RECOVERING from a drought can last longer, and have a bigger impact on a cattle business, than the drought itself.
While much-needed rains are required across most regions before restocking can occur, planning can start well beforehand. This article, written by agribusiness consultant Ian McLean*, outlines some issues to consider and a suggested process to evaluate some restocking options following a drought.
What is your situation?
If you were to get a normal season this summer, what will your situation be at the end of the growing season?
To avoid a debate on what a ‘normal’ season is, and if such a thing exists, let’s say it is getting your median growing season rainfall. Things to consider include:
- What will your herd (or flock) structure be and forecast recovery time?
- What land recovery/rest is required when the season breaks?
- What capacity (AE) will you have available?
- What financial resources are available (cash, long term debt, bank bills, FMD’s….)?
- What is your core business (breeding, backgrounding/growing, grass-finishing)?
- What infrastructure do you have? What types & classes of animals can you purchase?
What are your options?
Once you have a good handle of your situation, you’ll be in a position to look at what your options are. Each business will have a number of options. Below are a few general options that businesses will have, and some considerations for each:
Let the herd or flock breed back up and not buy-in or agist any additional stock. In this case, things to consider include:
- How long will it take for herd/flock to recover?
- How much of a slow build up in numbers is required for land condition recovery
- Can you afford to have unutilised capacity until herd/flock recovers?
Buy in animals that will be part of core business:
- Core herd/flock will recover quicker
- Allows core business to be focussed on
- Longer investment timeframe than trade
Buy in animals as a trade to utilise available capacity at a profit
- Extends options of classes of animals to purchase
- Potentially better cashflow than core business (cash will be recovered but will likely need to be reinvested)
- What will be the target weight and market of livestock purchased?
Agist additional capacity until flock/ herd recovers
- Attractive option, generates cash without requiring additional capital, but…….
- In a (possible) situation where everyone has excess grass but are understocked you should consider what the likely reliability & rate of the agistment market will be?
- Base sums on likely rate times likely utilisation (i.e. $x.xx/AE/week times xx% of the year) and perform sensitivities on that. Do not assume you’ll be able to agist all additional capacity all of the time at full rate, unless you are confident you can.
- Use the Adult Equivalent tools & tables to standardise and compare different agistment rates on an AE basis. For example, Brahman weaner steers starting at 200kg and gaining 0.6kg/day over 6 months at an agistment rate of $2/hd/wk will return 25pc more per AE than a 550kg Hereford cow with calf at foot for 6 months at a rate of $3.50/hd/wk will.
What other options are available to you? For example, combination of the second and third options listed above, cut hay …
How to approach the analysis
Option one may not be a realistic option for a lot of producers, depending on their current situation. However this ‘do-nothing’ option is the scenario against which all other alternatives can be compared.
Pick a timeframe for the analysis – I suggest two years, as one year can be too short to properly compare options, and for three + years you get into a herd /flock modelling scenario rather than an analysis of purchase options.
Doing the analysis
Estimates of the below will help you evaluate possible purchase options:
- What is the class/description of the animals being purchased?
- What is the landed purchase cost per head (purchase price, buying fees, dip, freight etc)
- What is the average annual AE rating per head over the first year?
- What will you have to spend on the mob in the first year (animal health, supplements, contractors etc.)
- Will you sell any (animals or wool) in the first 12 months? If so what, when and for how much?
- How much will your overheads change in the first year (compared to ‘do nothing’) as a result of the purchase?
- What is a reasonable expectation of losses each year?
- What will you have left at the end of the year and what will they be worth?
- What is the average annual AE rating per head over the second year?
- What will you have to spend on the mob in the second year (animal health, supplements, contractors etc.)
- Will you sell any (animals or wool) in second year? If so what, when and for how much?
- What will you have left at the end of the second year and what will they be worth?
- How much will your overheads change in the second year (compared to ‘do nothing’) as a result of the purchase?
Most of the above should be straightforward to estimate, be sure to include detail so you can change variables (e.g. 100hd averaging 200kg @$1.90/kg, rather than just $38,000). The Individual Adult Equivalent tool is a useful resource to determine the average annual AE rating of the stock being evaluated.
The estimated change in overheads will be very subjective, but is a very important consideration. A lot of your overheads are fixed and won’t change. However not all are, so have a think about what your overhead cost structure will be under the ‘do nothing’ option and how they will change under the scenario being evaluated. For example, if a scenario involves going from 2,700AE to 3,000AE then the difference will be minimal, but if it is going from 1,000AE to 2,000AE then there will likely be a significant change in overhead costs (wages, fuel etc).
Then use this information to analyse each scenario, calculating the following for each year.
- Capital Required
- Annual AE/DSE
- Gross profit (Sale – Purchases +/- Inventory Change)
- Enterprise Expenses
- Gross Margin
- Change in overheads
- Net Cashflow
- Contribution to Earnings Before Interest & Tax (in total, per AE & per $ invested)
- Finance Costs
- Contribution to Earnings Before Tax (in total, per AE & per $ invested).
Broadly speaking, as you move down the above list you get closer to the bottom-line implications of each scenario, and it is the bottom-line that is most important. However you are also applying more assumptions as you work down the list, which should also be taken into consideration.
Evaluating the options
Having the above information laid out for a number of purchase options will let you better fully compare each, against each other, against agistment and against the ‘do nothing’ option.
This isn’t a simple, clear-cut process, and you don’t have a crystal ball, so change a few of your assumptions around (e.g. best case, most likely, worst case) and have a look at the effect it has on the results of each scenario.
I don’t believe there is a single measure to look at and base your decision on; it can be dangerous to look at a single measure in isolation. Each option will require a different investment, utilise different carrying capacities, and have different cashflow timings, all of which need to be considered.
It is a complex process and a lot of things need to be considered. While it’s important not to over-complicate it, there are big risks with over-simplifying it.
Contribution to Earnings Before Interest & Tax (EBIT) per AE is one of the key measures I’d be looking at, as well as the contribution to EBIT per dollar invested, the relative investment, carrying capacity utilised (AE), cashflow timings and net cashflow of each.
For those that have done the MLA Business EDGE workshop, the material in that will help you calculate and understand the measures above and compare results.
How do you make the correct decision?
Unfortunately, only time will tell if the decision you make ends up being a ‘good’ one, but you have the ability to make sure you make a ‘correct’ decision. A ‘correct’ decision is one which, being based on all evidence available at the time the decision was made, appeared to have the most favourable outcome. A ‘correct’ decision may result in a less than favourable outcome because of unforseen future events, but not because of poor logic or poor methodology .
Be proactive with your banker
When you have gone through the process and identified one or more options for your business, you should review your budget for the year ahead with this information. This may then be a good time to book an appointment with your banker to discuss your situation, your evaluation of your drought recovery options and your budget forecasts – particularly if you will need to review your current financial arrangements to accommodate drought recovery. If you are well prepared and go to them in a business-like manner, you will be much better placed than if they have to ring you.
- * Ian McLean is director of Bush AgriBusiness. He works with pastoral businesses across Northern Australia and was co-author of ‘The Northern Beef Report: 2013 situation analysis’. He can be contacted on 0401 118 191 email: email@example.com
- Bush Agribusiness will host a series of Business EDGE workshops across northern Australia next year. The circuit starts at Hughenden (March 9-10) and Cloncurry (March 12-13). Kimberley & Pilbara region workshops are being planned for March/April. Other dates and locations will be advised.