Diversified Livestock Farming

Transcription

1 FACT SHEET 928 Diversified Livestock Farming Some farmers are considering diversifying production to include several species of livestock on their farms. This may be beneficial from a marketing, production, and financial standpoint, particularly if you are selling directly to customers. Customers who buy your beef are also likely to purchase poultry, pork, and lamb from you. By diversifying, you may be able to better utilize your land, building, machinery, fencing, labor, and capital resources in your production processes. It may also help you reduce risk, increase profits, and improve cash flow. The purpose of this fact sheet is to introduce you to some of the advantages of diversified livestock production and to illustrate a spreadsheet that will help you plan your production and analyze the profit potential of diversifying. Marketing advantages of diversified livestock farming The phenomenal growth in the number of farmers markets and direct sales from farmers to consumers can be attributed in part to the increased diversity of products farmers now offer. While fresh fruits and vegetables are still the primary products, many farmers now offer meat, dairy, and other livestock products for direct sale. Consumers want variety in their food purchasing choices. They also prefer the convenience of purchasing multiple items at one stop. These purchasing behaviors are in response to two well established methods for improving sales and increasing customer loyalty - up-selling and crossselling. Up-selling is the practice of offering customers products in addition to the product they are

2 currently purchasing. You may have customers who are currently purchasing your beef but might also purchase pork and chicken if the products are available and they can do so all in the same transaction. Think of this as filling their cart. Cross-selling is similar to Up-selling but it refers to selling items that are closely related or can be integrated with the other items being sold, for example, offering eggs paired with bacon and ham. If you are selling holiday turkeys, you might also offer sausage for the dressing and a leg of lamb to upscale the holiday feast. Your hamburger can be paired with hotdogs or steaks can be paired with pork chops for barbecues. Both up-selling and cross-selling can increase sales volumes and provide a valuable service to your customers. Offering your customers a diversity of products can also help you differentiate yourself in the marketplace from other farmers who are offering only one species of meat products. Other attributes that you may use to differentiate your products include: How it s grown: Customers are looking for specific production methods such as grassfed, cage-free, free range, organic, natural, or a third-party certification designation. How it is presented: Customers can be attracted through unique processing methods, packaging design, package sizes, labels, and additional value-added processing. Where it can be purchased: Customers can be increased through diversifying market channels such as on-farm sales, farmers markets, Community Supported Agriculture, institutional sales, cooperative marketing groups, and retail food stores. Marketing materials should tell your story as a whole but also address each species separately. Brochures and websites should inform your customers about the advantages of purchasing multiple products from you in one transaction. Production advantages of diversified livestock farming From a production standpoint, there are many advantages of a diversified livestock operation. Producing more than one species can have a synergistic effect. That is, you can increase total production through diversifying beyond what you could produce through specializing on one species. Overall production can be increased on fixed land, fencing, building, machinery, labor, and capital resources or only a modest increase in these resources. You should develop a separate marketing plan for each species so that marketing resources such as transportation, storage and freezer space, packaging and promotional costs, regulations and licensing fees, and marketing labor can be allocated efficiently. 2

3 new developments in fencing materials, particularly electric fencing, have helped to keep these adaptations cost efficient. Buildings that may have been used for just one species in the past can be more efficiently used year around as they are adapted to the needs of various species. For example, beef cattle housed in a bedded pack barn over the winter can be followed by pigs that will root through bedded pack in the spring time. In grazing, the various animal species prefer different plant species, so that grass and broadleaf plant populations as a whole are better utilized across the growing season. Beef cattle can be followed by poultry (broilers, layers, turkeys). Poultry offer the additional benefit of insect control. Goats are useful for weed and brush control. This increases total animal production on the same amount of land while decreasing reliance on cultural and chemical methods to manage undesirable plant species. It is important to employ Diversifying livestock enterprises may better utilize labor resources. For example, labor requirements for beef may be intensive during spring and fall calving seasons. During the summer, when beef labor requirements are reduced, then the excess labor can be employed in broiler production. Layers need a more constant supply of labor year around in feeding and egg harvesting. Livestock handling and transportation equipment can be adapted to the various species. The fixed cost of machinery is better utilized as it is spread over increased livestock production. Diversifying reduces production risk. For example, diseases are usually species specific. If there is an outbreak in one species which requires time, expense, and loss of income to be brought under control, then the other species can continue to carry the operation. intensive grazing systems with paddocks sized appropriately to the number of livestock. The rotation of the various species through the paddocks should be carefully planned and constantly monitored as growing conditions change. Fencing will likely have to be adapted as the various species have different fencing requirements. However, 3

