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# The Power Of Gross Margin

We've all heard the age-old wisdom of buying a profit. Bryan McMurry, PhD and a beef economist with Cargill Animal Nutrition, explains the specifics of accomplishing that by purchasing a wider margin up front.

We've all heard the age-old wisdom of buying a profit. Bryan McMurry, PhD and a beef economist with Cargill Animal Nutrition, explains the specifics of accomplishing that by purchasing a wider margin up front.

He uses the example of buying four-weight calves vs. those 100 lbs. heavier, and putting 200 lbs. of gain on them. At the outset, there is \$50 more margin to work with -- buy price vs. expected sell price.

In this case, a 400-lb. calf at \$1.50 costs \$600. Figuring \$1.20 at 600 lbs. that's \$720, or a gross margin of \$120. Compare that to a five-weight steer calf purchased at \$1.40 or \$700; and a selling price of \$1.10 on a seven-weight, or \$770. So, there's an additional \$50 margin advantage in favor of buying and selling lighter in this scenario.

Spun another way, McMurry points in this example the breakeven cost of gain on the lighter weight calf is 60¢ vs. 35¢ for the heavier one.

Using the margin above and applying the costs in Table 1, McMurry calculates the profit advantage of the lighter animal to be \$49.54. So, the profit was purchased in the form of gross margin -- the cost of gain for both the 4-weight and 5-weight was identical at 43¢.

"That's just too much margin to ignore," McMurry says.

Obviously, he's not suggesting this is the profit or cost one can expect in any given situation. The point is comparing gross margins at the outset can reveal opportunities tougher to see when focusing only on price and cost of gain.

Table 1:

 500-lb. Steer* 400-lb. Steer* Grazing \$50.00 \$50.00 Processing \$12.00 \$12.00 Vet/Med \$2.00 \$4.00 Mineral \$6.00 \$6.00 Hay \$5.60 \$5.60 Interest (cattle) \$10.79 \$9.25 Total Cost \$86.39 \$86.85 Net Profit/Loss** -\$16.39 +\$33.15

*200 lb. of gain on 100 days
**Calculated using the purchase and sell prices described in the above article.

Source: Bryan McMurry, PhD, Cargill Animal Nutrition