Regional Farm Production The important role of sheep in managing risk

Topics Farm Economics Gross Margins Risk Cost of production

Business analysis Small owner-operated businesses

Economics 101 Variable costs are spent per tonne or per head Grain treatment Contract costsabout 5-10% of costs Vet costs

Economics101 Variable costs are spent per tonne or per head Fixed costs are spent per hectare or per farm Fertiliser Chemical Rates Labourabout 70% of costs Machinery Admin Finance

Units $ Overheads Admin Labour Finance Direct Costs Crop inputs Fodder Animal health Total costs Breakeven point Farm Economic Model Turnover

Economics101 Variable costs are the costs of producing an item Fixed costs are the costs of maintaining the workforce Capital costs are the reward for good management Living costs to fund the current living standard 20% Investment to create wealth for the future

Economics101 Variable costs are spent per tonne or per head Fixed costs are spent per hectare or per farm Variable costs are the costs of producing an item Fixed costs are the costs of maintaining the workforce Capital costs are the reward for good management Which is the most important?

Gross Margins Best tool to assess enterprise profitability? Who disagrees?

STOP Gross margin analysis is dangerous Gross margin are always positive They do not allow for risk They account for less than 40% of costs They do not allow for the variable part of fixed and capital costs (labour, machinery, finance) – divisional costs They mask affordability Gross margins are the tip of the iceberg

The tip of the iceberg

Comparing gross margins and cash margins

Beyond Gross Margins Cattle DivisionFarming DivisionSheep Division Enterpr ise CowsSteersCanolaWheatWoolLambs Gross Product 50,000100,00090,00080,000100,000120,000 - Direct Costs 10,00020,00050,00040,00020,00045,000 = Gross Margin 40,00080,00040,000 80,00075,000 Division Gross Margin 120,00090,000155,000 - Division Overheads 40,00080,00050,000 = Division Profit/Loss 80,00010,000105,000 Property Gross Margin 195,000 - Business Overheads & Cap 60,000 = Operating Profit (Loss) 135,000 What are divisional overheads? Interest & capital on equipment R&M on equipment Super on stock pasture Additional labour units

RISK Risk is defined as the chance of financial loss Risk is the defining feature of dryland farming Climatic risk is the most important variable

How do you deal with this amount of risk? Variability buffered by: Grazing Price Poor management Variability amplified by: Cropping Compounding interest Income tax Good management Climate change

SW Slopes – average years

SW Slopes – drought year 2

Riverina cash flow – average years

Riverina cash flow – drought year 2

Riverina accumulated cash flow Effect of climate variation

Riverina accumulated cash flow Drought year 2

SW Slopes seasons

SW Slopes - drought year 2

Effects of risk 20 year run on Junee farm It’s all about minimising losses, not maximising profits

Getting on top of costs Know your cost of production

Why are costs important?

Costs are inflexible Variable costs are spent per tonne Fixed costs are spent per hectare

Cost of production COP = total cash costs area used = $520/ha to $650/ha for Junee Easy to work out Overcomes most of the problems of gross margins Contains all the costs Makes break-even easy to calculate

Calculating break-even Break-even yield = COP/price = $500/ $230 = 2.17 t/ha Break-even price = COP/yield = $500/ 1.1 t/ha = $455

How do we lock in a margin? Set goals (living standards, wealth, succession) WOTB Minimise risk at all times Concentrate on fixed costs Forget gross margins Use cost of production & cash flow for planning Aim to minimise losses, not maximise income – consistent profitability