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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:

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

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

Using these notations to represent the key elements involved, complete the 'formula' to represent the definition of a Gross Margin

GM = _____ - _____

Answer the following:
1. What is the definition of a Variable cost?
2. How do Fixed costs differ from Variable costs?
3. Identify the following costs as either Fixed or Variable for an animal enterprise:
  drench, vaccine, rates, casual labour eg. shearers, depreciation of equipment, ear tags, 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.
1. Name 5 typical resources used as units upon which GM's are quoted.
2. 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 GM's 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.

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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.

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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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