Farm Gross Margins
Farm Gross Margins provide a simple method for comparing the performance of enterprises that have similar requirements for capital and labour. A gross margin refers to the total income derived from an enterprise less the variable costs incurred in the enterprise. The examples given should only be used to assist in calculating gross margins for a specific case, with costs, prices and management assumptions being changed accordingly.
Northern Victoria Irrigated Enterprise Gross Margins 2005-06
The gross margin books for selected irrigated broad-acre and horticultural crops in Northern Victoria provide a simple guide to calculate the profitability of these crops using typical cost and price information.
The examples should only be used to assist in calculating gross margins for a specific case, with costs, prices and management assumptions being changed accordingly. When comparing enterprises that have different capital and labour requirements a comprehensive analysis is required.
Gross margins of raspberry and strawberry crops in Victoria
Generally the gross margins for any agricultural crop are determined by deducting variable costs from the gross farm income of a given crop for a given period of time (usually per year or per cropping season). They are not a measure of farm profit as they do not include capital (land, buildings, machinery, irrigation equipment etc.) or fixed costs (building and machinery depreciation, administration, insurance, rates, taxes etc.). However, they do provide a useful tool in terms of farm management, budgeting and estimating the likely returns or losses of a particular crop.
Gross margins are currently available from a variety of sources for a range of crops. When using pre-prepared gross margins (sometimes referred to as 'Average annual gross margins), remember to check all the costing and adjust them to suit your own situation, as both income and expenses can vary significantly with location, time of year, crop variety and so on. Before planting, gross margins can be useful in deciding which crops are likely to be the most profitable. Gross margins can be used as a predictor model under a range of conditions before the season starts or to generate 'break even' figures for yields or prices. While using projected figures, they are merely a predictive tool. When the season is over, actual on-farm figures can be used, and an assessment can be made of the season's performance or areas identified where management could be improved or production streamlined.
How to calculate a gross margin?
First, calculate all annual production costs and income of a particular crop on a per-hectare basis. Multiply these by the number of hectares of crop planted to produce an enterprise total. By working on a per-hectare basis, the figures are easily adapted if you decide to plant a different area the following season. When calculating your machinery costs, allow for fuel, oil, repairs and maintenance and other annual costs for tractors, tools and implements. Also remember to include the costs of small items such as replacement nozzles for spray equipment and replacement batteries for power equipment etc. A gross margin will include casual labour, but not the grower's own time. It is left up to the owner/operator to include their own wages and any permanent labour in a whole farm profit and loss statement.
The basic and broad guideline for calculating the Gross margin is that you need to take into account all the input costs and the cost of all hired services that contributed towards the income you received from growing the given crop for a given year or season.
The per hectare income from your crop is the on-farm price received per unit sold (tonne, kg, bunch, carton, bin etc.) multiplied by the number of units produced per hectare. The on-farm price is calculated by deducting freight, commissions, and levies per unit from the market price. Market prices can vary significantly during a season, generally decreasing as supply increases, and vice versa. Therefore, if using the gross margin as a predictor, you should attempt to estimate if your harvest will coincide with a peak or a trough in supply.
Detail all your expenses from the initial land preparation through to harvesting, packaging and marketing. Remember to calculate all growing expenses on a per hectare basis. Remember to include machinery and labour (mixing, spraying & cleaning up) costs and raw ingredients for fertiliser and pesticide applications. Machinery and labour should be costed separately from raw ingredients on a per application basis.
Land preparation - Include the use of all machinery operations, including ripping, harrowing, hoeing, cultivation, bedding up etc. Multiply the number of times each is done by the cost per hectare (machinery, labour, petrol etc.). Include any other procedures or requirements such as fumigation, plastic mulch or trellising that must be in place before the crop is planted.
Planting - Include the number of seedlings or the amount of seed required per hectare, the cost of the transplanting or seeding operation, and the cost of labour. If it is a perennial (multiple years) entire crop planting or seeding cost should not be included in the gross margins calculations. However the annual pruning or training activities required for some crops need to be taken into account
Fertiliser - Include the cost of basal or side dressings and foliar applications, including spreader or sprayer usage far fertiliser applications. There can be a number of fertiliser applications during the cropping year.
Pest, disease and weed control - Calculate the cost of all insecticide, fungicide and herbicide applications, including costs of spraying (ground or aerial) for all pre and post planting. Multiply the number of sprays by the cost per hectare. Also include the cost per hectare of any scuffling, slashing or hand chipping required. If you are using a crop monitor services such as "bug checker", include their charges as well.
Irrigation - Include water charges, pumping & sprinkler costs, electricity & maintenance costs. Also if there is annual licence fee etc they need to be included.
Harvesting and packaging expenses
Include harvesting labour, harvesting equipment costs (including trailers and pallets), packaging materials, packaging labour and cooling or storage expenses. Harvesting and packaging costs can be calculated on a per packaging unit basis, then multiplied by the number of units per hectare.
How can gross margins be used?
Calculation of a gross margin is the essential first step in farm budgeting and planning. It enables you to directly compare the relative profitability of similar enterprises and consequently provides a starting point to deciding or altering the farms overall enterprise mix.
Gross margins can be used to analyse actual enterprise performance. Comparing your own gross margins with standards for the district or province or State is a worthwhile exercise. Major differences may be explained by particular farm characteristics or technologies used by a given farm. But they may also indicate the areas where significant improvements can be made.
Break even analysis
Break even analysis can be used to determine what minimum level of output (yield) must be achieved to 'break even' at a given average market price. Sensitivity tables can be used to test the impact of a good or bad year by comparing the impact of different yields and prices on overall gross margins received from growing the particular crop.
Gross margins of raspberry and strawberry crops in Victoria
These gross margins worksheets have been constructed to give examples of variable expenses likely to be encountered in growing Raspberry and Strawberry crops in Victoria. The calculations are based on average costs and prices as reported by a few leading growers, ABS and some department officials for the year of 2004/05. Growers can estimate their own gross margins using the spreadsheet by deleting any entries not applicable and adding any other entries relevant to their crop. This is an estimated gross margin calculation example mainly aimed at showing how to input entries for gross margin calculation. Prices and yields are listed here as $ per tonne and per hectare basis but they can also be easily calculated on per punnet or other packaging unit as well.
Use gross margins carefully!
Gross margins need to be used carefully when using them as a guide to deciding on the farms overall enterprise mix. Because overhead costs are excluded, it is advisable to make only comparisons of gross margins between enterprises, which use similar resources. For example, wheat and barley are considered to be similar enterprises because both are winter crops, use the same land and have similar machinery and equipment requirements.
Important points to note
Growers need to copy the Gross Margin calculation spreadsheet to their PC before they start calculating their own gross margins for their crop. The given estimated average gross margins can provide some guidance in the process. Also it is recommended that you make a backup copy of the original of Gross Margin calculation spreadsheet before you alter any cells, and save the altered spreadsheet under a new name (say perhaps your property or business name and current year). By doing that, if you accidentally delete a formula, you have an another copy to refer to, without having to ask for them again.