GROSS MARGINS (GM)

Farm budgets are used as a guide to the costs and returns associated with farm production. The Departments of Agriculture publishes regional guides for major cropping and livestock enterprises in all Australian states. These can be used as a datum or comparison base against which the subject farm can be compared and evaluated.

Gross margins are based on specific assumptions concerning inputs, machinery costs, tillage practices, stock management and product prices. Variations of these factors can have a major impact on the gross margin for a particular enterprise.

The assumptions used in calculating gross margins are based on farming practices and expectations for the particular region. It should only be related to the assumptions on which they are based. Valuers should prepare their own gross margins using standard guidelines.
Calculating gross margins allows the farmer to:


DEFINITION OF GROSS MARGIN

The gross margin for an enterprise is the difference between the total
annual income and the variable costs directly related to the enterprise:

GM = TR - TVC
Where:

GM = gross margin
TR = total revenue
TVC = total variable costs

Therefore, the gross margin is not profit. It does not take into account fixed or overhead costs such as rates, machinery depreciation or permanent wages which have to be met regardless of the level of an enterprise undertaken. There are two main uses of gross margins:


EXAMPLE

A farmer estimates that the gross margin for a traditional pursuit such as wheat is $64/ha compared with $153/ha for lupins This does not mean that he/she should immediately convert all of the wheat fields to lupins. Other factors to take into account are:


The above factors make lupin farming more risky than wheat farming. The farmer may well conclude that the $89/ha margin is not sufficient to outweigh the relative riskiness of lupins.

PERSONAL FACTORs

There is evidence that some farmers will never make a major
change of product no matter what the gross margins are. For example, cattlemen who would never run sheep no matter how high the price of wool/kilo rises to.

CLASSIFICATION OF COSTS

FIXED COSTS
Generally, there will be some factors in fixed supply, such as land,
machinery, buildings, permanent labour. These are fixed costs.

VARIABLE COSTS
Other factors such as those in crop production for example, seed,
fertilizer, casual labour will depend on the chosen level of production. Therefore, such costs are variable costs. Even though the manager may have decided on the seeding, fertilizer and irrigation rates per hectare of the various crops, he/she will not have decided on the total quantity of these factors to use until each crop's level of production is decided.

For Gross Margins variable cost items are those that change with production levels while fixed costs items are those whose total cost doesn't change at all or very little. If a cost is to be incurred regardless of which enterprise is adopted, then it is "fixed" for the purposes of the particular analysis. However, the same cost item may be "variable" for
another analysis. For example, different farm enterprises will usually require different amounts of capital for their operation.

This can be accounted for in GMA by charging interest on capital invested in each enterprise. Capital already invested in a fixed non salvageable form should not be considered.

LIMITATIONS OF GROSS MARGINS

While gross margins are a useful management tool, they have the following limitations:

TABLE 1

EXAMPLES OF GROSS MARGINS

CROP  Yield  (t/ha) Price ($/t) Gross Margin($/ha)
 
Break EvenYield
Wheat
  1.00
175
98.82
0.36
Barley
1.00
144
74.47
0.43
Oats
1.00
115
61.72 0.39
ENTERPRISE
GM per head $
GM per DSE  GM per ha $
Merino Ewes
64.18
21.43
47.14
Merino Wethers
20.81
20.81
45
79
Beef Cattle
218.33
14.30
31.47
Pigs
78.00





EXAMPLES OF GROSS MARGINS

WHEAT CROP GROSS MARGIN

INCOME $/ha
Average yield 1.00 t/ha @ $175.00 /tonne
(net of CBH. tolls, levies and charges)

TOTAL INCOME 175.00

EXPENSES


Seed 55 kg/ha @ $220/t 12.10
Seed Treatment 55 kg/ha @ $18.10 /t
1.00
FERTILIZER

10:22:0 50 kg/ha @ $375 /t 18.75
CHEMICALS

Weed control
9.61
Pest control
0.00
Disease control
0.00


Fuel
5.48
Repairs, oil and grease
9.25
FREIGHT

Grain 1 tonnes @ $18 /tonne
18.00


Fertilizer 0.050 t @ $10 /t
0.50
Contract Work/hectare
0.00
Insurance $175 /ha @ $8.50 /$'000
1.49
Other
0.00
TOTAL EXPENSES  $76.18


GROSS MARGIN 175.00- 76.18 = $98.82

COMMENTS: Price of wheat is based on Department of Agriculture
estimate of $195 less $20 charges. Grain freight is from farm to terminal port.

