Page 1 Page 2 Page 3 Page 4 Page 5 Page 6 Page 7 Page 8 Page 9 Page 10 Page 11 Page 12 Page 13 Page 14 Page 15 Page 16 Page 17 Page 18 Page 19 Page 20 Page 21 Page 22 Page 23 Page 24 Page 25 Page 26 Page 27 Page 28 Page 29 Page 30 Page 31 Page 32 Page 33 Page 34 Page 35 Page 36 Page 37 Page 38 Page 39 Page 40 Page 41 Page 42 Page 43 Page 4435 IREC Farmers' Newsletter No. 197 — Autumn 2017 Water costs are the major driver of profitability in irrigated farming systems and to undertake a useful gross margin analysis it is necessary to calculate with accuracy the variable cost of water. Rice Extension developed Rice$cenario after identifying the need for a simple, user-friendly decision support tool to assist growers to analyse water costs within the farming business to ensure the most productive use of water available. There was no ‘free of charge’ tool in the marketplace that could meet this need. Growers using this tool will better understand irrigation needs and costs and the gross margin of all crops and livestock enterprises within the farming business. Rice$cenario allows growers to determine: l water budget — how much water is needed for an irrigation program or how much rice can be grow with the water available l fixed and variable costs of allocated and purchased water l average price for irrigation water (purchased, allocated and other) l what price a grower can afford to purchase temporary water l gross margin of farm enterprises, such as rice, winter crops, other summer crops and livestock l sensitivity analyses on yield, crop price and purchased water price l income and input costs to use in farm budgets. Rice$cenario stores scenarios electronically for future use or reference, and the information is protected by a user’s unique email address. Individual scenarios can also be printed out for a hard copy or emailed to an advisor or family members. When planning for the coming season, growers can assess different scenarios including crop size, variety, sowing methods and crop management to maximise their profitability. Rice$cenario has default charges for inputs in the templates however growers are encouraged to input their own information to obtain gross margins of enterprises and sensitivity analyses on yield, price and purchased water of the given scenario. Rice$cenario was released in July 2015 and a number of workshops and training days were held to promote the tool. The uptake has been healthy with 30% of growers having used Rice$cenario and created at least two scenarios each. Rice$cenario is continually being improved taking into account feedback from users and updates have included new gross margin templates for common winter crops and livestock operations. Irrigation fees and charges and default input costs are updated in July of each year. Water budgeting Calculating the cost of water in a gross margin is important to help determine the enterprise mix. Many growers will use the temporary water price only in their gross margin. Others will decide which crops they are assigning their purchased and allocated water to. Some advisors and growers think an average purchased water cost is a better indicator. What is most important is that a consistent process is used from crop to crop or between years. The advantage of the average purchased water cost, which is the method used in Rice$cenario, is that it assigns the cost of the water purchased and the water allocated consistently across all cropping enterprises grown within the irrigation year. An example from the Water Budgeting Calculator from the tool is shown in Figure 1. Fixed and variable costs of water Since the separation of land and water titles and the maturing of the water trade market, budgeting for fixed and variable charges for irrigation water has become more complex and difficult—even to calculate an accurate cost of the variable charges. Figure 1. An example of a water cost report prepared Rice$cenario. These complexities have evolved as irrigation companies have adjusted to the changes described above and as their customer base becomes more diverse. An example of the complexity is one irrigation company has 13 line items on the account received by growers including outlet fees, landholding fees, S&D outlet fees, fixed and variable charges on delivery entitlements and government charges, to mention a few. In addition, a lot of growers trade water in from the temporary market or in some instances sell water rather than growing a crop, which will have an impact on irrigation costs. The Rice$cenario water budgeting tool allows growers to calculate the fixed and variable charges from predicted or known allocation. Charges under a number of different scenarios can be calculated, such as purchasing extra water or selling water. Fixed and variable fees and charges are updated in July of each year. Gross margins Gross margins are used to compare the relative profitability of different farm management practices and similar enterprises. Consequently, they provide a starting point for understanding the farm’s management practices or overall enterprise mix. A gross margin can be defined as the gross income from an enterprise less the variable costs incurred in achieving that income. A gross margin includes only the variable costs of a farm business. Variable costs are costs directly attributable to an enterprise and vary in proportion to the size of an enterprise. For example, if double the area of rice is sown, then the variable costs associated with growing the extra area, such as seed, chemicals and fertiliser will also roughly double. A gross margin is not net profit because it does not include fixed or overhead costs such as fixed water costs, depreciation, interest payments, rates or permanent labour, which are paid regardless of enterprise size or mix. Gross margins are generally quoted per unit of the most limiting resource, e.g. land (per ha) or irrigation water (per ML). Gross margins need to be used carefully. As overhead costs are excluded, it is advisable to only make comparisons of gross margins between enterprises that use similar resources. If major changes are being considered, more comprehensive budgeting techniques such as capital costs, cash flow budgeting, profit and loss statements cost of production and balance sheets are required. Gross margins are a valuable aid in farm planning but they should be by no means the sole determinant of enterprise mix.