# Cost of production

A free short course from Farm CFO by Clunes Rural. 5 lessons, about 25 minutes in all. No sign-up.

Work out what it costs you to produce a kilogram of pork, beef or lamb, compare it with the price, and find the costs worth cutting.

Who it's for: Owners and managers of piggeries, cattle and sheep businesses who want to know whether each kilogram they sell pays its way.

You'll be able to:
- Explain cost of production and why it's measured per kilogram
- Work out cost per kg for pork, beef and lamb on the right weight basis
- Split costs into direct costs and overheads, and share overheads fairly
- Compare cost with price and rank the costs worth looking at first

## Lesson 1: What cost of production is

Cost of production is what it costs you to produce one unit of what you sell. For livestock, that unit is usually a kilogram. So you'll hear it as cost per kg of pork, beef or lamb.

It's one of the most useful numbers in a farm business. It tells you whether each kilogram you sell makes or loses money.

## The basic sum

Cost of production is total cost divided by kilograms produced.

[MLA](https://www.mla.com.au/globalassets/mla-corporate/extensions-training-and-tools/documents/cost-of-production-calculator/southern_beef_cop_case_study_final.pdf) (Meat & Livestock Australia) puts it this way for beef: the total cost of production for beef, divided by the kilograms of beef liveweight produced. Liveweight is the weight of the live animal.

## What counts as cost

Total cost means all the costs of the enterprise. That's not just drench and feed. It also includes a fair share of the overheads, such as fuel, repairs, rates and wages. The MLA method also puts a value on the owner's own labour, even if you don't pay yourself a wage. Lesson 3 covers how to split these costs up.

## What counts as kilograms produced

Kilograms produced is the weight your stock added during the year. It's not always the same as kilograms sold. If you bought stock in, take off the weight you bought. If you have more or fewer stock on hand at the end of the year than at the start, allow for that too. A stock record, which is a running count of animals bought, born, sold and died, makes this much easier.

## Why per kg?

A total profit figure is hard to compare. One farm is bigger, one had a better season. A cost per kg lets you compare:

- your business this year against last year
- your business against published benchmarks
- your cost against the price you're paid.

If it costs you $3.00 to produce a kilogram and you're paid $3.80, you make 80 cents on every kilogram. If the price falls below $3.00, every extra kilogram loses money.

## Why it matters to the bank

A lender wants to know if the business can survive a price fall. Your cost of production, set against the price, shows how much room you have. We look at that in lesson 4.

Try the free [break-even price calculator](https://farmcfo.com.au/tools/break-even-price) with your own numbers. Our guide to [cattle budgets and cashflow](https://farmcfo.com.au/guides/cattle-budget-cashflow) shows cost of production in a full budget.

### Worked example

This is an invented beef herd, and the figures are illustrative. Last year the herd's total costs, including its share of overheads and an allowance for the owner's labour, came to $180,000. The herd produced 60,000 kg of liveweight.

| Line | Amount |
|---|---|
| Total costs | $180,000 |
| Kilograms of liveweight produced | 60,000 kg |
| Cost of production | $180,000 ÷ 60,000 = $3.00/kg |
| Average sale price | $3.80/kg |
| Margin per kg | $0.80/kg |

At 80 cents a kilogram over 60,000 kg, the herd made $48,000 after all costs. If prices fell to $3.00/kg, that margin would be gone.

Try the break-even price calculator: https://farmcfo.com.au/tools/break-even-price

### Check your understanding

1. What is cost of production per kg?
   Answer: Total cost divided by kilograms produced. Cost of production is all the costs of the enterprise, divided by the kilograms it produced.
2. Your cost is $3.00/kg and the price falls to $2.80/kg. What happens?
   Answer: You lose about 20 cents on every kilogram you produce. When the price is below your cost of production, each kilogram costs more to produce than you're paid for it.
3. Why should total cost include a share of overheads?
   Answer: The business has to pay overheads too, so leaving them out hides the real cost. Fuel, repairs, rates and wages are real costs. A cost per kg without them makes the enterprise look cheaper to run than it is.

## Lesson 2: Cost per kg for pork, beef and lamb

The idea is the same for every enterprise: total cost divided by kilograms produced. What changes is the weight you measure, and how you deal with more than one product.

