AGRI30033 – Farm Management Economics Monday 9/3/2020

Week 2: Activity Analysis; Animal Farm Management

Lecture 3 & 4

Recap from last week

1. Farm management analysis is based on farm management economics (the whole

farm approach)

2. The whole farm approach = looking at the whole business system  analysing the
whole system
 People or Human (starting point of any analysis)
- The farm family
- The goals of the owners, their skills, interests and stage of life
- The labour force
 Technical: determines what is possible (technology probably 75% of the story)
E.g. Composition of pastures
 Economic: monetary values are placed on as many benefits and costs as can be
done
 Finance: identity the type and amount of the liabilities om the business 
sources of borrowings (non-equity capital e.g. bank leasing).
 Risk: What if analysis  One possible future (e.g. in the next 12 months); what if
something happened and the consequences
- Sources of risk
 Beyond the farm gate markets: inflation; exchange rates, interest rates;
technological change; unstable and declining prices; government policies

3. Farm management philosophy

The philosophy of farm management economic analysis is that it is more useful to
identify and solve the whole of a fam business problem in an approximate manner,
than it is if approach….

4. The whole farm approach  budgeted advice (if not, doesn’t have any value)
 All different systems are interconnected
AGRI30033 – Farm Management Economics Monday 9/3/2020

Business health check

The reason we’re doing business health check:
 To survive over time requires earning returns to capital that are equal to or
better than alternative uses of the resources involved

The basic arithmetic of profit budget (perspective is for the coming production …)
 Gross income (cash income from production sold and value of production not
yet sold) – variable costs = farm gross margin
Comparing different activities within different livestock (and number of livestock)

 Farm gross margin – overhead costs = operating profit (return to total capital)
 Operating profit – interest (return to debtors capital) = net profit (return to own
capital)
 Net profit -

 To survive over time = making sufficient cash to pay the bills and service the
debts
Cash flow budget (liquidity of the budget)
 To survive over time = building wealth so that the owners have choices in the
future

Managing a sustainable farm = managing so the business:

 Is Profitable
 …

Learning outcomes:
 Animal production
 Risk introduction
 Business health check for a livestock farm business

ANIMAL PRODUCTION

Information that we want to know:

1) Technical (Farm system details)
 Number of stock within the enterprise (herd)
 Replacement method of livestock (breed or buying new ones)
 Genetic improvements
AGRI30033 – Farm Management Economics Monday 9/3/2020

 Feed system: feedlot/ pasture based/ combination

Pasture demand graph
Understand the pasture demand for growth and the details on how to fill the gaps.
 Irrigation?
 Calendar: changes?
2) Goals
Included in the profit budget:
 Depreciation/ appreciation
 Livestock (with a livestock trade budget)

Example: what is the gross margin (p. 95)

1) Identify what’s happening at the start of the year

Livestock: 1,000 ewes + 30 rams

What’s coming in:

- Births: lambing got 1,000 lambs
- Rising 2 y.o. (since we’re replacing ewes) = 216
- Rams = 10

What’s coming out:

- 1,000 lambs
- Cull ewes 196
- Cull rams 10
- Deaths 20

What’s going on the system:

1,000 – 196 – 20 +216 = 2,000
30 – 10 +10 = 30

2) Livestock trading schedule

No. S/hd Total No. S/hd Total

value value
Opening Differentiated Sales
number with age (for
ewes)
Births Deaths

Purchases Closing
number
AGRI30033 – Farm Management Economics Monday 9/3/2020

Total (A) (B)

 Trading profit = B - A

 Cash flow budget = sales – purchases

 Depreciation (e.g. rams) = price of purchased – price of selling

 Numbers of animals should be the same on both sides.
 Opening & closing numbers go to the balance sheet as opening & closing value

1000 ewes @ 2DSE = 2000 DSE (21.67/ DSE)

1DSE = average of 48 kg of ewe

Income and profit of a livestock activity

Livestock income:
 Product (milk solids)
 Change in livestock inventory (increase in value …)

Animal activity Gross margin

Gross income – variable costs = gross margin

…
AGRI30033 – Farm Management Economics Monday 9/3/2020

Exercise

No. $/hd Total value No. S/hd Total value

Opening Ewes $160 $480,000 Sales Culled $80 $43,200
number = ewes
3,00 = 540
0
Culled $50 $900
Rams $1,025 $61,500 rams
= 60 = 18

Lambs $120 $360,000

Births 3,00 - - =
0 3,000

Purchase Ewes
s = 500 $180 $90,000 Deaths Ewes - -
= 60
Rams
= 18 $2,000 $36,000
Closing Ewes $464,000
number = $160
2900

Rams $61,500
= 60 $1,025

Total 7028 $667,500 7028 $983,600

Trading Profit = $983,600 - $667,500 = $316,100

Gross income
 Wool income
 Trading profit
AGRI30033 – Farm Management Economics Monday 9/3/2020

Introduction to risk

Australian agriculture is highly variable internationally and domestically!

RISK = uncertainty (not happening yet – can’t put probability)

 Managing a farm is about managing risk
 No risk, no management
 Minimise risk management return
 Managing a risky business is about gathering relevant information; weighing it
judiciously and acting accordingly
 Combined risky events, runs of risky events – major challenges

Uncertainty = no odds on it happening

Uncertainty has the challenges of dealing with unforeseen threats and solving unanticipated
problems, while raising the chance of benefiting from opportunities unexpected.

Sources of risk
To understand risk in farm systems and to manage it, it is useful to distinguish two types of
risk (because consequences are different due to management):
 Business rick (prices, costs & yields)
 Financial risk (debt: equity)
- Added risk associated with borrowing (since we’re using non equity of the
business, taking out & committing the financial commitment to repay the
interest & debt).
- Snowball effect if not using debt capital well: Debt remain the same and assets
decline

Business risk: volatility of operating profit before meeting financial obligations (CV 43%)
 Volatility around the operating profit & principal and interests
 Risk: Price, diseases, personal risk (owner of the business), institutional risk (e.g.
government policy changes, etc.)

Principle of increasing risk: Financial risk

The principle of increasing risk is about the obvious phenomenon whereby as the debt of a
business increases relative to equity, the more risk there is of that business not being able to
meet its debt servicing obligations at all time.

It is also about the phenomenon that if business have a certain amount of debt and use the
debt capital such that the return on total capital exceeds the cost of the debt, then the
owner’s equity grows at a faster rate than would have been the case if the business had a
lesser amount of debt.

Financial risk
…
AGRI30033 – Farm Management Economics Monday 9/3/2020

Gearing, growth & the principle of increasing risk

 Gearing or leverage ratio = debt/ equity

Risk
When business risk and financial risk combine, they magnify potential losses in farmers’
equity capital and net income and create inefficiencies in resource use by hampering
business planning.

Point: Using the capital well!!

Risk thinking
2 levels:
 Analysing risk to inform decisions
 Managing risk in farm systems
- Managing risk doesn’t mean minimizing risk
- …

Analysing risk
1. Identify an event that could be possible source of risk
2. Identify the possible outcome that can occur drom the event, such as various
weather conditions or prices, and their probabilities
3. Quantify