Profit drivers and achieving goals
A component of improving farm business skills is to obtain a deeper understanding of profit drivers and develop strategic and tactical management plans to meet goals. Our ‘Generating more profit from your farm business’ report (available via link) discusses the key drivers of profit and suggests some management strategies to boost profit.
The department’s Sheep Industry Business Innovation project aims to support the Western Australian (WA) sheep industry to capitalise on growing markets for sheep products. This includes a focus on increasing business performance by improving farm business skills and increasing access to investment by increasing confidence and promoting alternative business models.
The project has conducted a number of studies to help farmers better understand their costs and income base, and the costs and risks associated with adapting farming systems under increasingly variable operating conditions.
Contributors to profitable sheep businesses
Three studies were commissioned that examined economic research and analysis on components of the sheep enterprise that contribute to profit.
The following studies are summarised in the web publication Contributors to profitable sheep businesses, which also has links to the complete study reports.
Comparative analysis of gross margins for grain and sheep enterprises in the central and high rainfall regions of the WA Wheatbelt 2016
Average 2011-2015 crop gross margins were significantly higher than sheep gross margins in both regions. There was less difference between sheep and crop average gross margins in the high rainfall zone than the cereal-sheep zone. In any one year the between-farm variation far exceeds any difference between the enterprises. The good seasonal conditions of 2016 with the strong sheep and wool prices meant that the projected sheep gross margins in both regions were significantly higher than the 2011-2015 averages.
The 2016 projected gross margins of four different sheep enterprises in the high rainfall zone were found to have only small differences in profitability, and there wasn’t a demonstrably 'most profitable sheep enterprise'. Profitability is highly dependent upon a wide range of variables that are equally variable between individual producers and enterprises.
Opportunities for producers to expand their sheep enterprise
This study discovered from current relativities in sheep and crop margins for the H4, M4 and L4 agricultural zones of WA that the sheep enterprise can generate an equal or better margin than the crop enterprise. This may represent an opportunity for producers to profitably expand the pasture area to run more sheep and gain the rotational benefits of weed control, nitrogen fixation and disease control.
In the cereal-sheep zone, comparison of key performance indicators (KPIs) with high rainfall producers, allowing for rainfall, suggest low rainfall producers may have opportunities to expand their sheep enterprises. The priority for cropping in this zone will likely see a maintained focus on running sheep as ‘easily’ as possible, rather than maximising stocking rates.
The cost of getting back into sheep
This study found that modelling with current prices indicated that the most cost-effective option to increase flock size in the high rainfall zone from 1000 head to 2000 head, with moderate debt and a reasonable time to achieve debt payback, was to increase the lambing percentage from 90% to 105%. By improving ewe management, a farmer would be able to increase his sheep enterprise without purchasing ewes when the market was high.
This option compared favourably with buying ewes into an existing enterprise, retaining older ewes, increasing the number of ewe lambs retained, or starting a new sheep enterprise including acquiring essential sheep infrastructure.