You work all year to increase production. And when he goes to close the accounts, he realizes that he did not have the expected Result. Is the problem in production? Are you dedicating your time to the right activities? Is it buying inputs and selling products on time?
We separated seven signs that indicate whether the problem is inside or outside the gate.
- Its productivity is one of the best in the region. But the market is always affecting your business and consuming your profit.
If you felt that the phrase bothered you, don’t be surprised. More than 80% of the market focuses its attention and time on production in our surveys and ends up being frustrated by market fluctuations.
It is common for people to enjoy producing, as this is a pleasurable and challenging activity. We like to be the best and considered a reference in productivity.
However, as we have shown in our articles, a significant part of livestock profit is related to commercialization.
- Commercial Efficiency in Livestock: how to improve?
- Is profitability in beef cattle related to productivity or commercialization?
To change this situation, it is necessary to identify the problem. Here are some suggestions:
- structure a good Business Plan.
- Establish the Selling Price that produces the expected Result.
- Observe if the market conditions are favorable for this scenario to occur.
- Establish positive and negative scenarios.
- Structure a Plan B.
2.You meet your boss in the hall, and he asks, “How are the projections?” And you answer: “The production is great, but you know, nobody controls the market.”
This statement is very wise. However, we have to be careful not to use it to justify our failures or difficulties.
As we demonstrated in the article “Commercial Efficiency in Livestock: how to improve? “Being efficient in productivity represents only 50% of the result. The other 50% are related to knowing how to exploit market opportunities.
Taking care of production is not a simple activity, as it involves technical knowledge and several risks that we do not control. However, we feel more comfortable, as we can carry out technical actions that minimize risks.
Seeking opportunities in the market is also a technical activity that involves risks that we do not control. However, if we want to extract the maximum profit in the activity, we must learn to look at the market, dedicate effort, time, and resources. Although we do not control the market, several tools also help us to minimize the risk.
3. The price of live cattle or calves is going up. You call the three best friends, and they say not to sell because it will go up more. The market turns, and you miss the opportunity.
One of the lessons I learned in more than 20 years working in Livestock is that people have different market views. Sometimes the intentions are different, one needs to buy, and the other needs to sell. Other times, people’s commercial time diverges, one needs to sell next month and the other only six months from now, thus affecting perceptions.
Anyway, the lesson I learned is that we need to be well informed and be impartial in decisions. Studying the market and understanding the forces that affect it is essential for sound decision making.
Doing good planning and being very clear about where we want to go and the risks involved help us make decisions.
The live cattle market usually fluctuates by up to 18% in less than 60 days. Therefore, we need to know how to identify if we are close to an end of the movement and a possibility of reversal.
We know that this learning is slow, and each person is in a stage of knowledge. Whether from experience (mistakes and successes), age (very young), or the evolution of technologies. Thus, we created the questionnaire below, participate, and indicate a material to help your growth.
4. You have a feedlot, and the price of corn is falling. You have that feeling that it will fall further, wait, take no action, and the market starts to rise.
Our intuition is powerful and often gives us essential signals. It puts us in a situation of alertness and fear, which makes us seek more information for decision making.
The market for inputs (grains) is more volatile than the market for live cattle. In less than 60 days, the price of corn can rise by more than 35%. These moments of indecision can lead us to miss opportunities.
Due to the speed of reaction in prices, we need agility in decisions. It is at this moment that intuition comes into play.
We know that the search for information to assist in the decision is slow and can generate more doubts, as discussed in item 3. Therefore, it is essential to create decision models free of intuition. These analysis models should indicate if we are already close to one to the end of the trend. They are models supplied with market information, and that brings us neutral information, free from intuition. Only after having supplied this data will the decision-maker validate his information with his best sources of knowledge.
5. Your productivity is better or equal to that of your neighbor, but he always has a better result.
Unfortunately, livestock and agriculture are still very lacking in economic indicators. Due to bureaucracies and high taxes, management controls and balance sheets are still little used in the activity. Many farms and rural entrepreneurs still have their business models focused on individuals and use accounting to reduce taxation.
We do not create indicators to reference the activity, so it is common for the entrepreneur to seek information from neighbors and friends. However, in this case, it is always important to check how the calculations were performed. As there is no standard, it is straightforward to come up with surprising and exceptional numbers. The best way is to seek good managers and create a transparent relationship.
Having done the above warning and if your source is reliable, your problem is probably in marketing. In our article, “ Is profitability in beef cattle related to productivity or commercialization? “, We commented on the importance of separating variable costs from fixed costs and suggested some indicators for comparing businesses (Gross Profit Margin and Internal Rate of Return). However, even though we identify that the problem is commercial management, we still return to item 4.
6. The culprit is the “Forward Market.”
The “Mercado a Termo” is a way for producers to guarantee the sale price of production with industries without using the Futures Market Exchange (B3 or BM&F). For this, the industries request in return the products in the guarantee.
Many producers complain about this type of contract, as it guarantees production to the industry, which, once the future scales are guaranteed, pressures prices.
In our research with more than 400 producers across the country, less than 25% use some form of price protection. If we consider that only a part of these performs price locking via the Forward Market, we can say that less than 20% of production is linked to this type of contract. That is, it is too little to affect the price trend.
7. Your strategy is to buy and sell every month, so you have an average exchange ratio.
Many producers use this strategy to reduce the impact of market fluctuations. However, this is a clear sign that there is a management problem outside these companies’ gate.
DID YOU KNOW THAT THE PROFIT OF COMPANIES THAT WORK IN THE AVERAGE MARKET IS 3 TO 5 TIMES LOWER THAN THOSE THAT MANAGE OUTSIDE THE GATE? AND THAT THE RETURN ON INVESTED CAPITAL IS 50% TO 90% LOWER!
As we mentioned in item 1 of this article, most producers focus on problems within the gate and use strategies, such as this one, to protect themselves from market forces.
The problem is that Commercial Efficiency represents the other 50% of the result. And even worse, commercial errors often end up consuming the result obtained with production. For this reason, good commercial management often more than doubles the farm’s profit.
Anyway, if any of the above pains is taking your sleep away, you probably need to redirect some of your time or your team to off-site management.