Cost of Production and Break Even Price Analysis (2021/22)

The average budgeted unit Cost of Production (before interest), and Break Even Price (after interest), calculated from 2021/22 client budgets for the major commodities is shown below:

The Cost of Production (COP) and Break Even Prices (BEP) have risen significantly from the figures calculated for 2020/21. Both the COP and BEP prices are significantly greater for clients in the bottom 20% than those in the top 20%. This highlights the producers who effectively allocate inputs to achieve their economic production potential.

Caution is required in interpreting these figures, as no two businesses are the same and the sample size is relatively small for comparison purposes. However, the figures do show what is achieved by some clients, plus the extent of their comparative advantage in a competitive marketplace, both locally and globally.

Due to the very good season and very high crop yields achieved in 2020, many growers have had to increase fertiliser applications, particularly Phosphorous and Nitrogen to offset increased nutrient removal. Chemical costs are also increasing, with a greater focus on more expensive pre-emergent chemistry in addition to double-knock strategies, to combat resistant and harder to kill weeds. Clients who run livestock have also increased their stock numbers, to capitalise on robust returns.

Costs attributed to wool have declined due to the decrease in the price of wool relative to lambs, which results in a reallocation of costs. Due to the budgeted price increase for canola, this has allocated more costs to canola which has impacted both the COP and BEP.

The top 20% of producers continue to have both lower variable and fixed unit costs than the bottom 20%, due to higher productivity, increased scale diluting overhead costs 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 $250/tonne, the desired Cost of Production is $188/tonne or less.  For lambs, if $150/head net is obtained, the Cost of Production needs to be $112/head or less to achieve a 25% margin on sales.

The unit cost of production for the top 20% of wheat and canola producers, is around 65% and 70% respectively 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 37% and 39% respectively of that for the bottom 20% of these producers.

Other than for canola, the top 20% of client producers, based on Break Even Price, tend to have lower interest costs per unit of output, along with variable and fixed costs compared with the bottom 20% of producers.

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

The budgeted costs for the top 20% and bottom 20% of clients ranked by total costs per hectare are as follows:

The average total costs of $395/ha for the top 20% of clients ranked on total costs per hectare, is 71% of the overall average of $555/ha.

The average interest cost of $24/ha for the top 20% of clients ranked on total costs per hectare, is 49% of the overall average of $49/ha. The average interest cost per hectare for the top 20% has fallen by 49% over the last 12 months, while the average interest cost per hectare has fallen by 28%.

Many clients generated significant profits in the 2020 cropping season, with many being able to pay down debt.

Those in the top 20% have lower costs and would therefore potentially been able to generate a greater margin than those with higher costs, leading to a much higher cash surplus.

The top 20% group run very large, lean operations in low rainfall environments, with generally low inputs due to lower targeted output, but in line with environmental expectations. During average seasonal conditions they often reduce debt quickly from higher operating surpluses, then re-borrow to expand again through land purchases.