Gross margin information – a help or a hindrance?

Some people swear by gross margin information, others think it is misleading and pretty much irrelevant.  But, if you’re starting out in horticulture, or considering diversifying into a crop you’re not familiar with, gross margin information is probably going to be a key starting point for you.

But it should be just that: a starting point.  It is important not to read too much into the gross margin information.  And it is vitally and hugely important that you don’t underestimate the costs that are not included when working out a gross margin.  A common failing in business plans of new enterprises is underestimating overhead or non-divisible costs. Those are the costs that are not taken into account when calculating the gross margin.

Gross margin calculations consider the variable costs associated with producing a specific crop.  So, they will take into account operations specific to the crop, for example, cultivating, drilling, weed control and harvest.  They will not take into account contributions to costs like rent or mortgage payments, interest payments on any loans, running the office, paying your accountant, depreciation, insurances, etc.

It is easy to get taken in by a headline gross margin figure, but don’t do it!  Think harder and deeper.  Gross margin is not profit.

Another thing to bear in mind is that gross margins are generally quoted as a per annum figure – e.g. gross margin per hectare per year.  Not all crops occupy the land for the same length of time.  So, it is also important to take time into the equation.

A perennial crop like rhubarb or globe artichokes is going to be occupying your land all year round.

By contrast many summer salad crops will go from seed to yield in only six weeks.  With these crops, you’ll be able to have multiple harvests (either by using cut-and-come-again varieties or by resowing).  And with careful planning you’ll be able to follow them with a crop for late-winter or spring harvesting.  The gross margins of all these crops are then additive for that plot of land.

And finally, remember to consider where the gross margins you’re looking at have come from.  In general, the most widely published information comes from quite large scale, fully commercial operations in the main production areas of a country.  If you’re thinking of growing a small area of a crop with minimal machinery, data derived from hundreds of hectares of mechanised production are just not going to be of relevance to you.  Sometimes, you’re just going to have to sit down and work things out yourself!


Overcoming the labour shortage in horticulture

Research in Wales has repeatedly found that a lack of available labour is an impediment to horticultural business growth.  Informal discussions with potential employees (students, un- and under-employed) indicate that two factors have a strong impact on this:

Firstly, potential employees are unaware of opportunities with local growers.  Advertising in the press is not cost-effective for short-term posts.  Advertising positions with the Job Centre seems ineffective and often results in candidates who are uninterested in work applying for posts to meet the Job Centre’s requirements rather than because they have any interest in the position.

This problem of promotion is one which could be overcome relatively simply. 

The second factor adversely affecting recruitment in the horticultural sector is the perception of poor terms and working conditions.  It is undeniably true that some horticultural work is physically demanding, has to be done in horrible weather conditions and is mundane and repetitive.  But one of horticulture’s strongest points is the huge diversity of jobs that are available in it.  Growers need to raise awareness of this diversity.  And even for the most back-breaking, finger-freezing work, there is a willing pool of would-be employees, if they only new about the opportunities.

A more intractable problem is that of pay.  Margins are tight for many growers, so they feel they cannot afford to pay better wages.  But a better pay offer, coupled with the right terms and conditions, is an investment that will yield returns.  There will be less staff turnover (churn) –which is costly in terms of training, recruitment and morale; and there should be improved productivity.  Taking both of these into consideration, investing in improvements to employee terms and conditions may well be one of the best options for a grower.

Wage data are notoriously difficult to analyse.  However, Defra’s data for Agriculture and Horticulture Wages suggest that, when inflation is taken into account, wages for full-time female employees in 2009 were nearly 6% lower than they were five years earlier.  The figure was similar for full-time male employees, but they did earn more than 10% per hour more than their female colleagues. 

Rather than joining the race to the bottom, growers would be well advised to strive to be the best employer they can.  People need nurturing as much as plants.  People management is one of the trickiest parts of business, but getting to grips with it is one of the primary keys to success.