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Farm Product Study

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Gross margins 1

This material addresses aspects of the following syllabus outcome:

H3.1 assesses the general business principles and decision-making processes involved in sustainable farm management and marketing of farm products

The work presented in the following section contributes towards achieving the following syllabus content areas:

• decision-making processes and management strategies
  • assessment of the performance of systems and decision-making based on measurements of quality and quantity
    
    
• calculate a gross margin for an enterprise.

Source: NSW Board of Studies Agriulture Syllabus

Gross Margins are one of the most common tools used by farmers to help them plan. Gross margins are used as a management tool to help farmers choose between proposed strategies. This may mean choosing between two different enterprises or choosing between different production methods for the same enterprise.

A gross margin of an enterprise is the difference between the gross income earned by the enterprise and the variable or direct costs associated with it.

Gross margin = Gross income - Variable costs

The time period used is normally 12 months or a cropping season.

So what are variable costs?

Variable costs are the costs directly linked to the enterprise. They are called variable because they vary with the size of the enterprise. This means that the more wheat a farmer grows, the more fertiliser, seed, spray and machinery costs will be incurred.

The greater the number of sheep run by a sheep farmer, the greater will be the cost of drenches, vaccines, shearing and crutching and wear and tear on the sheep yard. Hence these costs are the sheep farmerís variable costs.

This is in contrast with fixed or overhead costs. These costs are those that are incurred regardless of whether or not production takes place. These costs do not vary as the size of an enterprise changes unless a very large and dramatic change is made. Variable costs are enterprise specific, whereas, fixed costs are associated with the whole farm. Council rates have to be paid no matter what is produced or in what quantities. Hence council rates are an example of a fixed cost.

1. Below is a list of costs incurred by a farmer in the western district near Warren, N.S.W, growing irrigated lucerne. The list includes both variable and fixed costs. Your task is to decide which are variable and which are fixed costs and write them in the appropriatecolumn.
   • depreciation of farm vehicles and machinery
   • fertiliser
   • baling twine
   • permanent employee wages
   • lucerne seed
   • sprays for weed and pest control
   • repairs to fences and farm roadways
   • interest payments
   • tractor and machinery maintenance
   • council land rates
   • water pumping costs
   • taxation payments
   • farm insurance and workers compensation for permanent employees
   • tractor and machinery fuel
   • cartage
     
     

   Variable costs	Fixed costs

   Answer

2. In this question you will need to complete the gross margin for irrigated wheat shown below. To complete this gross margin you will need to complete the calculations of the variable costs and then after totalling the income and the variable costs use the formula shown below to determine the gross margin for irrigated wheat.
   
   Gross margin = Total (gross) income - total variable costs
   
   

   Income:
   Yield 3.5 tonnes/ha @ $125.50/tonne	=	$439.25
   Variable Costs
   Tractor hours 2.2 hrs/ha @ $15.25/hr	=	$33.55
   Implement repairs and maintenance 2.0hrs/ha @ $1.10/hr	=
   Water pumping cost 4.6ML/ha @ $8.00/ML	=
   Seed 68kg/ha @ $0.35/kg	=
   Fertilisers 70 kg super @ $395.00/tonne	=
   Sprays
   1.75L/ha @ $19.20/L	=
   1.15L/ha @ $9.00/L	=
   Harvesting 0.5 hrs @ $140.00/hr	=
   Cartage Contract @ $9.00/tonne	=
   Total variable costs	=

   
   Income - Variable costs =
   

   Answer

3. In this question you will need to draw up a gross margin for prime lamb production. Below are shown the cashbook entries for income and expenditure for a 1,000 hectare property running 3,000 crossbred ewes for prime lamb production along with mixed cropping.
   
   You will need to decide which income and expenditure figures you will need to use for the prime lamb gross margin and then set out your gross margin calculations as was done in question 2. There are income and expenditure figures that are only applicable to the cropping enterprises and you will not need to use these. Your job will be to decide which figures you need to use.
   
   Cash book figures
   
   

   Income: $
   Wool sales	24,300
   Lamb sales	90,000
   Sale of cull ewes	900
   Wheat sales	25,000
   Canola sales	35,000
   Expenditure: $
   Rates	3,500
   General farm insurance	920
   Canola seed	2,900
   Wheat seed	1,900
   Cropping tractor costs	2,200
   Permanent labour	20,000
   Administration costs	520
   Sheep husbandry costs	4,500
   Casual labour - sheep	1,900
   Fertiliser	8,200
   Fences and roadways repairs	3,200
   Accountant	850
   Interest on loan for property	4,000
   Crutching	2,450
   Replacement ewes	18,000
   Sprays for crops	7,200
   Ram costs	750
   Crop cartage	6,300
   Wool cartage	180
   Wool sale commission	2,800
   Shearing	10,000
   Lamb sale commission	4,000

   
   Now calculate your gross margin for prime lamb production. Once you have calculated your gross margin for 3,000 crossbred ewes, convert your gross margin into a per ewe figure.

   Answer

4. What important piece of information would you require if you were going to compare your calculated gross margin for prime lamb production with the gross margin for irrigated wheat that you completed in question 2?

   Answer

5. Several factors can affect the final gross margin figure that you calculate.

   Answer

6. Below is a table showing how wheat prices and yields will affect farm gross margins. What is the difference between the gross margin calculated using the lowest yield and price and the gross margin calculated using the highest yield and price.
   
   On-farm price ($/tonne)
   
   

   Yield (tonnes/ha)	$220/t	$280/t	$340/t	$400/t	$460/t
   1.30	$3	$9	$82	$156	$228
   1.60	$59	$87	$177	$267	$357
   1.90	$64	$166	$272	$379	$486
   2.20	$119	$242	$366	$490	$613
   2.50	$172	$312	$453	$593	$734
   2.80	$228	$382	$539	$697	$854
   3.10	$278	$452	$626	$801	$975

   
   For example, a crop yielding 2.20 tonne/ha, gaining an on-farm price of $340/tonne, would have a gross margin of $366.

   Answer