## Pork

Pigs are usually sold on carcase weight. Carcase weight is the weight of the body after slaughter, which is mostly meat and bone. So piggeries work out cost per kg of carcase.

The steps are:

1. Sows, times pigs weaned per sow, gives pigs weaned.
2. Take off deaths after weaning to get pigs sold.
3. Pigs sold, times average carcase weight, gives kilograms sold.
4. Total costs, divided by kilograms sold, gives cost per kg.

Feed is the big line. [Australian Pork Limited](https://assets.pc.gov.au/__data/assets/pdf_file/0006/356361/sub031-future-drought-fund-attachment.pdf) told a Productivity Commission inquiry that grain was about 60% of the total cost of production. So it's worth working out feed cost per kg on its own as well. Our [piggery budget guide](https://farmcfo.com.au/guides/piggery-budget) goes through a full example.

## Beef

Cattle are often sold on liveweight at the saleyards, so beef cost of production is usually per kg of liveweight. That's the [MLA](https://www.mla.com.au/globalassets/mla-corporate/extensions-training-and-tools/documents/cost-of-production-calculator/southern_beef_cop_case_study_final.pdf) method.

For a benchmark, the [2026 Australian Beef Report](https://www.beefcentral.com/news/2026-australian-beef-report-what-separates-the-top-25pc-from-the-rest/) by Bush Agribusiness put the southern top 25% at $2.35/kg liveweight. The southern average was $3.40/kg. In the north, the top 25% was $1.79/kg and the average $2.49/kg. Use these as a rough guide only, because every district and season is different.

## Lamb and wool

Sheep are trickier, because many flocks sell two products: meat and wool. The [Making More From Sheep](https://www.makingmorefromsheep.com.au/globalassets/mmfs/manual/module-1/mmfs_cop-booklet_16pp_lores42f7f.pdf) method, from AWI and MLA, splits total costs by each product's share of income. If lamb brings in 80% of the income, it carries 80% of the costs.

Lamb cost is then divided by kilograms of carcase sold. Wool cost is divided by kilograms of clean wool. Clean wool is the weight after the grease and dirt are washed out.

The Making More From Sheep method leaves out interest. It says cost of production "is not complicated by how you have financed the business". That way, two farms with different debts can be compared fairly.

## Keep the basis clear

Always write down which weight you used: liveweight or carcase. Mixing them up is the most common mistake we see. Lesson 4 shows how to compare them.

Try the free [piggery cost of production calculator](https://farmcfo.com.au/tools/piggery-cost-of-production) or the [sheep gross margin calculator](https://farmcfo.com.au/tools/sheep-gross-margin).

### Worked example

This is an invented prime lamb and wool flock, and the figures are illustrative. Total costs for the year, including overheads and owner's labour but not interest, are $126,000.

| Product | Income | Share of income | Costs carried | Kilograms | Cost per kg | Price per kg |
|---|---|---|---|---|---|---|
| Lamb | $120,000 | 80% | $100,800 | 24,000 kg carcase | $4.20 | $5.00 |
| Wool | $30,000 | 20% | $25,200 | 4,000 kg clean | $6.30 | $7.50 |
| **Total** | **$150,000** | **100%** | **$126,000** | | | |

Both products earn more per kilogram than they cost. Lamb makes 80 cents a kilogram and wool makes $1.20 a kilogram.

Try the piggery cost of production calculator: https://farmcfo.com.au/tools/piggery-cost-of-production

### Check your understanding

1. A piggery sells pigs on carcase weight. Which cost per kg should it work out?
   Answer: Cost per kg of carcase. Match the cost to the way you're paid. If pigs are sold on carcase weight, work out cost per kg of carcase so you can compare it with the price.
2. In the Making More From Sheep method, how are costs split between lamb and wool?
   Answer: By each product's share of income. Costs are shared out by income. If lamb is 80% of income, it carries 80% of the costs.
3. Why does the Making More From Sheep method leave out interest?
   Answer: So farms with different levels of debt can be compared fairly. Leaving out interest measures how well the farm produces, not how it's financed. You still need to cover interest in your whole-farm budget.