BARLEY CROP GROSS MARGIN

INCOME $/ha

Average yield 1 $/ha @ $144 /tonne

TOTAL INCOME: 144.00


EXPENSES

Seed 50 kg/ha @ $203/t
10.15
Seed Treatment 50 kg/ha @ $18.10 /t  0.91
FERTILIZER

10:22:0 50 kg/ha @ $375/t
18.75
CHEMICALS

Weed control
11.13
Pest control
0.00
Disease control
0.00


Fuel
5.21
Repairs, oil & grease
8.85
FREIGHT

Grain 1 t @ $12.82 /t
12.82


Fertilizer 0.050 t @ $10/t  0.50
Contract Work
0.00
Insurance $144 /ha @ $8.50/$'000
1.22
Other
0.00
TOTAL EXPENSES  69.53
 

GROSS MARGIN 144.00 - 69.53 = 74.47

COMMENTS: Price of barley is based on Dept. of Agriculture estimate of $160 for #3 grade less $16 charges. Malting barley should show a premium of about $20 per tonne.

MERINO WETHERS GROSS MARGIN
80
INCOME $

Wool 3430 kgs @ 430 cents/kg = 14 620
Sales = 1 785

TOTAL INCOME 16 405


EXPENSES

Shearing 490 sheep @ $135 /100
662
Shed labour 2 days @ $80 /day 
160
Wool packs19 packs @ $7 /pack
133
Shed sundries 490 sheep@ 0.20/head
98
Dipping 490 sheep @ 0.25 /head
123
Crutching 500 sheep @ 40/100
20080
VETERINARY

Drench 500 sheep @ 0.11 /head
55
Vaccinate
0
Purchases 129 wethers @ $25 /head
65
Freight 129 sheep @ 0.50/head  65
19 bales @ $6/bale
111
SELLING CHARGES
Commission 5% of gross proceeds
575
Yard fees
0
FEED

Grain 5 tonnes @ $115 /tonne
575
Insurance value  0
Other expenses fuel etc $500 /year
500
TOTAL EXPENSES
5 998


GROSS MARGINS
Per flock: 10 407
Per dse: 20.81
Per hectare: 45.79


POULTRY FARM GROSS MARGIN

GROSS RETURN $
Egg Sales 37 400
Bird Sales 93 300
TOTAL INCOME 130 700

VARIABLE COSTS

Livestock Running Costs
8 200
Poultry Maintenance - Costs
3 800
Levies and Charges
4 400
Livestock Purchases
25 300
Feed Costs
48 500
Vehicle Costs 
600
TOTAL EXPENSES
90 800


GROSS MARGIN: 130 700-90800 = 39 900

Value of equipment and buildings: 177 800
Produces 5 700 broilers, 1 560 pullets and 2 790 turkeys per annum
Cage unit: 1 500 hens
Total: 11 550 mixed birds

Gross Margin/mixed bird: 3.46
Gross Margin/ha: 19 950

PIGGERY GROSS MARGIN
100 Sow Unit

GROSS RETURN: $
Livestock Gross Return 240 200

VARIABLE COSTS

Livestock Running Costs
26 900
Piggery Maintenance
15 200
Feed Costs
118 900
Vehicle Costs
12 000
Interest on Stock: 58 200 * 10%
5 800
TOTAL EXPENSES
178 800


GROSS MARGIN 240 200-178800 = 61 400
GROSS MARGIN/SOW: 614
GROSS MARGIN/ha: 24 560
Value of stock: 58 200
Capital:(excluding land): 214 400

DAIRY FARM GROSS MARGIN

240 ha with an average of 17 680 DSEs

GROSS RETURN $
Livestock and Milk production 159 800
Fodder Sales 31 200
TOTAL INCOME: 191 000

VARIABLE COSTS

Livestock Running Costs
21 300
Dairy & Equipment Maintenance
8 800
Pasture, crop and hay costs
10 200
Feed costs
81 000
Vehicle Costs
2 400
Interest on stock 126 000 * 10%
12 700
TOTAL EXPENSES
126 400





GROSS MARGIN: 191 000-126400 = 54 600
GROSS MARGIN/DSE: 31.00
GROSS MARGIN /ha: 227.50

Stock Capital: 126 600
Capital including land: 1 000 000

A most useful feature of gross margins is their use in sensitivity analysis. This allows the comparison of the effect of variations of important variables on the gross margin. Table 2 below shows such a table where the effect of variations in the average price of wool
and cut per head on the gross margin is shown.


TABLE 2

GROSS MARGIN SENSITIVITY ($/DSE)
Average Greasy Wool Price (cents/kg)

Wool Cut (kg/head) 390
410
430
450
470
5.8
13.49
14.61
15.73
16.85
17.97
6.0
14.27
15.13
16.59
17.75
18.91
6.2
15.03
16.23
17.43
18.63
19.83
6.4
15.81
17.05
18.29
19.53
20.77
6.6
16.56
17.81
19.12
20.40
21.68
6.8
17.31
18.63
19.95
21.27
22.59
7.0
18.09
19.45
20.81
22.17
23.53
7.2
18.85  20.25
21.65
23.05
24.45





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