Using capital to counter the threat of low and volatile farm income

by

Alex Sinnett, Jonathon Tocker, Bill Malcolm

DEPI Victoria

Base Farm (status quo SQ) 560 ha; 16 dse/ha; 129% lambing

C2. Increase

stocking rate on base farm 20 dse/ha

(+4 dse/ha) Low Extra

Capital $344,000

C3. Increase land

area and run at same stocking

rate as base farm

800 ha(+240 ha) High Extra

capital $1,348,400

C4. Increase land

area and stocking rate on base farm and

extra land 20 dse/ha; 800

ha High Extra

Capital $1,800,000

C1. Increase

lambing % on base farm 145% lamb

marking (+16%) Low extra

capital $72,000

Changes investigated for case study farm

Total Cost

Total Fixed Cost

Total Variable Cost

Quantity of output

Total variable cost, total fixed cost and total cost

$

Quantity of output

Average variable cost, average fixed cost and average total cost

$

Average Total Cost

Average Variable Cost

Average Fixed Cost

profit profit

profit

Costs and Scale

Costs per unit of output and the number of units of output combine to create total profit.

Increasing output increases profit and wealth by reducing average fixed costs per unit of output and increasing gross revenue.

Base Farm (status quo SQ) 560 ha; 16 dse/ha; 129% lambing

C2. Increase

stocking rate on base farm 20 dse/ha

(+4 dse/ha) Low Extra

Capital $344,000

C3. Increase land

area and run at same stocking

rate as base farm

800 ha(+240 ha) High Extra

capital $1,348,400

C4. Increase land

area and stocking rate on base farm and

extra land 20 dse/ha; 800

ha High Extra

Capital $1,800,000

C1. Increase

lambing % on base farm 145% lamb

marking (+16%) Low extra

capital $72,000

Changes investigated for case study farm

SQ C1 C2 C3 C4

Costs

per

one d

ollar

of

incom

e

Total income over 7 year analysis period

Cost of producing a dollar of income

What about Risk?

Business risk

Financial Risk

Return relative to total risk for each option

Ind

icat

or

of

To

tal

Ris

k

Business Risk compared with Financial Risk

Each change increased productivity and increased income more than costs increased, thus increased profit, above that of the current farm system.

Borrowing and buying and intensifying more land increased financial risk and business risk

and at the same time

increased the probable annual net cash flows and profits and growth in wealth.

In this case, if buying more land,

intensification was also required to better service the added debt that

had to be taken on.

Buying and increasing productivity was the highest return highest risk

option.

Who Bets?