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ABARES data highlights cost and return benefits of increasing scale

by Sheep Central, 13 October 2017

RECENT Australian sheep meat industry data has indicated the cost and operating margin benefits in increasing scale when prices are rising.

ABARES cost of production comparisons between 2013-14 and 2015-16 suggest that significant economies of size in the Australian sheep meat industry offered producers a strong incentive to increase production and profitability.

The ABARES report, commissioned by MLA, presents cost of production estimates for sheep producers for the three years ending 2015-16, based on data that ABARES collects on broadacre farms through its Australian Agricultural and Grazing Industries Survey.

From 2013-14 to 2015-16, wool, lamb and sheep prices increased. However, the on-farm per kilogram cost of sheep production also lifted over the same period in real terms. For the three years, the national average total cost of sheep production was 311c/kg live weight for all sheep producers and 298c/kg lwt for slaughter lamb producers.

However, the survey results show that the average cost of production declined as lamb production increased. For the three years to 2015-16, the total cost of production (including the value of unpaid labour) for the smallest slaughter lamb enterprises surveyed (200 to 500 lambs sold) averaged 366c/kg, whereas the cost of production for slaughter lamb producers selling more than 2,000 lambs averaged 257c/kg.  As the level of production increased, the decline in cash costs of production was fairly minimal; however, the cost of capital depreciation and value of unpaid labour were considerably lower.

ABARES said operating margins (receipts per kilogram minus cost of production) also recorded an increase in 2015-16, even when the value of unpaid labour was taken into consideration, as the lamb, sheep and wool markets strengthened. The operating margin for slaughter lamb producers averaged 54c/kg lwt in 2015-16, up from 26c/kg in 2014-15.

ABARES said operating margins increased as the scale of production increased. For example, when accounting for all costs, the operating margin for smaller producers (selling 200 to 500 head) averaged 2¢/kg lwt, while those that sold more than 2,000 head for slaughter achieved an average margin of 80¢/kg lwt, ABARES said.

Producers can use this report to compare the cost of production of their sheep flock with the industry average, and possibly identify opportunities for improvements within their business, ABARES said.

For slaughter lamb producers, spending was higher across most cost components in 2015-16, compared to the previous year. Poor seasonal conditions across much of the south-east saw expenditure on fodder rise 28 percent year-on-year. The cost of sheep purchases was up 25pc in 2015-16, as a result of higher lamb and sheep prices.

For more detailed information, click here to read the full ABARES cost of production report.

Source: MLA.

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