Economic Performance of Rice 2013
By John Fowler, Senior Lands Services Officer – Mixed Farming Systems
About this time last year, many rice growers were wondering whether to grow rice or sell their water and have the year off. It seems like history is repeating itself, or as Yogi Berra (not to be confused with Yogi Bear) would say "It's like deja-vu all over again".
The best financial decision last year seems to have been to grow rice – even if you needed to purchase water to do so. I say this after examining the actual gross margins for 28 rice crops in the Deniliquin district.
In a nutshell, the yields from the 28 crops varied from 6.0 t/ha (a Koshi crop) to 15.2 t/ha (an Illabong crop), with an overall average of 10.8 t/ha (all varieties combined). Gross margin returns varied from $138/ML (a Reiziq crop) to $250/ML (an Opus crop), averaging $189/ML. Most water sales were for less than $100/ML, so growing a crop proved to be the best economic decision (even without taking into account any of the rotational benefits of rice).
These are very pleasing results and obviously gratifying for those who took the risk, put in the effort and grew rice. It is important however to know which costs are included in the gross margin analysis, and which costs are not.
Gross margins are intended to determine the financial advantage of undertaking an enterprise – what are the additional costs associated with doing so and what are the additional returns? For this reason, only variable costs are included, fixed or overhead costs are not. This applies to the water charges as well – only the variable water charges are in the gross margin, not the fixed costs (which can be greater than the variable or usage charges).
The advantage of leaving fixed costs out of the analysis is it allows a direct comparison of growing rice or selling water on the temporary market. Landholders need to pay their fixed water costs irrespective of which ever they do.
An examination of the gross margins also highlighted several other important points. The main lesson was the necessity of getting good yields (which is stating the obvious). A general rule of thumb is that a 10% increase in yield gives almost 20% increase in the gross margin. If growers only achieved yields equivalent to the 10 year average for the variety in their district, their gross margin would have been considerably lower. This is demonstrated in the following table.
The example is from an actual Reiziq crop grown in the West Berriquin district that used 15.9 ML/ha water. It compares the actual gross margin achieved with what it would have been if the yield was 10% lower or was equivalent to the 10 year average for Reiziq in eastern Murray Valley (excluding last season).
|Situation||Yield (t/ha)||Income ($/ha)||Variable costs ($/ha)||Gross margin ($/ha)||Gross margin ($/ML)|
|Actual less 10%||10.0||$3,384||$1,393||$1,991||$125|
|10 year average||9.1||$3,094||$1,354||$1,740||$109|
The other interesting issue last year was the variation in growing costs, which ranged from $770/ha (on new country) to $1,646/ha and averaged $1,370/ha. Any reduction in growing costs adds directly to the gross margin, so it is important to keep costs as low a practical. However, it is definitely false economics to cut costs if doing so reduces the crops yield potential.
Rice Varieties: The following table compares the gross margins for Reiziq, Sherpa and Opus (Koshi and Illabong have been omitted as there were not sufficient crops for a fair comparison).
|Variety||Average Yield (t/ha)||Average Gross Margin ($/ha)||Average Gross Margin ($/ML)|
Extreme care needs to be taken when drawing conclusions from this data. It is neither a random sample of crops (only includes crops of growers willing to share their details) nor a large sample, so it may not reflect the results from the wider industry. Also, last year was a favourable season for all varieties, but particularly Opus. Its yield increases were proportionally higher than for Sherpa or Reiziq. And, finally, we need to remember that the Opus bonus has been slightly reduced for the coming season.
More Information: John Fowler, Murray LLS Deniliquin 03 5880 1424, firstname.lastname@example.org