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Determine the Selling Price
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A simple way to evaluate cattle feeding and marketing alternatives is to use break-even analysis. This is a way of comparing total cost and total returns.
Calculate a Break-Even Point
When returns equal cost, the operation is breaking even. To calculate a break-even point, use the following formula:
(IW X IP) + (G X C) = FP
FW
IW is the initial weight purchased
IP is the initial price of the animal going into the program
G is the expected pounds of gain during the feeding program
C is the cost per pound of gain
FW is the final weight sold
FP is the final price needed to break even on the investment
The equation for developing a breakeven price is relatively simple. Determining accurate numbers is another matter. Economic projection articles and local auction barn prices are a good places to start for cattle prices. Gain projections may need to be obtained from personal experience or you might check with other producers that have similar feeding programs. The real "pencil sharpening" is on the cost of gain.
Standard components in the cost of gain are feed, vet, electric, labour, interest, marketing, and other yardage charges.
Calculating a Break-Even: Purchase Price
Another way to use the break-even analysis formula is to work it backwards to determine the break-even purchase price, break-even cost of gain, weight of steer or heifer to purchase, or amount of gain to try to put on in the feeding program.
What price can I pay for calves?
(FP x FW) - (G x C) = IP
IW
What sort of gain must I get?
(FP X FW) - (IW x IP) = G
C
What is the maximum cost of gain I can handle for this rate of gain and at these animal prices?
(FP X FW) - (IW X IP) = C
G
At what weight should I sell my cattle?
(IW x IP) + (G X C) = FW
FP
Break-even analysis will allow the feedlot operator some idea of how much they can pay for their calves. Breakeven prices can be calculated for the entire feeding period or only a certain part of the feeding program. By looking at different parts of the feeding program (e.g. growing versus finishing) a producer can determine where the most return to labour and management can be obtained.
The farmer can determine his breakeven point, but the market dictates the price. The critical question that must be asked with regard to price is: At what price can I sell my product to the customer to ensure the optimum sales but also the best possible profit margin?
The price at which the product is sold is critical. This is because a high proportion of the costs involved in producing and packing fresh fruit for a particular market are fixed. Distribution costs vary depending on who does it and where the market is located. Profit is highly dependent on the price earned in the market.
It has been said that the market price is the market price – take it or leave it. This is indeed the case in well-supplied markets where large volumes of products are moved at discount prices. In this case, the retailer is able to exercise pressure on the supplier. In other cases, where the supplier or grower, has a product that is generally in short supply or is particularly desired by the market, he has more bargaining power and is in a position to more easily influence the selling price in his favour.
When the produce of a particular variety or specification is in abundance, it is more difficult for the farmer to negotiate any form of advanced payment or minimum guaranteed price with the buyer or his export agent. Under such circumstances, the farmer may be forced to send his produce to the market and hope for the best. This is called selling on consignment.
Before deciding what price to ask, the farmer should have in mind some kind of pricing strategy. For example, he might decide to work on a cost-plus basis, whereby he simply calculates his costs and adds a desired profit margin. The farmer might otherwise decide to try to penetrate a particular market by going in at a specifically low price. On the other hand, he may go in at a high price and skim the market for a short period while a competitive product is absent.
Whatever pricing strategy is followed, price is a critical aspect of the marketing mix.
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