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Beyond the Bale : February March 2009
6 cost oF production know your costs and increase profit The opening module of Making More From Sheep – Plan for Success – focuses on setting objectives for sheep enterprises. An important component of this is knowing your cost of production By Rebecca Ryan r ising prices for fertiliser, fuel, feed and chemicals have increased production costs for all farm commodities over the past year. consultant James Hall, of Jrl Hall & co, says these increases can have a direct impact on farm profits, enterprise margins, and programs for the coming year and into the future. “Working out the cost of production (cop) is one method sheep producers can use to identify areas of both strength and weakness in the business,” James says. unlike simple gross margins analysis, cost of production considers both variable and overhead costs to the business. this takes enterprise analysis to another level. “the process of working out the cost of production is more complex than gross margins,” he says. to best assist sheep producers, AWi and Meat and livestock Australia (MlA) have invested funds in the development of a cop calculator, which can determine the cost of production for both meat and wool. “By working out the cost of production, individual sheep producers can determine where the weak link in the business is, and then start working to address those weaknesses. “do they need to focus more management and energies into the production side of the business or, indeed, is the production system sound and working well? “conversely, is the production side of the business sound, and is it the overhead cost structure of the business that is impacting upon profits?” the initial cost of production calculation gives sheep producers a snapshot of the business at a particular point in time. simply comparing cost of production with average sale prices provides a quick ‘business health check’, and shows whether the variation is sufficient to meet overhead costs, interest expenses and taxation liabilities. “like most analysis, one year’s data can be misleading. However, over time, you will get a picture of where you are and how you compare with other enterprises,” James says. “it will also give the business an idea of the break- even price and, indeed, can be expanded to show what price is necessary to generate good profit from the enterprise.” James feels that from a business perspective, the best use of cost of production is in highlighting an enterprise’s strengths and weaknesses. thereafter, points for improvement can be identified. “if the answer lies in production, then one can start looking further for information to assist – for example, to Module 10 of Making More From sheep, Wean More lambs,” he says. “if the answer lies in the overhead costs, then looking at the farm system as a whole, the scale of the enterprise and the scale of the individual enterprises will be important. it may be that the business is overcapitalised and there needs to be a restructure. Module 1 of Making More From sheep – plan for success – will help focus attention on business planning, future systems and direction. “once system changes have been made, continued calculations can help monitor the progress. With the current turmoil, there is probably no better time for sheep producers to look at cost of production.” More information: the COP calculator is available at www.woolcheque.com.au HoWto MAkE MorE FroM Your sHEEp Understanding the market and being clear about production objectives are key business success factors for fine wool producer Ben Watts. Ben and his family produce superfine and ultrafine Merino wool at Molong, in central-west NSW, as well as running an off-farm consultancy business. The success of the Watts’ business links directly to decisions they have made about production and marketing goals, Ben says. In an era of “information overload” he says it is critical to use ben Watts has been selected as the wool- industry sponsored participant for the australian rural leadership program. he will commence the program in May as part of the Course 16 group. information economically, while seeking the views of industry bodies and peers. Commenting on the value of the AWI and Meat and Livestock Australia (MLA) joint initiative Making More From Sheep, and in particular the comprehensive guide Making More From Sheep – A sheep producer’s manual, launched in January 2008, Ben notes the value of business partners conducting a structured analysis of their operation. “We have a pretty strong business orientation and use business advice from a range of sources, so we probably felt that we were already pretty much on top of the business side of our operation,” he says. “Nevertheless, when we sat down with the manual and went through it methodically, we found real value in it. That value came from examining our strengths and weaknesses. “We find that it is important to be honest with ourselves when doing a business analysis. Using the manual we could identify our strengths and more or less put them to one side. But, importantly, we could also identify weaknesses and could see the benefit of really trying to work out how we could turn them around into strengths.” Making More From Sheep has been developed with the input of nearly 250 leading sheep producers and technical experts to help sheep producers increase their productivity, profitability and overall satisfaction with their farming businesses. Since the program’s launch more than 3,000 sheep producers have attended Making More From Sheep workshops across Australia. The centerpiece of the program, Making More From Sheep – Making More From Sheep – A sheep producer’s manual costs $65 (plus gst) for aWi levy payers and Mla members, and can be ordered from the aWi helpline, 1800 070 099, or from www.makingmorefromsheep.com.au. information on Making More from sheep activities, forums and workshops can also be found on the website. A sheep producer’s manual, consists of 11 modules covering all aspects of sheep management and production. It captures the experiences of leading sheep producers and technical specialists and the latest recommendations from research and development to help users identify and improve the 20 per cent of decisions that have 80 per cent of the impact on business profitability and risk control. Ben says the comprehensive nature of Making More From Sheep – A sheep producer’s manual is extremely valuable for busy sheep producers. “So often sheep producers get stuck in a bit of a rut, and can keep digging themselves further down and taking actions that really don’t yield much in terms of either business success or satisfaction,” he says. “But the manual is definitely a handy tool to use for those who want ben Watts to evaluate their current and future operations. I think it has the potential to help people clarify what they are doing and why, rather than just staying on the same old path without understanding whether or not that is the right path.” ? February – March 2009 Beyond the Bale ? pHoto: nsW dpi
Dec 08 - Jan 09
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