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.

Contribution margins

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.

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