Financial Effects of Volume
Newsletter No. 65 – Item 4
Newsletter No. 64 discussed the effects of low, medium and high production to demonstrate how efficiencies in production methods improve performance. The article illustrated the impact on the overall profitability in money terms. The figures illustrate why so few currently make good profits from Ostrich production and why few who entered the industry have remained. Note that whilst these are figures discussed in 2008, actual figures vary from region to region, and clearly will have changed in 2013. The important factor when studying the details is understanding fully the principles of the discussion and how they impact on profitability.
Feed is the highest input cost of all livestock production and has the greatest control over production, product quality and profitability. In such a discussion we can only talk in general principles as costs do vary on location and are dependent on volume. Main ingredient prices are similar throughout the world; reasons for price variances are mainly volume related, but local transport costs, subsidies and duties can also have an influence. The following are some examples of variables influencing costs:
The following tables illustrate the differences based on average feed ingredient costs at current world prices. They illustrate the impact of improvements in “productive performance” and how “productive performance” has a greater influence on profitability than costs per tonne of feed and other production costs. The Low, Medium and High relate to production levels as discussed in last month’s newsletter, which can be viewed at here.
Table 1 illustrates the production costs per Trio and the individual costs per chick. Other production costs include an allowance for incubation costs, labour, infrastructure, utilities etc. You will note that as production improves, although input costs are higher, the cost per chick on the ground is significantly lower. The impact of reduced days to slaughter, as can be seen, is significant.
Table 2 illustrates the gross margin per trio and assumes high volume production in the first section. The lower section illustrates the effect of the increased costs that come as a result of low volume. The revenue illustrates the price required per chick under the different production scenarios. Market conditions will determine the value of chicks if sold. Worthy of note is that the chicks from low production breeders are more challenging to rear and take longer to finish, adding further to their costs of production, with many slaughtering out with low meat yields, thus reducing revenue potential.
Costing slaughter bird production is challenging as economies of scale have a significant impact on processing, marketing and distribution, as well as market availability. Many markets are not available when working on low volume. Table 3 assumes high volume with the farmer slaughtering and marketing his own meat, as currently there are very few organisations purchasing birds off farm for processing. Meat price is average for all cuts, with processing costs allowing for packaging costs. Processing costs do vary from country to country and are volume sensitive.
Table 3 shows increasing values for the skin as days to slaughter reduce due to the reduced likelihood of scaring. These skins must be in good condition and produced in sufficient volume to enable meaningful sales. Tanneries purchase skins by the container load (min. 1200) and dealers providing a consolidation service are rarely interested in less than 200. Skins not removed correctly or not stored correctly will have little or no value. There are some low volume producers achieving excellent additional revenue from the sale of the oil, but that is a specialist area requiring specialist knowledge.
Meat yield is assumed the same, with the variable the number of days taken to slaughter. However, the current average meat yield of low production birds is below 30kgs, even when slaughtered in greater than 365 days…that will reduce the revenue potential by a further $80/bird. As processing costs remain similar, reduced yield increases the processing costs per kilo, increasing the production costs of that meat. An example of a high production chick achieving 40kgs of boneless meat in 200 days is included to illustrate the impact on revenue and margin of the additional kilos.
These figures illustrate the challenges when working in low volume. They illustrate the need for collaboration, a move to precision agriculture and development of the genetic base. The higher the volume of turnover, the faster the genetic base can be improved. To date the industry has followed the low/medium production route and this is a major reason for the slow industry development.