a joint initiative of Cost of Production Calculator

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1 a joint initiative of Cost of Production Calculator 1

2 KEY BENEFITS Learn to use te MAKING MORE FROM SHEEP cost of production calculator to: Measure te performance of your seep enterprise year on year Compare te performance of your business annually wit oter seep producers and find out if tere is scope for improvement, or if your enterprise is already performing well Designed as a do-it-yourself tool, we ope tat every seep producer will use te Making More From Seep cost of production calculator to figure out teir CoP and compare teir performance annually. Finally, knowing your CoP is just te first step. Once you ave a roug idea of ow you are performing, we strongly urge you to measure te performance of your business in more detail and for all enterprises. Tere are a number of bencmarking groups already establised, run by State Departments or private farm management consultants. CALCULATING COST OF PRODUCTION FOR YOUR LAMB AND WOOL ENTERPRISES HOW TO USE THE Making More From Seep COST OF PRODUCTION CALCULATOR For seep producers wanting to improve te performance of teir enterprises, a good understanding of te current operating efficiency of te business is essential. Cost of production is a key factor affecting te profitability of seep enterprises. Calculating your cost of production is one of te important steps in assessing flock performance and a first step to making improvements. COST OF PRODUCTION Cost of production (CoP), measured in dollars per kilogram, is an indication of te outlay required to produce eac kg of lamb or wool. However, as tere is more tan one way to calculate CoP, and people can confuse it wit oter indicators, CoP may not always provide a meaningful comparison between businesses. CoP sould not be used to compare enterprise mixes. Te Making More From Seep cost of production calculator as been developed to standardise tis very common performance indicator, so you can easily compare te performance of your enterprise wit oters in te seep industry. A quick comparison of your CoP will indicate weter you ave great scope for improvement, or are already performing well. Te calculator is intended to be used for only one enterprise at a time, for example a specialist prime lamb flock or a Merino wool flock. If you ave a Merino wool flock and you join a percentage of te ewes to a terminal sire and te rest to Merino sires, break tat flock into two enterprises: 1) a dual purpose lamb flock tat includes te ewes joined to a terminal sire, and 2) a wool flock tat includes tose ewes joined to Merino sires and all Merino weters. Te income and costs sould be apportioned accordingly trougout te calculator. Use te most appropriate 12-mont period for your situation and keep te same period for eac enterprise, if you ave more tan one. Te CoP calculator is split into te following seven sections: 1. Adult seep trading account 2. Lamb trading account 3. Wool trading account 4. Direct expenses for wole farm business 5. Labour expenses for wole farm business 6. Overead expenses for wole farm business 7. Summaries and CoP calculations CoP is simple to calculate. It is not complicated by ow you ave financed te business, ow muc of it you own, or ow you acquire your land, and it only deals wit one enterprise at a time. CoP does not automatically reveal wat aspects of production you are in a position to improve, but it will provide a very useful start. You can use it to compare te operating efficiency of your business year on year, and ten compare it against oter seep producers wit similar resources to your own. In developing a standard approac to calculating CoP, care as been taken to ensure tat wile te easiest metod as been applied at every step, te usefulness of te measure as not been compromised. Eac section as a number of questions to be answered from your own records, wit a number next to te question referring to a comment in te explanatory notes box were required. Tere is a box at te end of eac section wit a letter beside it tat refers to te figures used in te final CoP calculation. Once you ave calculated your CoP, te next section gives you an idea of ow your performance ranks against oter seep enterprises. Please eed te WARNING section about te accuracy of CoP for different enterprise mixes. 2 3