## Lesson 3: Direct costs and overheads

To work out cost of production, you need every cost in the business. But not every cost belongs to one enterprise. So it helps to sort costs into two groups.

## Direct costs

Direct costs belong to one enterprise and go up or down with its size. They're also called variable costs. Examples:

- feed, drench, vaccines and vet bills
- shearing and crutching
- freight, commission and selling costs
- bulls, rams or boars you buy
- agistment.

These are usually easy to find. Most of them are on invoices with the enterprise's name on them.

## Overheads

Overheads are costs you pay whatever the size of the enterprise. They're also called fixed costs. Examples:

- rates and insurance
- fuel, vehicle costs and repairs
- permanent wages
- the accountant, phone and power
- depreciation, which is the wear on your gear spread over the years you use it.

## Don't forget your own labour

Many family farms don't pay the owner a wage. That makes the cost of production look lower than it really is. Both the MLA and Making More From Sheep calculators put a value on owner and family labour. The [Making More From Sheep calculator](https://www.makingmorefromsheep.com.au/globalassets/mmfs/manual/module-1/mmfs_cop-booklet_16pp_lores42f7f.pdf) uses $55,000 a year for the first owner, shared by the time spent on sheep. If you'd have to pay someone to do your job, it's a real cost.

## Sharing overheads across enterprises

If you run more than one enterprise, overheads have to be shared out. A common way is by DSE. DSE means dry sheep equivalent. It measures how much feed an animal eats, compared with a dry adult sheep. [MLA's method](https://www.mla.com.au/globalassets/mla-corporate/extensions-training-and-tools/documents/cost-of-production-calculator/southern_beef_cop_case_study_final.pdf) allows overheads to be shared by DSE, or one by one.

So if cattle use 60% of the farm's DSE, they carry 60% of the shared overheads. It isn't perfect, but it's consistent, and that's what makes it useful from year to year.

## Why the split matters

When you look for savings, direct costs and overheads behave differently. Cutting a direct cost, like drench, saves money on every head. But it may cost you in growth or deaths. Overheads don't fall when you run fewer stock. In fact, running more stock over the same overheads is often the cheapest way to lower your cost per kg.

Our guide to [adding a new enterprise](https://farmcfo.com.au/guides/adding-a-new-enterprise) shows how overheads change when you add one. You can set out costs by enterprise in the [enterprise gross margins spreadsheet](https://farmcfo.com.au/downloads/farm-cfo-enterprise-gross-margins.xlsx).

### Worked example

This is an invented mixed cattle and sheep farm, and the figures are illustrative. The farm's overheads, including an allowance for the owner's labour, are $90,000. Cattle use 3,000 DSE and sheep use 2,000 DSE, out of 5,000 DSE in all.

| Line | Cattle | Sheep |
|---|---|---|
| Share of DSE | 3,000 ÷ 5,000 = 60% | 2,000 ÷ 5,000 = 40% |
| Share of overheads | $54,000 | $36,000 |

The cattle have $70,000 of direct costs. With their $54,000 of overheads, their total cost is $124,000. They produced 40,000 kg of liveweight. So the cattle cost of production is $124,000 ÷ 40,000 kg, which is $3.10/kg liveweight.

Download the enterprise gross margins spreadsheet: https://farmcfo.com.au/downloads/farm-cfo-enterprise-gross-margins.xlsx

### Check your understanding

1. Which of these is an overhead rather than a direct cost?
   Answer: Council rates. Rates are paid whatever the size of the flock or herd. Shearing and drench go up and down with stock numbers.
2. Why put a value on the owner's labour if they don't draw a wage?
   Answer: So the cost of production reflects the real cost of running the enterprise. Someone has to do the work. If you leave out your own labour, the cost of production looks lower than it really is.
3. Cattle use 3,000 DSE and sheep 2,000 DSE. How much of $90,000 overheads should the cattle carry if shared by DSE?
   Answer: $54,000. Cattle use 60% of the farm's DSE, and 60% of $90,000 is $54,000.

## Lesson 4: Comparing cost with the price

Your cost of production only means something when you set it against the price. The gap between the two is your margin per kilogram.

