The average budgeted unit Cost of Production (before interest), and Break Even Price (after interest), calculated from 2015/2016 client budgets for the major commodities is shown below:
Both the Cost of Production (COP) and Break Even Prices (BEP) for wheat, canola and wool are similar to those figures calculated for 2014/15. However both the COP and BEP for lambs have increased, due largely to a slight increase in budgeted lamb costs in line with client actuals and increased returns.
This phenomenon of costs rising to meet income occurs as a result of management becoming complacent about costs when incomes are better, or spending money to chase even higher returns. It is pleasing that the budgeted COPs for wheat and canola have remained stable, even though budgeted yields have been reduced in line with declining farm average crop yields, due to declining available moisture for crops.
The top 20% of producers continue to have both lower variable and fixed unit costs than the bottom 20%, due to higher productivity and better matching of variable costs to expected output.
The challenge to management is to achieve a Cost of Production which provides sufficient margin from expected commodity returns. The suggested target margin is at least 25% of expected returns.
Therefore if the net ESR for wheat is $220/tonne, the desired Cost of Production is $165/tonne or less. For lambs, if $100/head net is obtained, the Cost of Production needs to be $75/head or less to achieve a 25% margin on sales.
The unit cost of production for the top 20% of wheat and canola producers, continues to be about 70% of that for the bottom 20% of producers, while the unit cost of production for the top 20% of wool and lamb producers, is about 50% and 35% respectively of that for the bottom 20% of these producers.
The unitised interest cost of the top 20% of client producers is not much different to that of the bottom 20% of these producers.
An example of the differences in unitised variable, fixed and interest costs between the top 20% and bottom 20% of producers (ranked by total costs), is illustrated in the following table:
The budgeted costs for the top 20% of clients ranked on a total costs per hectare basis are as follows:
The average total costs of $369/ha for the top 20% of clients ranked on total costs per hectare, is 24% lower than the overall average of $486/ha, despite this top 20% group operating an average effective total area 14% smaller than average. While scale of operation is important, it in itself does not guarantee lower costs.
This group runs very lean operations, generally with lower gearing ratios and low inputs due to lower targeted output, but in line with environmental expectations.
Unitised costs are a more reliable indicator of cost efficiency, as they take into account productivity as well as absolute costs.