of low and volatile farm income by Alex Sinnett, Jonathon Tocker, - PowerPoint PPT Presentation

Using capital to counter the threat of low and volatile farm income by Alex Sinnett, Jonathon Tocker, Bill Malcolm DEPI Victoria

Changes investigated for case study farm Base Farm ( status quo SQ) 560 ha; 16 dse/ha; 129% lambing C1. C2. C3. C4. Increase Increase Increase land Increase land lambing % on stocking rate on area and run at area and base farm base farm same stocking stocking rate on 145% lamb 20 dse/ha rate as base base farm and marking (+16%) (+4 dse/ha) farm extra land Low extra Low Extra 800 ha (+240 ha) 20 dse/ha; 800 capital Capital High Extra ha $344,000 capital High Extra $72,000 $1,348,400 Capital $1,800,000

Total variable cost, total fixed cost and total cost Total Cost $ Total Variable Cost Total Fixed Cost Quantity of output

Average variable cost, average fixed cost and average total cost $ Average Total Cost Average Variable Cost Average Fixed Cost Quantity of output

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.

Changes investigated for case study farm Base Farm ( status quo SQ) 560 ha; 16 dse/ha; 129% lambing C1. C2. C3. C4. Increase Increase Increase land Increase land lambing % on stocking rate on area and run at area and base farm base farm same stocking stocking rate on 145% lamb 20 dse/ha rate as base base farm and marking (+16%) (+4 dse/ha) farm extra land Low extra Low Extra 800 ha (+240 ha) 20 dse/ha; 800 capital Capital High Extra ha $344,000 capital High Extra $72,000 $1,348,400 Capital $1,800,000

Cost of producing a dollar of income Costs per one dollar of income SQ C1 C2 C3 C4 Total income over 7 year analysis period

What about Risk? Business risk Financial Risk

Return relative to total risk for each option Indicator of Total Risk

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?