3 WARNING CALCULATE CoP FOR A NUMBER OF YEARS TO GET AN IDEA OF YOUR AVERAGE CoP can vary a lot between years due to a range of circumstances. Tese include but are not limited to: Unusual rainfall Canges to flock management or structure, suc as lambing date Greater tan normal expenses, suc as capital fertiliser applications or pasture establisment As a general rule, te more variable te rainfall for your location, te more years you sould calculate to determine your average CoP. An alternative to calculating CoP over multiple years is to try to normalise entries by averaging certain expenses instead of taking te total cost into one year. As an example you migt reduce repairs and maintenance spending because in tat particular year you ad invested in renewing te seep yards. THIS CoP CALCULATOR IS BEST USED FOR A PRIME LAMB AND/OR A WOOL ENTERPRISE For businesses tat run dual-purpose or multiple enterprises, costs can be split by using te percentage of gross income contributed by eac enterprise. For cattle, seep and cropping businesses, calculating CoP for individual enterprises requires estimating ow muc of some costs sould be allocated to eac. Tis is difficult and can lead to significant inaccuracies. Wile tis calculator attempts to address tis wit guidelines about ow to proportion costs, a full bencmarking program across all enterprises is advised. In any case, te results will be a useful starting point for furter discussion wit your farm management adviser or bencmarking group. HOW DOES YOUR CoP COMPARE WITH OTHERS? If your cost of production is greater tan $2.51/kgDW, te future of your business may be at risk. Based on lamb prices less tan $3.00/kg DW, you will generally not be earning sufficient income to service debt. If you own all your assets your return on equity will be poor in comparison wit oter investment opportunities unless your land value is appreciating considerably. Te most efficient one tird of farms produced lamb for between $1.56 and $2.01/kg dressed weigt. Lowest cost of production $1.56/kg dressed weigt. $2.01/kg dressed weigt. Te middle group of farms produced lamb for between $2.01 and $2.51/kg dressed weigt. $2.51/kg dressed weigt. Te least efficient one tird of farms produced lamb for between $2.51 and $3.34/kg dressed weigt. Higest cost of production $3.34/kg dressed weigt. Wool enterprise Fine wool (less tan 19 micron) tends to ave a iger cost of production tan medium and strong wool. Te reasons are a combination of intensity of production systems (fine wool production in iger rainfall areas) and lower fleece weigts of seep. Coose wic category you fit into by comparing your average adult micron for your clip. Te most efficient one tird of fine wool enterprises produce wool for between $5 and $7/kg clean. Te middle group produce wool for between $7 and $9/kg clean, and te least efficient one tird of farms produced wool for between $9 and $17/kg clean. Te most efficient one tird of medium to strong wool enterprises produce wool for between $3.50 and $6/kg clean. Te middle group produce wool for between $6 and $7.50/kg clean, and te least efficient one tird of farms produced wool for between $7.50 and $12.50/kg clean. If your cost of production for your fine wool (less tan 19 micron) enterprise is greater tan $9/ kg clean, or greater tan $7.50/kg clean for your medium-strong wool (19 micron or stronger) enterprise, te future of your business may be at risk. You will generally not be earning sufficient income to service debt. If you own all your assets your return on equity will be poor in comparison wit oter investment opportunities unless your land value is appreciating considerably. Less tan 19 micron PRIME LAMB ENTERPRISE By industry standards, if you ave a cost of production of less tan $2.01/kg dressed weigt (DW), you are performing better tan te average prime lamb producer. As sown in te following diagram, te most efficient tird of prime lamb producers ave a regular cost of production in te range of $1.56-$2.01 per kg DW a good goal for any prime lamb producer interested in wealt creation. A cost of production of between $2.01 and $2.51 per kg DW would suggest significant room for improvement. Te most efficient one tird of farms produced <19 micron wool for between $5 and $7/kg clean. Lowest cost of production $5/kg clean. Greater tan 19 micron Te most efficient one tird of farms produced 19 micron wool for between $3.50 and $6/kg clean. Lowest cost of production $3.50/kg clean. Te middle group of farms produced <19 micron wool for between $7 and $9/kg. Te middle group of farms produced 19 micron wool for between $6 and $7.50/kg. Te least efficient one tird of farms produced <19 micron wool for between $9 and $17/kg. Higest cost of production $17/kg clean. Te least efficient one tird of farms produced 19 micron wool for between $7.50 and $12.50kg. Higest cost of production $12.50/kg clean. 4 5 $7/kg clean. $6/kg clean. $9/kg clean. $7.50/kg clean.