## Compare like with like

The weight basis must match. If your cost is per kg of liveweight, compare it with a liveweight price. If it's per kg of carcase, compare it with a carcase price.

Prices are quoted both ways. Saleyard cattle are often sold in cents per kg liveweight. Pigs and many lambs are sold in cents per kg carcase weight, written c/kg cwt.

To convert, use the dressing percentage. [MLA](https://www.mla.com.au/globalassets/mla-corporate/extensions-training-and-tools/documents/fs03-understanding-dressing-percentage-final.pdf) gives the formula as carcase weight divided by liveweight, times 100. So a 500 kg steer with a 260 kg carcase dresses at 52%.

## Which price to use

For a piggery, [NSW DPIRD](https://www.dpird.nsw.gov.au/about-us/publications/pdi/2025/pork) reported eastern Australia porker prices averaging $4.52/kg carcase weight in 2024-25, with baconers at $4.43/kg. Prices move in cycles, so look at more than one year.

For your own numbers, use your average price over the year, after you've been docked for pigs or cattle outside the grid. A grid is the buyer's price table by weight and fat. Then compare it with your cost.

## Two break-even prices

A break-even price is the price you need to just cover your costs. There are two worth knowing.

1. **Cost of production.** The price that covers all running costs and overheads.
2. **Cash break-even.** The price that also covers interest, loan repayments and drawings. Drawings are the money the family takes out for living costs. This is the number the bank cares about.

The second one is usually higher. A business can cover its costs and still not have enough cash to meet the bank.

## How much room do you have?

Take the price you expect, less your cash break-even. That gap tells you how far prices can fall before you're short of cash. If the gap is small, you have little room for a bad year.

Sort this out before the bank review, not after. Our guide to [what the bank looks at in a farm review](https://farmcfo.com.au/guides/bank-farm-review) explains what lenders test. Try the [break-even price calculator](https://farmcfo.com.au/tools/break-even-price) with your own figures.

### Worked example

This is an invented 200-sow piggery, and the figures are illustrative. The sows wean 24 pigs each, which is 4,800 pigs. After 5% deaths, 4,560 are sold at 76 kg carcase, which is 346,560 kg.

| Line | Amount |
|---|---|
| Total costs | $1,250,000 |
| Cost of production, $1,250,000 ÷ 346,560 kg | $3.61/kg |
| Interest, loan repayments and drawings | $200,000 |
| Cash break-even, $1,450,000 ÷ 346,560 kg | $4.18/kg |
| Budget price | $4.30/kg |

At $4.30, income is $1,490,208. That's $240,208 above costs. But the cash break-even is only 12 cents under the budget price, so a small price fall would leave the unit short.

Try the break-even price calculator: https://farmcfo.com.au/tools/break-even-price

### Check your understanding

1. Your cost of production is per kg of liveweight. Which price should you compare it with?
   Answer: A liveweight price, or a carcase price converted using dressing percentage. Liveweight and carcase prices are very different numbers. Compare on the same basis, or convert using dressing percentage.
2. Why is the cash break-even price higher than cost of production?
   Answer: It also covers interest, loan repayments and drawings. The cash break-even adds what the bank and the family need on top of running costs, so it's usually higher.
3. In the piggery example, what does the 12 cent gap tell you?
   Answer: The unit has little room if pig prices fall. The budget price is only 12 cents above the cash break-even. A small fall in price would leave the unit short of cash.

## Lesson 5: Finding the costs to cut

Once you know your cost per kg, the next question is how to bring it down. There are two ways: spend less, or produce more kilograms from the same costs. Often the second is worth more.

## Start with the biggest lines

Rank your costs from biggest to smallest. Then work out each one per kg. A 5% saving on a big line is worth far more than a 50% saving on a small one.

In a piggery, feed is nearly always the biggest line. [Australian Pork Limited](https://assets.pc.gov.au/__data/assets/pdf_file/0006/356361/sub031-future-drought-fund-attachment.pdf) has put grain at about 60% of the total cost of production. In cattle and sheep, look hard at feed, labour, replacement stock and pasture costs.

