These are the main costs associated with producing an animal for sale and they include, milk replacer, purchased and home grown feed, purchased forage, fertiliser, lime, veterinary, contractor, seed, spray, straw, silage additives, polythene, levies and transport.
Gross Output minus Variable Costs gives you the Gross Margin.
The Gross Margin figure is the amount of money that is left to pay the fixed costs.
These fixed costs include land rental, hired labour, machinery running costs, machinery leasing costs, overdraft, credit and loan interest, depreciation on machinery and buildings, repairs and maintenance, insurance, professional fees, car, phone, electricity and sundry costs.
The average fixed costs on non-breeding dry stock farms will generally range from €450 -€650 per hectare.
When this amount is subtracted from the gross margin it represents the Net Margin and this is effectively the amount of money available to live off.
In many incidences, net margin may be zero or a negative value and farmers are left to survive on the Basic Payment Scheme and GLAS payments and so on.
The clear aim would be to have a positive net margin of at least €500/ha once all costs have been taken out.
Looking at the experience of the 10 Teagasc Green Acres Calf to Beef farmers, we can see a range in financial and physical performances.
All farmers started from different bases and the plan is to improve gross and net margins over the next two years.
The key to achieving a good gross margin on any farm is to have a good output.
There are three main drivers of profit on a farm.
Performance per livestock unit
The first two are factors that can be controlled inside the farm gate by the farmer. They are management issues and if the farmer can get these right he/she gives themselves every chance of a good margin.
The third factor in relation to price is one that he/she can have little or no influence over, unless they have a pre-arranged contract price agreed with their processor.
As can be seen from the adjoining table, the highest gross margins come from the farms where the gross output is highest. These farms invariably have the highest stocking rates as well.
The variable costs as a percentage of output are generally higher on systems where there is a lot of meal fed in an intensive finishing system like an 18 month old bull.
A finishing system like a Friesian steer at 28-30 months and an Angus heifer system would have lower costs as per percentage of output and the target would be around 50pc versus 60pc for the bull system.
Some of the participating farmers have higher percentages than these and over the next few years as output increases this figure should come down.
A lot of the increase in output at the moment is coming from a positive change in inventory as most or all farmers are current ly increasing stock numbers.
Some gross margins may appear low at the moment.
For example, in Christy Dowd's case, he has just bought calves for the first time in the spring of 2015 and has sold none of them yet, at the moment he has an 52 extra one year old stock and an extra 55 calves on the farm that weren't previously there.
These will form a system over the next two years where he will have 50 plus stock to sell every year, increasing the output and gross margin.
The target would be to get all farmers to have a gross output of close to €2,500 per ha.
Even with average variable costs as a percentage of output as 55pc, this would be equal to variable costs of €1,375, subtracting this from €2,500 would give a gross margin of €1,125 per ha.
In order to reach a gross output of €2,500 per ha, a number of factors need to be addressed.
Stocking rates need to be increased to at least 2.2 livestock units per ha.
Performance per animal needs to be improved to around 500kgs+ per LU.
Case study - John Lalor: aiming for a gross margin of €1,000/ha
A recent Teagasc Green Acres Calf to Beef farm walk on the farm of John Lalor, Ballyfin, Co Laois highlighted John's position at the start of the programme and the targets to be achieved by 2018.
Traditionally being a suckler farmer, John decided to change to a dairy calf to beef production system and in early 2014 sold the last of his suckler cows.
He joined the Teagasc Green Acres Calf to Beef programme in 2015 and at the start of the programme he was slaughtering around 75 Angus/Hereford heifers out of the shed between Feb and May at 22 to 24 months of age. He was farming 45 hectares of grassland at a stocking rate of just under two livestock units per hectare.
As can be seen from the adjoining table, John was producing 848kgs of beef per hectare with a value of €1,521/ha. His main variable costs of production which ran to €808/ha were purchased feed, home grown feed, fertiliser, veterinary, straw, levies and transport.
As a percentage of his output, this accounted for 53pc, which meant that for every €1 John received it cost him 53 cent to produce.
All this left John with a gross margin of €713/ha, which was required to cover all his fixed costs which can range between €450 and €650 on similar non-breeding farms.
Once the fixed costs are removed the remainder is what is left to live on and re-invest!
A plan was drawn up for John to try and improve his margins. Due to the high cost of purchasing the Angus/Hereford heifer calves and the lighter carcase weight at slaughter, it was decided to reduce the number of Angus heifers reared and to bring some Friesian steers into the system.
The main thoughts on doing this were to have more beef produced per ha while still rearing the same number of calves.
The purchasing cost of calves in the spring would be reduced, therefore not tying up as much money. Also, all his eggs wouldn't be in the one basket and John now has two different products to sell at different times of the year, creating a better cash flow.
So the plan for John for 2018, is to buy in 52 Friesian bull calves in early spring and then another 52 Angus/ Hereford heifers in March, the bulls will be castrated and run as steers.
Allowing for four percent mortality, there will be 50 heifers and 50 steers to sell as beef.
To reduce the number of animals to be housed, the 20-25 best performing heifers will be sold off of grass in the October/November period at 250kg carcase weight.
The remaining 25 heifers plus the 50 steers will be housed. The heifers will be finished out of the shed at around 260kg and the steers will be returned to grass for a third grazing season.
The Friesian steers will then be slaughtered off of grass at the beginning of June at the traditionally higher beef price. The aim is to have them between 650-660kgs killing a 330kg carcase.
This system will create a gross output of €2,071/ha, variable costs will increase to €1,036/ha, but as there is more output, the variable costs as a percentage of output will decrease to 50pc.
All this should leave John with a gross margin of just over €1,000 per hectare and a 45pc increase on his 2014 figures.