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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:
Students learn about:
Decision-making processes and management strategies
- the impact of financial pressures on farmers
Extract from Stage 6 Agriculture Syllabus NSW Board of Studies Amended 2009
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 farmers 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.
- 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
appropriate column.
- 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
- 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 totaling 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 =
- 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. - 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?
- Several factors can affect the final gross margin figure that you calculate.
- 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.
| Variable costs | Fixed costs |
|---|---|
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