4 Optional extras Using te figures you ave drawn on to measure CoP, tere are a couple of extra indicators you can calculate. In many cases teir accuracy may be limited because tey require you to estimate te figures. However, sould you coose to fill tese extras out, te results will be a useful starting point for furter discussion wit your farm management adviser. Kilograms of lamb produced per ectare (kg DW/a) You can calculate kg DW/a by simply dividing te number of kilograms of lamb produced (refer Lamb produced page 9) by te number of winter grazing ectares used for lamb production. If lamb is your only enterprise, tis is easy to determine accurately. However, were you ave a number of different enterprises, deciding on te number of ectares you allocate to te lamb enterprise as opposed to te oters may be difficult, so don t rely too muc on te result. Kilograms of wool produced per ectare (kg clean/a) You can calculate kg clean/a by simply dividing te number of kilograms of wool produced (refer Total wool production page 10), by te number of winter grazing ectares used for wool production. If wool is your only enterprise, tis is easy to determine accurately. However, were you ave a number of different enterprises, deciding on te number of ectares you allocate to te wool enterprise, as opposed to te oters, may be difficult, so don t rely too muc on te result. Average sale price For prime lamb production, you sould be able to get an idea of your average sale price per kg DW from your sales records, especially if you sell over te ooks. For wool production, you sould be able to get an idea of your average sale price per kg clean from your istorical sales records or divide te Wool Gross Income box (Box $WI) by te total kilograms of wool produced (Box TWP). Alternatively, you can use te AWI Woolceque program ( as an indicator of your current clip value. Margin Subtracting your CoP from your average sale price ($/kg DW for prime lamb or $/kg clean for wool) will give you an idea of te margin you are making from your lamb and wool enterprises. If tese figures are less tan or close to 0, your business may be at risk. Were to from ere? Congratulations! You ave taken te first step. Bencmarking your CoP as given you an idea of te scope you ave for improving te profitability of your seep enterprise. Te next step is to very clearly decide te lifestyle and financial goals your business as to support, and ten determine te enterprise strategy, flock structure and markets tat will best acieve tese goals. However, all options you migt take will influence eiter of two tings your feed supply or your feed demand. Feed demand is influenced by te flock structure and target markets you coose. Te tactical options you may coose from to cange feed demand include: classes of stock, breed, time of lambing, age at weaning, target growt rates and turn-off weigts. All of tese factors influence te feed demand in terms of quality and quantity required at different times of te year. On te oter side of te equation, options for providing te feed required include: te pasture species grown on different land classes; te grazing rotation, wic includes fencing, grazing and rest times; te use of irrigation, supplementary feeding, and fodder conservation. Based on your current enterprise structure, you need to determine ow well your feed supply matces your feed demand. Tere are a number of programs available to elp you do tis, suc as MLA s EDGEnetwork PROGRAZE course, as well as various tools and information in Turn Pasture into Product in te Making More From Seep manual. MLA s Feed Demand calculator is a relatively simple tool to use and can be downloaded free from its website ( Alternatively, you can contact your local State Department or farm management consultant for assistance. If te matc between your feed supply and demand is poor, look for options to cange eiter or bot. Oter seep producers, often from regions quite different to yours, can be a great source of new options for you to consider. Keep an open mind, listen to oters and read widely. Wen you ave cosen a few possible options, you sould do an economic analysis of eac of tose options to ensure tey will meet te profit goals you ave set. Once you ave decided on te flock structure, target markets and feed supply options you want to implement, you need to develop a transition plan to get from te current enterprise strategy to te new one. Tis plan needs to account for access to capital, and