Whole Farm Analysis Versus Activity Gross Margin Analysis: A Sheep Farm Example

Analysing and understanding the performance of livestock activities is important for an effective assessment of how management changes might influence farm returns and risk. Models have been developed that allow simulation of pasture and animal growth across different years and climatic conditions to provide some estimate of performance and climate risk. Gross margins are a traditional method used to assess farm activities. However, they have a limited ability to inform farm management decisions. This study uses a whole farm approach and risk assessments to compare two alternative sheep activities for a farm business. The performance of a 'first cross ewe' (1 x ewe) activity is compared to the performance of a 'Merino ewe joined to terminal sire' (M x T) activity.The 'M x T' activity generated a higher average gross margin than the '1 x ewe' activity ($423 vs. $353/ha). Using the whole farm systems approach, the 'M x T' activity generated higher annual average Net Farm Income, Net Cash Flow, Change in Equity, Return on Capital and Return on Equity with greater variance around the means. Results indicate that for assumed degrees of aversion to risk, the values of profit generated by the 'M x T' enterprise outweigh the extra risk associated with this activity. The conclusion is that the whole farm approach enables decision makers to better weigh up the choice of livestock activities by considering the implications for economic efficiency of the business, cash flow, growth in wealth and risk.