Vegetable gross margins using VegTool decision support tool

An important step in farm planning is the development of a gross margin budget. A gross margin is calculated from a crop's gross income less the variable costs incurred in growing and marketing that crop. The gross margin indicates the potential financial gain or loss of the crop being produced. Gross margins are usually expressed in units related to resources such as land, labour or irrigation water. Some common examples are $/hectare, $/tonne and $/megalitre. Developing a gross margin budget is a useful way of reviewing farming and management practices and can improve the financial understanding of crop production. Analysis of the information in the budget helps identify major costs and areas of potential cost savings. A gross margin is not a measure of profit because costs such as overhead costs, capital costs and permanent labour costs are not included. Overhead costs, also called fixed costs, will be incurred regardless of the extent of production and they are usually attributed to the whole farm. Overhead costs include items such as property rates, interest payments. Capital costs include items such as purchases for new equipment, machinery or buildings. Permanent labour expenses are also excluded from gross margins unless they are directly associated with the particular crop, or can be apportioned to, specific production activities. The components used in the calculation of the gross margin are those directly associated with the production, handling and marketing of the produce. The two major components are gross income and variable costs. These components include several management items that can be customised to represent individual farm characteristics and practices. Gross income is calculated by multiplying the crop yield and sale price of the produce. For crops that have several market outlets, for example, fresh and processing, budgets need to reflect the relevant yield and sale prices of each. Crop yields are commonly expressed as tonnes per hectare (t/ha), tons per acre (t/ac), bins per hectare, cartons per acre and so on. The sale price can be expressed as a gross or net sale price. For gross margin calculations, the gross sale price is usually used. The gross sale price is the price prior to sales commissions and other fees being deducted. The net sale price is the price after sales commissions and fees have been deducted. If the net sale price is used, then sales commissions and fees are not included as variable costs in the …