ave defined limits for cas flow and liquidity against wic you can monitor progress. If tese limits are breaced, action can be taken in advance to get te business back on track. Tis is critical to managing risk. Developing an enterprise strategy is a complex task requiring many repetitive calculations. Most farm management consultants ave a range of computer tools to automate tis process, and tey are aware of most of te pitfalls tat may confront you. It is strongly advised tat you seek professional support. Access to capital, attitude to risk, land class and rainfall are some of te factors tat make your situation different to oters and will govern te enterprise coices available to you. 6 7

5 Adult Seep Trading Account LAMB TRADING ACCOUNT Opening No. Closing No. Cange (Closingopening) Inventory Value ($/d) Cange in Livestock Inventory ($) Opening No. Closing No. Cange (Closingopening) Inventory Value ($/d) Cange in Lamb Inventory ($) Ewes >12mts (a) (b) (b) - (a) (t) inventory value x cange in no. of ewes Lambs <12mts (i) (ii) (ii) - (i) (vii) (xviii) (vii) x (xxiii) $li inventory value x cange in number of weaners Weters >12mts (c) (d) (u) inventory value x cange in no. of weters Liveweigt (kg/d) (iii) (iv) (d) - (c) (e) (f) (v) inventory value x cange in no. of rams Total Liveweigt (kg) (v) (vi) (f) - (e) Total cange in livestock inventory ($) $si sum of inventory cange (i) x (iii) (ii) x (iv) (vi) - (v) Ewes >12mts No. Sold or transferred (g) Fleece x weigt on sales (kg/d) () Wool sold on seep (kg) Total adult ewe sales/transfers ($) No. Sold or transferred out closing lwgt opening lwgt li No. purcased or transferred in Lamb Traded () x (g) Lambs <12mts (vii) (viii) Value of lamb (<12 monts) sales ($) (ixxx) $ls Weters >12mts (j) (k) (j) x (i) Total adult weter sales ($) Liveweigt (kg/d) Liveweigt sold/ purcased (kg) (ix) (xi) - (x) (xii) Value of lamb (<12 monts) purcases ($) (ixxx) $lp (l) (m) Total ram sales ($) (vii) x (ix) (viii) x (xii) (xi) - (xii) Quantity of wool sold wit seep (kg) (SWS - sum of wool sold wit seep) Ewes >12mts Weters >12mts No. purcased (n) (p) Quantity of wool purcased wit seep (kg) (SWP sum of wool purcased wit seep) (r) Fleece weigt x on purc. (kg/d) Adult Wool Traded on SHEEP (kg) Wool purcased on seep (kg) SWS Tis is significant particularly were seep are sold in teir wool. SWP Tis is significant particularly were seep are purcased wit significant amounts of wool. (g) & (n) Include any ewes transferred from or to anoter seep enterprise at teir market value (eg $50/ead). (t) A suggested standard value of $50 can be used in te eastern states and $35 in Western Australia. It is assumed tat te opening and closing values are te same. (o) (q) (s) (l) x (k) (n) x (m) (p) x (o) (r) x (q) AWT Sws - SWP Total adult seep sales/transfers ($) $ss sum of sales Total adult ewe purcases ($) Total adult weter purcases ($) Total ram purcases ($) Total purcases ($) $sp sum of purcases SHEEP TRADING INCOME $STI $si + $ss - $sp (t) Suggested standard value of $35 can be used and it is assumed tat te opening and closing values are te same. (u) Suggested standard value $300 can be used and it is assumed tat te opening and closing values are te same. $sp If seep ave been purcased ten use positive values so tat te $STI formula remains correct. Lamb Produced (Kg Lwt) Dressing % Lambs <12mts Clean Fleece Weigt on Sales (kg/d) Wool sold/purcased Lamb s wool sold or transferred out sales lwgt purcased lwgt lt (vii) (xiii) (xv) ll li + lt Lamb Produced (Kg CWt) LP ll x dp Lamb Trading Income $LTI $li + $ls - $lp (vii) x (xiii) Lamb s wool Purcased or transferred in (viii) (xiv) (xvi) (viii) x (xiv) Lambs Wool Traded (xv) (xvi) sales of wool on lambs purcases of wool on lambs LWT (kg) (xvii) Suggested standard value $40 as used in Holmes Sackett bencmarking and it is assumed tat te opening and closing values are te same. dp If you are unsure, te suggested dressing percentage is between 42% for 1st X lambs and 46% for 2nd X lambs. (ixxx) & (iixxx) Include any lambs transferred to anoter seep enterprise at teir market value (eg $50/ead). $lp If seep ave been purcased ten use positive values so tat te $LTI formula remains correct. - dp 8 9

