Calculation of gross margin for barley and wheat
This number will present an example on how profit and cash flow can be improved on an Romanian farm. On this number, we will present first step of the analysis. Next number, we will follow up with the following steps. We invite all readers of AgroAdvice News to send comments and suggestions to office@agroadvice.ro – and we will give answers in our next newsletter.
If you want to have a similar analyse to be made on your farm, please contact AgroAdvice consultants for an appointment.
All successful business in Europe focus on improving the economical performences. Farms are also business entities and therefore the farmers have to focus on, how they can increase the profit by using the resources available on the farm.
In this article, we will focus on how to improve the profit in the short run. The analyses are based on the gross margin calculations, widely used in all type of business in Europe. In the calculation of the gross margin, we only take the value of production and the variable costs into consideration, meaning costs that vary according to the production. The fixed costs (as depreciation, interest on credits or salary for management) will not be included in the calculations, as these do not change in the short run.
On an actual farm analysed by AgroAdvice, the farmer is growing 1600 hectares with barley, wheat, maize, sunflower and rapeseed. The farmer is planning to use technologies, which results in the following calculation of the gross margins for 2 alternative crops, Barley and Wheat:
Calculation of gross margin for Barley and Wheat
| Winter barley, 1 hectare | Winter wheat, 1 hectare | |||
| Value of production< |
6 tons/ha, 400 RON/tons |
2.400 RON | 0 5 tons/ha, 450 RON/tons |
2.250 RON |
| Variable costs | ||||
| Seeds | 275 RON | 400 RON | ||
| Fertilizer | 560 RON | 600 RON | ||
| Pesticides | 215 RON | 220 RON | ||
| Total variable costs | 1.050 RON | 1.220 RON | ||
| Gross margin | 1.350 RON | 1.030 RON | ||
Remark: It can always be considered to include other costs in the calculations (consumption of diesel, drying of grain etc). In order to focus on the methodology, the example is kept simple.
The farmer agreed with the consultant from AgroAdvice that the figures in the calculation were realistic.
In addition, it was agreed, that it would not be profitable to increase the yield by increasing cost element of input.
According to the actual plan for crop rotation, the farmer is planning to grow 200 hectares with barley and 350 hectares with wheat. Is this the most profitable decision?
There are of course many different issues to take into consideration when the farmer is going to decide on how many hectares will be cultivated with different crops.
Based on a simple evaluation of the figures presented in the table above, it is realised if the farmer cultivate barley instead of wheat, he increase his profit with 320 RON per hectare. Many Romanian farmers have limited financial resources – and therefore the farmers wants to reduce the costs for seeds, fertilizers and pesticides. If we cultivate one hectar with barley instead of one hectar with wheat, the variable cost (or the required cash flow) is reduced from 1220 to 1050 RON per hectar. This also indicates that from the point of cash flow, barley should be preferred instead of wheat.
Based on these arguments an economist might propose replace all the wheat by barley – and hereby increase the gross margin on the farm by 112.000 RON and reduce the variable costs by close to 60.000 RON.
Comparing the gross margin of the two alternatives
| Farmers proposal | Economist’s proposal | ||||
| Crop | Gross Margin per Ha, RON | Area | Total Gross Margin, RON | Area | Total Gross Margin, RON |
| Barley | 1.350 | 200 ha | 270.000 | 550 | 742.500 |
| Wheat | 1.030 | 350 ha | 360.500 | 0 | 0 |
| Total GM | 630.500 | 742.500< | |||
| Improvement: 112.000 RON = 18% | |||||
Comparing the Cash Flow (costs for seeds, fertilizers and pesticides) of the two alternatives
| Farmers proposal | Economist’s proposal | ||||
| Crop | Cash Flow per Ha | Area | Total CF ron | Area | Total CF |
| Barley | 1.050 | 200 ha | 210.000 | 550 | 577.500 |
| Wheat | 1.220 | 350 ha | 427.000 | 0 | 0 |
| Total cash flow | 637.000 | 577.500 | |||
| Savings: 59.500 RON = 9% | |||||
Other issues
These presented analysis and examples are only focus on the very simple financial calculations presented in the tables. Obviously there are many other issues to take into consideration, including on the market conditions. Could some of these change our analysis – and the result could be made a new allocation of the areas?
What is your observation?
Please send these to office@agroadvice.ro – and these will be answered in the next news letter.