## Look at output as well as cost

Cost per kg has two parts: the cost on top, and the kilograms underneath. You can lower it by lifting the kilograms. For example:

- more pigs weaned per sow, or fewer deaths
- a higher weaning rate in cattle or sheep, meaning more calves or lambs weaned for every female joined
- better growth, so stock reach sale weight sooner
- running more stock over the same overheads, if the feed is there.

In a piggery, feed conversion is a big lever. It's how many kilograms of feed it takes to grow a kilogram of pig. A small gain, spread over thousands of pigs, adds up fast.

## Be careful what you cut

Some costs drive output. Cutting drench, vaccines or feed can save money this month and cost you more in deaths or slower growth. Before you cut a cost, ask what it does to the kilograms. If output falls more than the cost, cost per kg goes up, not down.

## Compare with others

Benchmarks help you see where you're out of line. Compare your figures with published budgets, industry reports and your own past years. Look for the lines where you're well above others, then ask why. Your vet, nutritionist or agronomist can help with the production side.

## Keep a simple routine

Work out cost per kg once a year at least, at the same time each year. Use the same method each time, so the trend means something. Then pick two or three changes, put a figure on each, and check the result next year.

Try the free [piggery feed margin calculator](https://farmcfo.com.au/tools/piggery-feed-margin) to see what feed price and conversion do to your margin. Our guide to [grain prices and piggery cashflow](https://farmcfo.com.au/guides/grain-prices-piggery-cashflow) shows how to test a grain spike.

### Worked example

This continues the invented 200-sow piggery from lesson 4. Feed costs $779,760 a year. That's 4,560 pigs sold × 380 kg of feed per pig, which is 1,732.8 tonnes at $450 a tonne. Feed is 62.4% of the $1,250,000 total cost.

The manager works with the nutritionist and cuts feed use by 10 kg per pig sold.

| Line | Amount |
|---|---|
| Feed saved, 4,560 pigs × 10 kg | 45.6 tonnes |
| Money saved, 45.6 t × $450 | $20,520 |
| New total cost | $1,229,480 |
| New cost per kg, ÷ 346,560 kg | $3.55/kg |

Cost of production falls from $3.61 to $3.55 a kilogram. That's about 6 cents on every kilogram sold.

Try the piggery feed margin calculator: https://farmcfo.com.au/tools/piggery-feed-margin

### Check your understanding

1. Where should you start looking for savings?
   Answer: The biggest cost lines, worked out per kg. A small percentage saving on a big line, like feed, is usually worth more than cutting a small line altogether.
2. What are the two ways to lower cost per kg?
   Answer: Spend less, or produce more kilograms from the same costs. Cost per kg is cost divided by kilograms. Lowering the cost or lifting the kilograms both bring it down.
3. You cut the vaccine budget, and deaths rise. What can happen to cost per kg?
   Answer: It can rise, because you sell fewer kilograms. If output falls by more than the money you saved, each kilogram costs more to produce.

## Next step

Farm Optimiser: https://farmcfo.com.au/farm-optimiser

## Sources

- [MLA, Cost of production calculator: southern beef case study](https://www.mla.com.au/globalassets/mla-corporate/extensions-training-and-tools/documents/cost-of-production-calculator/southern_beef_cop_case_study_final.pdf)
- [AWI and MLA, Making More From Sheep, cost of production booklet](https://www.makingmorefromsheep.com.au/globalassets/mmfs/manual/module-1/mmfs_cop-booklet_16pp_lores42f7f.pdf)
- [Beef Central, 2026 Australian Beef Report: what separates the top 25pc from the rest](https://www.beefcentral.com/news/2026-australian-beef-report-what-separates-the-top-25pc-from-the-rest/)
- [Australian Pork Limited, submission to the Productivity Commission inquiry into government drought support](https://assets.pc.gov.au/__data/assets/pdf_file/0006/356361/sub031-future-drought-fund-attachment.pdf)
- [NSW DPIRD, Performance, Data and Insights 2025: Pork](https://www.dpird.nsw.gov.au/about-us/publications/pdi/2025/pork)
- [MLA, Understanding dressing percentage (fact sheet)](https://www.mla.com.au/globalassets/mla-corporate/extensions-training-and-tools/documents/fs03-understanding-dressing-percentage-final.pdf)

General information only, not financial, tax, legal or credit advice. These courses are not nationally accredited training.