The type of budget provided in the Farm budgets and costs section is the gross margin budget. A 'gross margin' is the gross income from an enterprise less the variable costs incurred in achieving it. It does not include fixed or overhead costs such as depreciation, interest payments, rates, or permanent labour. The gross margin budgets are intended to provide a guide to the relative profitability of similar enterprises and an indication of management operations involved in different enterprises.
Budgets are calculated using:
These budgets are not a complete list of all enterprises. The aim of the budgets is to provide producers with an additional planning tool to help evaluate options. The budgets presented are meant to be a projection of price expectations in the near future, rather than a statement of the recent past. It is extremely difficult to accurately predict future prices, growth rates and feeding costs, to name a few of the variables. However, by using the best available information, it is still better to evaluate your options by making your own projections and combining them into a business plan for your property. These budgets will help you in developing your own budgets.
The degree to which these budgets reflect actual returns will be influenced not only by general factors common to all farms, such as prices and seasonal conditions, but also by the individual farm characteristics, such as soil type, crop rotation, pasture quality and management.
Consequently, it is strongly recommended that the budgets be used as a GUIDE ONLY and should be changed to take account of movements in commodity prices, changes in seasonal conditions and individual farm characteristics.
A gross margin can be defined as the gross income from an enterprise less the variable costs incurred in achieving it.
Variable costs are those costs directly attributable to an enterprise and which vary in proportion to the size of an enterprise. For example:
A gross margin is not profit because it does not include fixed or overhead costs such as depreciation, interest payments, rates and permanent labour, which have to be met regardless of enterprise size.
Gross margins are generally quoted per unit of the most limiting resource, for example, land, labour, capital or irrigation water.
Crop gross margins are provided on a per hectare basis and also per megalitre of water in the case of irrigated crops.
It is also common for livestock gross margins to be quoted on a per dry sheep equivalent (DSE) basis reflecting returns on the grazing resource. The livestock budgets express outcomes in terms of:
Note: these budgets are GST exclusive. For an explanation of why this approach has been used see "Treatment of GST in gross margin budgets".
The 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 is a worthwhile exercise. Major differences may be explained by particular farm characteristics, but may also indicate areas of potential improvement.
Gross margins need to be applied carefully when used to decide a farms overall enterprise mix. Because overhead costs are excluded, it is advisable to only make 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.
However, while different sheep enterprises may have similar resource requirements, caution should be taken when comparing gross margin returns from livestock and cropping enterprises due to different land, labour and equipment requirements. Likewise, if a beef or sheep enterprise is being considered for poorer pastures, some enterprises are excluded because growth rate requirements will not be met.
If major changes are being considered, more comprehensive budgeting techniques are required to indicate the real profitability of the situation. Gross margins are a valuable aid in farm planning but they should be by no means the sole determinant of enterprise mix.
Other factors which need to be considered when contemplating a major enterprise change are discussed below.
When considering a change in the farm enterprise mix, it must be established whether there is sufficient land, labour and capital to implement the proposed change. The technical feasibility of any enterprise change will depend on the type and availability of physical resources, such as soil type, rainfall, labour, yard and handling facilities, and pasture type as well as other factors such as the expertise required. For example, if you are considering another crop, have you the expertise to grow it? Is it suitable to your area or soil type? Does the crop fit in with the farm's labour availability? Does specialist machinery have to be purchased?
The proposed change must also be considered on a whole farm basis because a change in one enterprise may affect other farm enterprises. For example, expanding a breeding enterprise could significantly reduce the amount of labour available for other enterprises at critical times.
Additional capital may also be required to facilitate investment in additional machinery or improvements. When more capital is required, it is important to calculate the percentage return on the marginal (or extra) capital invested. This is calculated by expressing the expected change in profit as a percentage of the extra capital required:
Return on extra|
in profit ($)
This return should be high enough to repay loans and account for the risk involved in physical production and price volatility. A return of at least 20% is desirable.
Before considering a change in the farm plan, examine the performance of current enterprises. Gross margins may be improved through better management or by the adoption of new techniques, for example:
The comparison of a farms current gross margins to district averages may indicate inefficiencies and highlight possible areas of improvement.
When taking on a new enterprise, allowance should be made for the fact that some mistakes will be made while gaining expertise in the enterprise, so performance may not immediately reach expected or quoted levels.
Different enterprises involve different levels of price and production risk which need to be taken into account when deciding on enterprise mix. For example:
Enterprises that suggest high returns on paper often involve considerably more risk. In terms of the whole farm, thought should be given to spreading risks through strategies such as diversification, that is, not putting all your eggs in the one basket.
A comparison of gross margin figures alone does not account for the time period involved in reaching steady state production. Some enterprises require considerable outlays of money before any income is received.
Tree crops for example take a number of years to reach full yield potential and a gross margin based on full yield must be treated with caution because of the outlay required. Herd or flock build-up or establishing a breeding program requires time.
Before undertaking any enterprise which will take time to establish, the effect on farm cash flow should be considered.
A gross margin figure does not indicate the nature of the work nor its appeal to the prospective producer. This should be given some consideration prior to embarking on the new enterprise.
Budgets generally consist of two A4 pages. The components are:
The gross margin budget: Provides a summary of the income and variable costs for each particular enterprise. For crops, gross margins are calculated per unit of the most limiting resource, ie. per hectare for dryland crops, but in the case of irrigated crops a gross margin per megalitre of water is provided as well as the gross margin per hectare. The livestock budgets express outcomes in terms of: gross margin per animal eg. per breeding cow/ewe or per steer/wether; gross margin per hectare; and gross margin per dry sheep equivalent (DSE) reflecting returns on the grazing resource.
Effect of crop yield/animal weight/weaning % and price on gross margin: This allows growers to look at the effect of seasonal variations (crop yield, animal weight, weaning %) and market variations (price received) on gross margin. In irrigated crop budgets, yield and price effects are also evaluated on a gross margin per megalitre basis.
Calendar of operations (crop budgets): For the crop budgets, this section provides technical details on application rates and timing of various inputs used in crop management operations and, in addition, the cost of and the time involved in such operations.
Agronomic information/assumptions: Comments provide the user with important additional technical information and assumptions used in preparing the budgets. This will help in assessing the suitability of a particular enterprise to the individual farm. It is advisable to consult local agronomists or livestock officers for further information.