Changing sheep systems to increase

profit

By

Jonathon Tocker, Tom Jackson, Bill Malcolm, Janna Heard, Alex Sinnett

What did we do?

We looked at some ideas that could be good ideas for improving the rewards from producing prime lamb.

What did we do #1?

We looked at 15 areas of improvement in a lamb producing system that might be worthwhile researching further.

What did we do #2?

We looked at 4 development options over a 7 year planning period for a real case study farm in south-west Victoria.

#1: The ideas for research were• Increase weaning and stocking rate on same land area• Increase ewe and lamb feed efficiency• Increase weaning percentage• Increase ewe longevity• Reduce ewe mortality• Increase lamb growth rate, 50kg turnoff• First ewe mating at younger age, same and different

prices• Increase wool weight• Reduced health costs

The winners were: (substantially better profit than the base case)• Increase weaning rate and stocking rate• Increase ewe and lamb feed efficiency and lamb

turnoff• Increase ewe feed efficiency• Increase ewe longevity and reduce ewe mortality• Increase stocking rate• Increase weaning rate, same stocking rate

The less effective changes were: (still improved profit of the base case but not by a lot)

• Increase wool price/weight• Increase ewe longevity no decrease in mortality• Decreased ewe mortality• Mating at 2 years, lower prices for ewes• More lambs to 50 kg in same time• Increase fleece weight• Increase lamb feed efficiency plus turnoff• Increase lamb feed efficiency/reduce age to sale• Reduced health costs• Mating at 2 years unchanged prices (was worse than base

case)

What about Risk?Annual growth in equity

$-

$100,000

$200,000

$300,000

$400,000

$500,000

$600,000

$700,000

Mating at 2years

(unchangedprices)

Base case Decreasedhealth costs

Inc. GR/dec.age to sale

Inc lamb effplus turnoff

Inc. fleeceweight

More lambsto 50kg

Mating at 2years (lower

prices)

Decreasedewe mortality

Incr. ewelongevity

(+avg mort)

Incr.price+fleece

weight

Higherweaning ratemaintain SR

Higherstocking rate

Incr. ewelongevity

(+dec. mort)

Inc. eweefficiency

incr ewe +lamb eff plus

turnoff

Higherweaning rate

higher SR

15 1 14 12 7 13 5 15 9 10 13 4 2 11 6 8 3

Lamb Directions analysis

Analysing investment in changes in to lift profitability on lamb farm case study in south-west Victoria:

#2: Whole Farm Analysis (ii)

Criteria: Profit, Cash, Wealth, Risk• Operating profit/EBIT as Return to Capital Managed

(economic efficiency)• Net Cash flow before and after debt servicing

(financial viability)• Growth in Wealth (change in equity from farming)• Risk (variability of these measures over time around

their means)

Base Farm

1.

Increasing stocking rate

2.

Increase land area

3.

Increase stocking rate and

land area

Case Study Farm 1 – Prime Lamb South-West Victoria

4.

Increase lambing %

$165,983

$247,608 $258,033

$356,178

$211,992

Bas

e Fa

rm (

fully

cos

ted)

1.

Incr

ease

sto

ckin

g ra

te2.

Incr

ease

land a

rea

3.

Incr

ease

sto

ckin

g ra

te a

nd la

nd a

rea

4.

Incr

ease

lam

bin

g %

$0

$100,000

$200,000

$300,000

$400,000

$500,000

$600,000

$700,000Operating Profit (EBIT) (steady state year)

95%

75%

Mean

25%

5%

Good Investment? Return on the extra capital

18.4%

7.7%10.1%

1.

Incr

ease

sto

ckin

g r

ate

2.

Incr

ease

land a

rea

3.

Incr

ease

sto

ckin

g r

ate

and land a

rea

-20%

-10%

0%

10%

20%

30%

40%

50%

60%Marginal Modified Internal Rate of Return

95%

75%

Mean

25%

5%

Return on whole farm total capital after change

0.00%

1.00%

2.00%

3.00%

4.00%

5.00%

6.00%

7.00%

8.00%

0.00% 1.00% 2.00% 3.00%

Retu

rn

Risk - Standard Deviation of Return

Modified Internal Rate of Return

Base Farm(fully costed)

1. Increasestocking rate

2. Increaseland area

3. Increasestocking rateand land area

4. Increaselambing %

Increase in wealth by end of year 7

Increased stocking rate, increased lambing percentage and buying land and increasing stocking rate on it (no real gain in land value) all added around $400,000 to net worth above where the farmer would otherwise reach by continuing with business as usual (Status Quo).

Buying the extra land and not improving it, and paying 9% interest on the lot, added next to nothing to wealth.

Risk and increase in wealth with each option by end of year 7

2.135

2.524

2.153

2.558 2.512

Base

Farm

(fu

lly c

ost

ed

)1

. In

crease

sto

ckin

g r

ate

2.

Incr

ease

lan

d a

rea

3.

Incr

ease

sto

ckin

g r

ate

an

d lan

d a

rea

4.

Incr

ease

lam

bin

g %

0.00

0.50

1.00

1.50

2.00

2.50

3.00

3.50

4.00

4.50

5.00

Valu

es

in M

illio

ns

($)

Increase in Wealth

95%

75%

Mean

25%

5%

Risk and increase in wealth by end of year 7

5.0% 90.0% 5.0%4.8% 71.4% 23.8%

1.29 3.06

01

23

45

6Values in Millions ($)

0

1

2

3

4

5

6

7

8

Valu

es x

10

^-7

Increase in Wealth

Base Farm (fully costed)

1. Increase stocking rate

2. Increase land area

3. Increase stocking rate and land area

4. Increase lambing %

Financing the changes; Cumulative net cash flow

How Financial Risk of the Changes (Gearing) adds to Business Risk (Prices, Yields) and increases Total Risk

 

Capital investment

Extra debt required Proportion of financial risk to total risk

Base farm $3,713,000 $80,000 (98%equity) 9%

Increased stocking rate $4,146,750 $433,750 (89%equity) 36%

Increased land area, same stocking rate

$5,060,680 $1,347,680 (73%equity) 58%

Increased stocking rate and increased land area

$5,681,380 $1,968,380 (65%equity) 60%

Increased lambing % $3,785,400 $72,400 (98% equity) 12%

Probability of servicing extra debt from the changes (if average conditions occurred)

Option Fixed debt servicing obligations at 8% interest

Probability of NCF being greater than debt servicing obligations at 8% interest

Length of loan

Base farm $15,366 98% 7 years

Increased stocking rate $60,021 94% 7 years

Increased land area, same stocking rate

$166,795 86% 15 years

Increased stocking rate and increased land area

$239,311 81% 15 years

Increased lambing % $29,272 99% 7 years

Probability of servicing extra debt from the changes (if average conditions occurred)

Option Fixed debt servicing obligations at 15% interest

Probability of NCF being greater than debt servicing obligations at 15% interest

Length of loan

Base farm $19,229 98% 7 years

Increased stocking rate $87,860 92% 7 years

Buy land/same stocking rate

$244,158 66% 15 years

Buy land/ increased stocking rate

$350,308 62% 15 years

Increased lambing % $36,631 99% 7 years

Time taken to achieve 100% equity (if average conditions occurred)

Option Starting equity Time taken to achieve 100% equity

Base farm 98% 1 year

Increased stocking rate 89% 3 years

Buy land/same stocking rate

73% 7 years

Buy land/ increased stocking rate

65% 8 years

Increased lambing % 98% 1 year