Calculating a gross margin for sheep, goat and cattle enterprises

George Millear and Anne Conway and Tony Mills, formerly DPI&F

Introduction

When establishing a new enterprise, it is important to consider the economic value it will contribute to the whole business. A quick way to assess the performance of a new livestock enterprise is to calculate a gross margin.

This DPI&F Note is a guide for calculating the gross margin. A gross margin enables producers to evaluate their existing enterprise performance, and for those who are contemplating investing in a new enterprise, it provides a guide to estimating a gross margin.

A gross margin is the value of enterprise output (comprising inventory change and net livestock trading) less the variable costs attributable to the enterprise. This allows comparison to be made between enterprises (eg. sheep, goats and cattle).

The gross margin does not measure profit. It shows the contribution that each enterprise makes to fixed costs, interest, and capital expenditure. Therefore enterprises can be compared on the basis of their gross margins provided fixed costs are the same.

How to calculate a gross margin

You can calculate the gross margin for a flock or herd that changes in size from the start of the year to the end of the year-as happens in most flocks or herds in most years-in the following way:

Gross margin = value of enterprise output - variable costs

Gross margin = (Net trading* + inventory change^) - variable costs

* Net trading ($) = sales - purchases
^ Inventory change ($) = (closing number - opening number) X per head market value

Note: If the flock is in a 'steady state' situation (ie. opening and closing inventory are the same number), the value of output from the enterprise is the value of net animal trading. If the enterprise is not 'steady state', change in inventory must be accounted for too.

Other terms that you need to be familiar with include:

• Variable costs
  Variable costs are those that vary directly with the number of stock. This includes animal health, fodder, livestock freight, ear tags, selling costs and some contract labour such as mustering.
• Fixed costs
  Fixed costs are those that do not vary with the number of stock that are run. Examples of fixed costs are accountancy, electricity, insurance (general, not livestock), repairs and maintenance, fuel and oil, rates and rents, operator's labour allowances.
• Dry Sheep Equivalent (DSE)
  DSE is the nutritional requirement of a 50 kg dry (ie. non-lactating) sheep. This enables different classes of animals to be compared on a common basis.

Gross margin can be expressed in a number of ways. Gross margin per DSE is a useful means of comparing grazing enterprises against each other, such as goats compared with sheep and cattle.

To enable comparisons to be made between enterprises with different capital requirements, gross margin per $100 of livestock capital is used. It should be calculated as a part of every gross margin analysis because it helps the grazier decide the best use of limited capital.

Information used

Following are the production and financial information requirements for calculating a gross margin. They also form the basis of assumptions for gross margin calculations.

Production information

This includes:

• number of females (ie. does, ewes, cows)
• joining percentage (eg. number of bucks to does)
• kidding, lambing or calving percentage
• weaning percentage; mortality rate
• age when livestock are culled for age
• age when progeny are sold
• approximate carcass weight or live weight at selling.

For producers who have already run livestock for a financial year and have a livestock trading account in their financial statements, most of the stock numbers and transactions can be derived from this statement.

Financial information

This includes:

• number and value of livestock sales
• number and value of livestock purchases
• opening and closing inventory
• deaths and rations.

Variable costs attributable to livestock includes:

• animal health
• fodder
• livestock freight
• selling costs
• some contract labour such as mustering.

The accuracy of these variable costs depends heavily on the records kept by the producer. When expenditure on the variable cost items mentioned occurs, it is imperative the producer include in their records which enterprise it is attributable to.

Example gross margin calculation

Following is an example of how to set out a gross margin calculation. It is important to specify each class of livestock (bucks, does/cows, calves, weaners/ewes, lambs etc) when calculating income and costs.

DSE tables

Merino sheep

Class of	DSE ratings for average weights of.
animal	20 kg	30 kg	45 kg	50 kg	55 kg	60 kg
Ewe > 1 year & lamb			1.3	1.4	1.6	1.7
Wether > 1 year			0.9	1	1.1	1.2
Weaner < 1 year	0.9	1.1
Ram						1.5

Crossbred sheep

Class of	DSE ratings for average weights of.
animal	30 kg	40 kg	60 kg	70 kg
Ewe & unweaned lamb			2.0	2.4
Wether < 1 year	1.2	1.7
Ram			1.5	1.7

Beef cattle

Class of	DSE ratings for average weights of.
animal	200 kg	300 kg	400 kg	450 kg	500 kg	550 kg	600kg	800kg
Cow & unweaned calf				14.5	16.1	17.7	19.3
Dry cow				6.8	7.5	8.3	9.0
Weaned calves < 1 year	6.1	7.9
1-2 years heifers		8.1	10.8	12.2
1-2 years steers		8.1	10.8	12.2
2+ years steers			10.8	12.2	13.5	14.9	16.2
Bulls							14.4	18.0

Goats

Current best practice suggests that DSE ratings for various classes of goats are similar to Merino sheep. Thus DSE calculations for goats can be performed using the table for Merino sheep.

Horses

Ponies: 9-11 DSE
Mature horses: 10-14 DSE

Sources

Merino and crossbred sheep and beef cattle: Benchmarking the wool enterprise, 1999, The Woolmark Company, Melbourne.

Horses: Merino enterprise workbook for benchmarking and best practice in the sheep industry, NSW Agriculture, Orange.

Income					Total
	Number	kg per head dressed	$ per kg dressed	$ per head on farm
Livestock sales
				Total sales (A)
	Number	$ per head
Livestock purchases				Total purchases (B)
				Net sales (C=A-B)
				Inventory change (D)
				Value of enterprise (E=C+D) output
Variable costs
	Number	$/head
Dipping				Total
Drench				Total
Vaccine				Total
Supplement				Total
Tags				Total
	No. of days	$ per day
Casual labour				Total
	Number	$ per kid
Marking				Total
Selling costs
	Av. no. per deck	$ per deck per km	Average km
Freight				Total
No. sold
Commission %				Total
	Number	Cents per head
Livestock levy				Total
				Total variable costs (F)
				Gross margin (G=E-F)
				Gross margin per DSE
				Gross margin per ha
				Gross margin per $100 livestock capital

Further information

For further information contact DPI&F on Telephone 132523 (Queensland residents) or +61 7 3404 6999 (non-Queensland residents) between 8 am and 6 pm weekdays, or e-mail callweb@dpi.qld.gov.au

This DPI&F Note is also published on the PrimeNotes CD-ROM.

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Information contained in this publication is provided as general advice only. For application to specific circumstances, professional advice should be sought. The Department of Primary Industries Queensland has taken all reasonable steps to ensure the information in this publication is accurate at the time of publication. Readers should ensure that they make appropriate inquiries to determine whether new information is available on the particular subject matter.

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File No: SW0043 . Date created: June 2001 . Reviewed: February 2005