The average budgeted unit Cost of Production (before interest), and Break Even Price (after interest), calculated from 2012/2013 client budgets for the major commodities is shown below:

Both the Cost of Production (COP) and Break Even Prices (BEP) for wheat, wool and lambs have increased since these figures were last calculated, due to higher costs. However both the COP and BEP for canola have decreased, largely due to a slight increase in budgeted canola yields.

The increases for wheat, wool and lambs are due primarily to increases in the level and costs of inputs, as costs have risen in line with increasing incomes ie as commodity prices improve or returns increase due to better seasonal conditions, so too do input costs, as the focus on costs by management, tends to relax in better times.

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 margin is 30%. Therefore if the net ESR for wheat long term is $170/tonne, the desired Cost of Production is $131/tonne or less. For lambs, if $90/head net is obtained, the Cost of Production needs to be $69/head or less to achieve a 30% margin over costs (excluding interest).

The unit cost of production for the top 20% of wheat and canola producers, is 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 45% of that for the bottom 20% of these producers.

The unitised interest cost of the top 20% of wheat and canola producers is higher than that of the bottom 20% of these producers, but the top 20% still achieve lower BEPs through having significantly lower COPs.

An example of the differences in variable, fixed and interest costs between the top 20% and bottom 20% of producers (ranked by costs), is illustrated in the following table:

The budgeted costs for the top 20% of clients ranked on costs on a per hectare basis are as follows:

Variable Costs $221/ha 62% of Operating Costs

Fixed Costs 133/ha 38% of Operating Costs

Operating Costs $354/ha

Interest Costs 50/ha 12% of Total Costs

Total Costs $404/ha

It is interesting to note that average fixed costs for medium scale operations are now around $163/ha, or $65/acre, compared with the old rule of thumb of $125/ha or $50/acre, which only the very low cost or larger operators can now achieve. This is a reflection of the higher costs of most services to business.

The average total costs of $404/ha of the top 20% of clients ranked on costs per hectare, is 19% lower than the overall average of $500/ha. This arises from both Variable and Fixed Costs being 18% lower than average, and interest costs/ha being 25% lower than average. This top 20% group operates an average effective total area 22% larger than average.

Cost of Production and Break Even Price Analysis (2012/13)