Contribution margin as a key planning instrument in farming
One of the core goals in business is to use the company’s applied resources as efficiently as possible. In farming, these resources are used as factors of production to produce food. Since resources are limited, the farm’s processes need to be efficient. This enables factors of production to be conserved and costs saved.
Goods are produced by combining and transforming the four main factors of production of soil, environment, labour and capital. The first three can be classed as the original factors of production, with education and technical knowledge being added to the list in recent years. Capital is described as a derivative factor of production and is created by combining the elementary factors. These factors are limited and cannot be produced in any quantity or quality at will.
Combining and transforming factors of production is subject to a strategic process. This process is supported by key figures, which in turn enable concrete strategies to be developed and selected. In this case, a strategy is understood to be a combination of numerous individual decisions. Entrepreneurs respond in a timely fashion to environmental changes and in line with their long-term objectives. In farming, decisions often come down to the decimal point. The contribution margin figure is very often used to compare alternative courses of action and to support decision making. Software solutions are now available to ensure farmers don’t lose sight of the many variables and data points. Some providers offer software that not only calculates the key figures, but also provides tools for simulating and forecasting commercial success.
The Profit Manager component by 365FarmNet, for example, is a sophisticated planning instrument that also records all the relevant business data. The programme then uses the data to automatically calculate the overall contribution margin for each farm enterprise. It also provides the EU spot market prices for agricultural products and displays stock levels, among other data. What-if analyses simulate various marketing strategies, which can be used to make business decisions. The best way to get started is with 365FarmNet’s Free Basic Package. This allows you to document your arable activities and calculate contribution margins in the field catalogue.
Using contribution margins for strategic decision making
Strategic planning is used to describe situations and to identify opportunities, risks, strengths and weakness. SWOT analyses are a tried-and-tested method for this. They enable you to identify the “strengths” and “weaknesses” of your business. By analysing external factors, you can then identify the “opportunities” and “threats” determined by the market situation. In a farm business, the managers can then monitor any potential changes and respond accordingly by adjusting the strategy.
The SMART rule is key here: According to this rule, a strategy must be specific, measurable, achievable, realistic and time-bound. A goal is the pursuit of opportunities resulting from a company’s strengths. In this sense, a strategy must always be viewed in a competitive context. There are two main forms of market positioning – cost leadership and differentiation – for which the contribution margin can be used as a measure. In a differentiated farm business, a specific contribution margin can be calculated for each farm enterprise in order to compare performance. A contribution margin calculation can also be used within an enterprise to compare alternative courses of action and find the most efficient solution with the best potential output. This approach supports the cost leadership strategy. Alternative courses of action may be found in areas such as seed selection, production intensity, and choice of breed or fertiliser. In this case, how products are distributed in the field is also important. Small differences within fields create uncapped potential for efficient farming. Farmers can make of the most of this potential by using technical solutions from the Precision Farming domain. In this case, yield potential maps highlight the yield performance of each field segment. Application maps can be used to identify differences in the soil and adapt sowing and fertilisation measures for specific areas. A contribution margin comparison can be used to assess the impact of any changes in production methods. If several farm businesses are to be compared against one another, the contribution margins of each enterprise within the individual farms must first be added together.

The contribution margin calculation basis
In order to calculate the contribution margin in arable farming, it is important to consider some fundamental aspects first. Most notably, that the crops produced on farms have different uses. Although they are primarily produced for commercial purposes, they may also have an internal purpose on the farm, for example in livestock farming, where this is very often the case. This results in marketable and non-marketable outputs, with the latter requiring specific evaluation. As a matter of course, the precise structure of each enterprise should be determined for calculation purposes. Individual outputs must be evaluated and variable costs must be classified and recorded. The contribution margin is then a result of the difference between individual outputs and variable costs. Sales revenues, non-marketable outputs, direct payments and withdrawals in kind are all classed as individual outputs. Variable costs include seed, fertiliser, plant protection products, insurance and machinery, among others.
To calculate the contribution margin in livestock farming, the type of animals kept and the feed used are important. Roughages are not suitable for long-distance transportation due to their unfavourable ratio of nutrient content to volume. As such, they are often produced internally, for example on cattle farms. The resulting farm type is described as a land-dependent livestock farm. Non-land-dependent livestock farms such as pig and poultry farms, on the other hand, use commercial feeds. In order to calculate feed costs for contribution margin calculation purposes, the market price is taken into account for commercial feed. This way, whether the farm produces fodder itself or buys it in is unimportant. However, it is important to know whether you’re using the purchase price (including delivery) or the farmgate price for the calculation. Non-marketable, home-made fodder is generally incorporated into the calculation as an associated marginal cost of production. In addition, the variable costs are also subtracted from the individual outputs. The costs can all be broken down by a Herd Management software programme. The costs may include items such as stock replacements, feed, veterinary care, insemination, general husbandry and machinery. It is equally important to know whether the farm uses its own offspring for production. This line item must also be evaluated for the contribution margin calculation in order to compare individual enterprises or businesses against one another and to develop a targeted business strategy.