6 WOOL TRADING ACCOUNT $/kg Total Values ($) DIRECT EXPENSES $ Adult Wool Traded (kg) AWT (25) $awt AWT x (25) Total flock ealt costs A Found in adult seep trading account (26) $lwt LWT x (26) Contractors and casual labour for enterprise work (ie lamb marking) B Lambs Wool Traded (kg) LWT Gross Value ($) $ws Total value of ome grown feed fed out: C Wool Sold (kg clean) Found in lamb trading account WS Average Value ($/kgclean) (Wool sold value $ divided by Wool sold kg clean) $ws / WS Total value of purcased feed fed out: Agistment costs Transport and Cartage D E F Ewes Lambs (<12 monts) Opening No. (1) (a) (3) (i) Estimated x Fleece Weigt (kg/d) (2) (4) Opening Fleece Weigt (kg) (9) (2) x (1) (10) (4) x (3) Value of Opening Sorn Wool Inventory ($/kg clean) (27) *(Use wool appraisals to get tis figure if possible) * Total Value Opening Wool Inventory ($) (27) x woi $wo Selling Costs (seep and wool) Searing and Crutcing Oter costs, eg Insurance, materials TOTAL SHEEP DIRECT EXPENSES LABOUR EXPENSES Cost of permanent employees ($) Number Value G H I $D sum direct expenses above Weters (5) (6) (11) Owner/operator allowance * X J (c) (6) x (5) Cost of additional family labour (not already included above) X K (7) (8) (12) TOTAL LABOUR COSTS $tl sum labour expenses above (e) (8) x (7) Percentage time worked on tis seep enterprise. L ta Opening Fleece Weigt (kg clean) os TOTAL LABOUR COST OF SHEEP ENTERPRISE $L $tl x $ta Ewes Lambs (<12 monts) Weters Opening Sorn Wool Inventory (kg clean) Total Opening Inventory (kg) Closing No. (b) (ii) (d) (f) (13) (15) (17) (19) Closing Fleece Weigt (kg clean) Closing Sorn Wool Inventory (kg clean) Total Closing Inventory (kg) Total Wool Production (kg) (9) + (10) + (11) + (12) woi os + oi Estimated Closing x Fleece Weigt Fleece (kg/d) Weigt (14) (16) (18) (20) (21) (2) x (1) oi (22) (15) x (16) (23) (17) x (18) (24) (19) x (20) cs (21) + (22) + (23) + (24) ci wci cs + ci wci cs + ci TWP AWT + LWT + WS woi + wci Value of Closing Sorn Wool Inventory ($/kg clean) WOOL TRADING INCOME (28) *(Use wool appraisals to get tis figure if possible) * Total Value Closing Wool Inventory ($) (28) x wci $wc $WI $awt + $lwt + $ws - $wo + $wc (2), (4), (6), (8), (14), (16), (18) & (20) Estimating wool on seeps back at opening and closing is only important were tere as been a cange in searing time or were significant numbers of seep ave been purcased wic means te average may ave canged. If weigt on seeps back at opening and closing are te same ten tis step can be left out. (25), (26), (27), (28) It migt be appropriate to use te average wool price from wool sold to put a value on adult wool traded wit seep. Tis is significant particularly were seep are sold / purcased in teir wool. A Includes drences, drips, vaccines and vet costs B Includes marking, classing, mustering and casual labour used for te lamb enterprise (excluding searing and crutcing) C & D Feed sould be valued at market price, not cost of production because if it wasn t fed to stock it could ave been sold on te market E Cost of agistment for seep sent away F Include cost of all lamb, ewe and ram transport (not involved in selling costs) G For all seep and wool sold; including freigt, commissions, fees, taxes and levies H Include cost of searing, crutcing, mulesing, wool packs, emery paper, combs, cutters and any oter associated expenses I Include any permanent paid labour (casual labour goes in B) and not owner/operator or family members; include all on-costs, eg workers compensation, superannuation etc. J Tis is an allowance for te manager of te business; if manager is less tan full time, pro rata te $55,000 annual allowance, ie 50% $27,500 per annum; exclude off-farm labour * Tis is a manager s allowance for te first owner labour unit. Exclude off-farm labour so if te first labour unit is less tan full time ten use te corresponding fraction of te full time unit K Additional family labour over and above te first labour unit is given station ands wages of $35,000. L Estimate if time records not available 10 11

7 OVERHEAD EXPENSES SUMMARIES AND CoP CALCULATIONS Wole Farm Total ($) % Allocation to Seep Enterprise Administration M X Electricity and Gas N X General Insurance O X Pasture Costs S X Rates and rents P X Repairs and maintenance: sed, yards, fences, land U X Seep Enterprise Overeads $ Direct Expenses $D from expense page Labour Expenses $L from expense page Overead Expenses $O from expense page TOTAL EXPENSES $TE $D + $L + $O Wool Income $WI from wool trading account Total Market Value of Plant and Equipment Value of Seep Enterprise Plant and Equipment (includes farm utes, motorbikes etc.) Seep enterprise plant and equipment as a % of total plant and equipment Repairs and