COST OF PRODUCTION AND BREAK EVEN PRICE ANALYSIS

The average budgeted unit Cost of Production (before interest), and Break Even Price (after interest), calculated from 2024/25 client budgets for the major commodities is shown below:

The Cost of Production (COP) and Break Even Prices (BEP) have risen slightly from the figures calculated in the previous COP newsletter. For clients in the bottom 20%, both the COP and BEP prices have increased to a greater extent 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.

As a result of the four previous, high production seasons, many growers have increased input requirements budgeted, particularly fertiliser, (Phosphorous and Nitrogen) and chemicals (pre-emergent herbicides and fungicides). This is due to nutrient removal in the export of grain and lost through leaching, plus weeds and disease inoculum have significantly built up due to the conducive growing conditions. In most instances, this has been offset to some degree by an increase in yields budgeted, diluting these extra costs. In most sheep enterprises, shearing expenses have remained at elevated levels since 2020.

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, which at current commodity prices and input costs will be very challenging for many clients.

Therefore, if the net ESR for wheat is $300/tonne, the desired Cost of Production is $225/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 56% and 58% 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 38% and 37% respectively of that for the bottom 20% of these producers.

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 and fixed costs between the top 20% and bottom 20% of producers (ranked by Cost of Production), is illustrated in the following table:

The average total costs of $564/ha for the top 20% of clients ranked on total costs per hectare, is 31% less than the overall average of $811/ha.

The average interest cost of $76/ha for the top 20% of clients ranked on total costs per hectare, is 63% of the overall average of $120/ha. One notable difference year on year, is that the average interest cost per hectare for the top 20% has increased by 73%, while the average interest cost per hectare has increased by 18%.

Clients in the top 20% ranked by Total Costs per Hectare, in general run very lean, smaller operations, with a significant proportion of livestock with less debt compared to the average client. This client group are also very responsive to negative changes in trading conditions and can limit financial losses through reduced expenditure.