4 To some farmers, having a variety of livestock on the farm makes production more interesting and enjoyable. Economic and financial advantages of a diversified livestock system Diversifying livestock can increase production and improve profits. This is particularly true because of the relationship between fixed costs and profit. Fixed costs are a major expense in operating a farm. Fixed costs are those expenditures that must be made regardless of the level of production. They include depreciation, interest, insurance, land rent, property tax, salaried labor, etc. As production increases for a fixed level of resources, fixed costs per unit of production are reduced and the profit per unit increases which also increases overall profitability. Diversifying livestock production can also even out cash flow. For example, cow-calf or sheep operations often have sporadic cash sales as all young stock from seasonal production are all sold in a narrow marketing window. Other species have different production cycles which spread out sales and create a more constant cash flow. Planning and analyzing your diversified livestock system Before embarking on a diversified livestock system or adding a species to the current livestock system, it is useful to plan the production numbers and do an economic analysis to estimate the income, expenses, and profit for each species and for the farm as a whole. The economic analysis will help you think through the inputs you will need. It will also help you calculate the cost per pound so that you determine the market price that you will need to set on your products in order to generate a profit. Table 1 is a simplified example of a diversified livestock analysis for a small, part-time farm. The farmer has been selling 10 head of beef each year but wants to increase sales by producing hogs (25), turkeys (200) and broilers (1,000). Each species is put in a different column and then the income, variable expenses, overhead expenses, and profit are calculated for each. Lines 2-6 calculate the income from each enterprise. It is particularly important to estimate accurately the average pounds of meat sold per head (line 3) This is not necessarily the carcass weight (beef and pork) but the pounds sold to customers which includes shrinkage. Equally important is estimating the price (line 5) which is a function of marketing strategies, production costs, and whether the meat is sold by retail cut or in bulk. Line 6 calculates the total income from each enterprise and the total for the farm. Line 7 calculates the percent of total sales attributable to each enterprise. This is used to allocate overhead costs (line 25). Lines 9-12 calculate the variable costs for each enterprise. These costs vary according to the number of livestock sold. This example farm buys young feeder livestock and finishes them out. The cost of the feeder livestock is on line 9. Usually the biggest expense on a livestock farm is feed so it is important to analyze and calculate this carefully (line 4

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6 10). Lines are overhead costs that are difficult to allocate out to the different enterprise so they are just totaled and the total is apportioned to the enterprises (line 27) based on their proportion of total sales (line 7). Deprecation (line 26) is not a cash cost but it is important to estimate and include since is reflects the annual costs (loss in value) of buildings, fencing, machinery, and equipment. Including it gives a better estimate of profit. Tax depreciation can sometimes be used but because tax rules allow rapid depreciation then tax depreciation sometimes overstates the actual annual costs of capital items and should be reduced for the analysis. As mentioned earlier, when overhead or fixed costs can be spread over more species, the cost per unit of production can be reduced and profit per unit of production, as well as overall profit can be increased. The variable and overhead expenses are totaled on line 28 and subtracted from income on line 6 to determine total profit for the farm and each enterprise on line 29. This helps to understand the importance of each enterprise. On this example farm, beef is the most important product, yet hogs, turkeys, and broilers all contribute significantly to the total profit of the farm. It is useful to calculate the cost per pound for each enterprise (line 30). This is done by dividing the total cost for each enterprise (line 28) by the total pounds for each enterprise (line 4). The selling price should take into account the cost per pound to produce each enterprise plus a margin for profit which in this example must cover the farmer s labor and management. On line 31, the total cost per pound (line 30) is subtracted from the price per pound (line 5) to calculate the profit per pound for each species. This is a simplified example. You may be thinking about other livestock enterprises such as lamb, goats, ducks, geese, eggs, and rabbits. This analysis can be expanded for the number of enterprises you are considering. You may have costs that were not illustrated here. For example you may have a cow/calf operation where you have breeding livestock costs instead for feeder livestock costs. You may also want to break out costs for more detail. For example, you may want to separate feed costs into forage and concentrates. You could change or expand this analysis to meet your own needs. This analysis can be used for projecting the future or for analyzing historical income, expenses, and profit. A blank spreadsheet is included at the end of this fact sheet for your use or you can obtain an Excel template of this spreadsheet to do your analysis by ing Dale Johnson at dmj@umd.edu. This fact sheet and an Excel template can also be found at 6

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8 Diversified Livestock Farming (2011) Authored by: Dale M. Johnson, Farm Management Specialist, University of Maryland Extension Keedysville Road, Keedysville, MD Michael R. Bell, Extension Agent, University of Maryland Extension 700 Agriculture Center Westminster, MD Ginger S. Myers, Marketing Specialist, University of Maryland Extension Keedysville Road, Keedysville, MD Issued in furtherance of Extension work, acts of May 8 and June 30, 1914, in cooperation with the U.S. Department of Agriculture, University of Maryland, College Park, and local governments. Cheng-i Wei, Dean and Director of University of Maryland Extension. The University of Maryland is equal opportunity. The University s policies, programs, and activities are in conformance with pertinent Federal and State laws and regulations on nondiscrimination regarding race, color, religion, age, national origin, gender, sexual orientation, marital or parental status, or disability. Inquiries regarding compliance with Title VI of the Civil Rights Act of 1964, as amended; Title IX of the Educational Amendments; Section 504 of the Rehabilitation Act of 1973; and the Americans With Disabilities Act of 1990; or related legal requirements should be directed to the Director of Human Resources Management, Office of the Dean, College of Agriculture and Natural Resources, Symons Hall, College Park, MD