Gross margins prove a handy tool for assessing returns

Gross margins a tool for assessing enterprises' marginal returns

Farm Business
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Growers can assess relative returns of individual enterprises using gross margins and fixed costs

Gross margins provide an estimate of income and variable costs per hectare and are a tool to assess the relative marginal return of individual enterprises.

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When fixed costs are added to a land use rotation, a whole-farm margin comparison can be analysed.

Table 1 and Table 2 provide comparisons of two typical rotations in the medium-rainfall zone.

The tables illustrate that a less intensive rotation can be as profitable and carry less financial risk.

Two typical land use rotations in the medium-rainfall zone highlighting the overall cost-benefits of a less crop intensive farming system, such as fallow-crop-sheep.

Two typical land use rotations in the medium-rainfall zone highlighting the overall cost-benefits of a less crop intensive farming system, such as fallow-crop-sheep.

Profit for each crop type varies according to their position in the rotation.

For example, wheat on fallow has higher yield potential due to stored soil moisture.

However, this fallow-sheep-sheep rotation has a lower cost. This is due to the lower weed pressure being offset by extra nitrogen fertiliser requirements to support the higher yield.

The same six-year average profit is achieved for each of the above rotations.

However, the lower crop intensive rotation spends an average $69 per hectare less.

When using the lower intensity rotation, a 3000-hectare farm would spend about $200,000 less per year.

Yet a lower intensity rotation can still achieve the same profit with less financial risk. The lower total annual dollar spend, combined with less income volatility between seasons, results in a more resilient farming system. This is one that is making profits in more years. 

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