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!