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| High Value crops in Kenya |
Choice of farm enterprises from among several possible alternatives in agribusiness is critical. Production resources are scarce and they must be used for maximum profit which is the main theme of agribusiness. Gross margin analysis is the best management tool to use for enterprise selection, as it indicates whether an entity will cover its cost of production, and only the relevant costs are considered. Therefore the Gross Margin of a farm enterprise is the difference between gross income and the variable costs directly associated with the enterprise. Gross income is calculated by multiplying total yields by the current market price while, Variable cost refers to expenses which can be allocated to a specific enterprise; and they change with alteration of scale. For instance an extra hectare of crop will increase the expenditure on seeds, fertilizer and machinery. Similarly, an increase in the number of sheep in a herd will increase the expenditure on drenching, shearing, and animal feeds. Gross margins do not consider fixed and overhead costs. Fixed costs are expenses which are not affected by a change in the scale of operation. Examples are expenses of vehicle registration which are incurred regardless of whether you plant an extra hectare of crop on the farm or not.
GROSS INCOME
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Minus
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VARIABLE COSTS
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=
|
GROSS MARGIN
|
Minus
|
FIXED COSTS/ Overheads
|
=
|
NET MARGIN
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Minus
|
CAPITAL COSTS e.g. finance cost, depreciation
|
=
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PROFIT (pre-tax)
|
In addition, there are other farm costs which cannot easily be charged to a particular commodity because they are spread across all activities on the farm and they are called Overheads. Examples are accountancy fees, vehicle ownership expenditure, electricity charges. Gross margins do not calculate profit but indicates potential profitable enterprises; they are used for comparing relative costs and returns for similar farm activities e.g. wheat vs. barley, predicting the performance of potential alternative farm enterprises, planning farm enterprise mix, and estimating impacts of changes in expected yields, prices and costs.
KALE'S Gross Margin analysis/acre/season
Item
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Unit
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Quantity
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Price/unit- KSH
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Value- KSH
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Total yields/output
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Bags
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50
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1,200
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60,000
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Gross income
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60,000
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Variable costs
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Seeds
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Kg
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0.5
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1,000
|
500
|
DAP fertilizer
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Bag
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1
|
2,500
|
2,500
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CAN fertilizer
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Bag
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1
|
1,800
|
1,800
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Nursery establishment
& management
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MDS
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4
|
150
|
600
|
Fertilizer application
|
MDS
|
2
|
150
|
300
|
Manure purchase
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Tons
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1
|
1,500
|
1,500
|
Manure application
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MDS
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4
|
150
|
600
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Transplanting
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MDS
|
6
|
150
|
900
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Insecticide
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Litres
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1
|
1,000
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1,000
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Spraying
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MDS
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4
|
150
|
600
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weeding/Harvesting
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MDS
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10
|
150
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1,500
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Total variable cost
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11,800
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Gross Margin
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48,200
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