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Farm Product Study
Gross margins 2
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 Agriculture Syllabus
What is a Gross Margin?
Farmers can use a number of tools to assess the financial
performance of an enterprise. A common budget used in decision
making and planning by the manager is the Gross Margin. Following
your reading of the information in section 2 of Beef
Gross Margins 
test your understanding by answering these
questions.
- There are a number of accepted abbreviations for well known budgeting terms:
- GM = Gross Margin
- I = Income
- VC = Variable costs
- FC = Fixed costs
GM = _____ - _____
- Answer the following:
- What is the definition of a Variable cost?
- How do Fixed costs differ from Variable costs?
- Identify the following costs as either Fixed or Variable for an animal enterprise:
drench, vaccine, rates, casual labour eg. shearers, depreciation of equipment, eartags, permanent labour eg. farmer's own wage, wool bales, supplementary feed eg. hay, bank interest, selling costs eg. agents commission or yarding fees.
- How does a GM differ to a calculation of Profit?
- The GM is a figure in dollars related to a particular factor eg $/ha. If you are to use
the GM to compare enterprises they must be expressed in similar units.
- Name 5 typical resources used as units upon which GMs are quoted.
- What additional information would you need to know to enable you to determine the best enterprise choice in the following case:
- Cattle enterprise GM = $268/breeding cow
- Fat lamb enterprise GM = $21/breeding ewe
- Outline the two main uses of a Gross Margin.
- Why are GMs less useful
in comparing enterprises that are very different in their needs
for land labour and capital eg intensive cropping vs animals?
- Discuss 6 factors, other than GM comparison, that a farmer should consider before undertaking a major enterprise change.
Working with real Gross Margins
A number of typical Beef Cattle GM Budgets are also available
for you to see, following this basic information at the Beef
Gross Margins site. This service is provided to farmers by the
Department of Ag and it enables them to compare their enterprise
to current average figures for a particular local region. When
you examine the GM for Yearling
Beef in Southern/Central NSW you can see that there is space for the farmers to
calculate their own GM to enable a comparison to be made.
A considerable amount of information is supplied in a GM and the farmer can easily model the expected effects of changes to current management practices.
- Calculate the change in the GM/cow (including pasture costs) if
supplementary feed (hay and grain) to the value of $1650 was needed due to a period of drought.
- The establishment and
production of a fodder crop eg. sorghum, costs the farmer $1850.
What effect does this have on the GM/cow (pasture costs included)?
- The use of this fodder
crop increases the dressed weight of the steers for sale
to 225 kg. Assuming the farmer receives the same price/kg as
before (237c), is the production and use of this sorghum crop worthwhile?
- Describe two ways in
which the farmer may be able to achieve the desirable 5% increase
in weaning percentage of calves that will greatly improve the GM.
- Other than improving the weaning % or providing additional fodder, describe strategies the farmer could adopt to improve the GM.
Vegetable Gross Margins
Vegetable growers also have access to prepared Gross Margins
to aid in their planning and to provide a tool for assessing the
relative performance of their enterprises. Lettuce is an
important and widely grown crop. Use the GM for lettuce at Vegetable Gross Margins Budgets to answer these questions.
- Which area of Variable costs is most expensive for the farmer? Explain why would this be the case?
- How could the introduction of some innovative technology improve this situation?
- Suppose a genetically
modified lettuce has just become available and the newly created
variety is resistant to most normal lettuce diseases. This
lettuce will require the use of only one chemical spray, Benlate
( 3 applications as before). What is the revised GM using this
variety of lettuce?
- The genetically
engineered lettuce seedlings are more expensive, costing
$75.00/1000. Is it still a better option for the farmer? What
other implications are there?
- The graph following the
GM indicates that price received by the farmer fluctuates
considerably throughout the year. Describe and explain the trends
seen in the graph depicting monthly lettuce production and prices
received.
- The table following the
GM shows the effect on GM/ha as price for lettuce changes.
Evaluate the sensitivity of lettuce to a price fall and suggest strategies the farmer could use to minimise risk.
- The prices of
vegetables fluctuate greatly throughout the year and from year to
year. Suggest some reasons why vegetable prices show such
fluctuations.
- You will have noticed that there is a considerable difference between the GM/ha for lettuce and the GM/ha for Yearling beef. Why wouldn't the beef producer simply convert to lettuce farming as it seems there would be around $2500/ha more to be made?
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