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 (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 with your own numbers. Our guide to cattle budgets and cashflow shows cost of production in a full budget.