maintenance: plant & equipment Fuel and oil Depreciation T Oter U Q R sp% Seep Trading Income Wool Income Traded wit Seep Seep Trading Income (net of wool) Lamb Trading Income Wool Income Traded wit Lambs Lamb Trading Income (net of wool) TOTAL INCOME $STI from seep trading account $awt from wool trading account $NSI $SI - $awt $LTI from lamb trading account $LWT from wool trading account $LI $LTI - $lwt $TI $WI + $NSI + $LI Motor Veicle Expenses V TOTAL (Sum of Q to V) X sp% TOTAL OVERHEAD COSTS sum seep enterprise overeads above $O Wool as a proportion of total enterprise income % pwi $WI / $TI Total cost of wool production $WC $TE x pwi Total kg wool produced (kg clean) TWP from wool trading account M Telepone, fax, postage, general office expenses; do not include labour if already accounted for previously WOOL COST OF PRODUCTION ($/KG CLEAN) Yield lclean TWP TWP x Yield WCoP WC / Clean TWP N Exclude personal use O Includes public liability, sickness and accident insurance P Rates include sire, RLP Board and council Lamb as a proportion of total enterprise income % pli $LI / $TI Total cost of lamb production $LC $TE x pli Total kg lamb produced (kg dressed weigt) TLP from lamb trading account Q Includes veicles, motor bikes, tractors etc. DO NOT include labour if already accounted for previously LAMB COST OF PRODUCTION ($/KG Dwgt) LCoP LC / TLP R Includes petrol, distillate, fuel oils and lubricants; exclude personal use S Include cemicals, fertilisers, irrigation and seed T Use te depreciation figures from your most recent tax return U Include items not already accounted for SHEEP ENTERPRISE LIVESTOCK SCHEDULE Total Opening Total Purcases + + $NSI - If seep trading income is negative ten wool and lamb income as a percentage of total income will be iger tan 100%. Tis is because te negative seep trading income is a cost on te business tat is sared between lamb and wool. V Farm usage only for all private and farm veicles (cars, utes, 4WD, trucks, bikes) registrations and licenses, insurance, repair and maintenance Natural Increase Deats Clean TWP If wool entries in te wool trading account were greasy ten te total wool produced (TWP) needs to be converted back to a clean basis. Tis is done by estimating te yield. If TWP entries were on a clean basis ten use TWP. Total Sales Total Closing Balance 12 13

8 NOTES NOTES 14 15

9 FURTHER INFORMATION CONTACT DETAILS: For more information from Making More From Seep for your seep enterprise, call AWI on , or MLA on or visit Australian Wool Innovation Limited and Meat & Livestock Australia acknowledge te matcing funds provided by te Australian Government to support te researc and development detailed in tis publication. Acknowledgement Te metod for calculating cost of production was developed by Holmes, Sackett and Associates for Australian Wool Innovation Limited and Meat & Livestock Australia. Publised by Australian Wool Innovation Limited (ABN ) and Meat & Livestock Australia Limited (ABN ) Marc 2009 Australian Wool Innovation Limited and Meat & Livestock Australia Limited (2008) ISBN Australian Wool Innovation Limited Call te AWI Helpline on (free call witin Australia) Meat & Livestock Australia Limited Call MLA membersip services on (free call witin Australia) Te MLA & AWI Making More From Seep Cost of Production Calculator as been designed to elp you estimate te cost of lamb and wool production. Care is taken to ensure te accuracy of te information contained in tis Calculator. However MLA and AWI make no warranty or representation, and accept no responsibility, regarding te accuracy, completeness or suitability for any purpose of te information provided and you sould make your own enquiries and assessments before making any decision concerning your interests. Neiter MLA nor AWI accepts any liability watsoever for information provided by te Calculator or for any loss or damage incurred as a result of reliance (in wole or in part) upon information contained in tis Calculator. Te Calculator is designed to allow you obtain an approximate idea of te cost of lamb and wool production in a limited number of circumstances. Te actual calculation of te cost of lamb and wool production can be more complex depending on many factors. Professional advice regarding te cost of lamb and wool production sould be sougt. Reproduction in wole or part of tis publication is proibited witout prior consent and acknowledgement of Australian Wool Innovation and Meat & Livestock Australia.