rate does not severely limit profits. A mortality rate of 1% to 2% is accepted as normal.

Feedlot Profit

The feedlot profit margin is a function of price margin, feed margin and other expenses. Adding these three together indicates profit or loss for the period of time over which the calculation is made. Feedlot managers need to keep a close watch on feedlot profit, which is a very sensitive measure of the efficiency of management.

Feedlot Management Impact On Profit Margins

The price paid for feedlot cattle or their initial value (cost/kg), is a critical factor affecting the profitability of a feedlot enterprise, especially when a small or negative feed margin exists. A positive feed margin can only be realized with high mass gains and a relatively low cost of feed. The cost of the feedlot ratio relative to the beef price and live mass gain thus exerts a major influence on the cost of gain.

Because of the high proportion of energy required to ensure good feedlot performance, the cost of carbohydrate, which is usually included in most feedlot rations in the form of maize, hominy chop or one of the other grains, in relation to the beef price, is a significant factor deciding the profitability of a feedlot enterprise. This is usually expressed by the ratio beef: maize price, which experience has shown must be more than 13:1 for feedlots to be profitable. Feedlots can make substantial profits when the beef to feed cost price ratio is favourable. Some of this profit must be held over to tide the enterprise over in a subsequent period, which is sure to come when profit margins are negative.

Because average daily gain declines toward the end of the feeding period, where animals are fed for too long a period of time (are over-finished), a negative feed margin resulting in reduced profit margins is likely.

It can therefore be stated that management will have a major influence on the profitability of a feedlot enterprise. Management aspects that are important include:

• Ensuring that the right type of animal is bought at the right price and at the right time. In some larger feedlots, feedlot managers rely on the services of experienced buyers.
• The feedlot ration must be balanced in respect of nutrient content, must be matched to the type of animal fed and should be the most cost-effective ration available at the time of feeding. In most feedlots, the manager achieves these goals by keeping records of animal performance and monitoring results. A nutritionist is usually employed to do the ration balancing because this is a highly specialized task requiring a great deal of time monitoring feed quality and costs of ingredients.
• The daily running of a feedlot is the major task of the feedlot manager. This includes care that feeds bins are full all the time, that freshwater is available to the livestock continuously, that animals are processed and adapted on arrival and that animals are marketed when ready.
• Diseases can be a problem in a feedlot. The services of a veterinarian to advise on disease prevention and the treatment of sick animals is a cost well justified. The adage "prevention is better than the cure" is very true in feedlots. 

Click here to view an explanation about the Karan Feedlot in Johannesburg.