Commercial Management of the Sheep Enterprise

Original Version

This module includes 16 topics.

PPT files associated with these topics can be downloaded as a compressed archive.


Topic 01: Farm Management Topic 01: Methods

This topic provides information on constructing, using and interpreting gross margins . Gross margin budgets are important tools for farm decision making where the enterprise or activity does not change significantly and where existing capital resources such as wool sheds and sheep yards remain unchanged. If capital items were to change, then a whole-farm budget is more applicable to use.

Topic 02: Economics of Sheep Production

This topic is directed to the analysis of the economics of sheep production. The main purpose is to develop an understanding of the principles of production and price theory, and how these principles can be applied to economic problems in sheep production.

Topic 03: Benchmarking Sheep Performance

The focus of this topic is on how to apply benchmarking methods to compare production performance in the sheep enterprise between farms. Benchmarking analysis has been undertaken for many decades on sheep farms in Australia, originally under the guise of comparative analysis, but has been improved under its current name of benchmarking. The standard benchmarking methods are outlined and assessed, and compared with recently developed, more advanced methods. Empirical examples are provided of the various indicators using both standard and advanced methods for benchmarked farmers in south-west Victoria.

Topic 04: Use of Discounted Cash Flow Analysis in the Sheep Enterprise

The primary focus of this topic is on the application of discounted cash flow (DCF) methods to make investment decisions in the sheep enterprise. Methods are introduced for carrying out investment analyses using DCF analysis, with three popular criteria – net present value, benefit-cost ratio and internal rate of return – outlined and used in three brief case studies. The case studies are provided to demonstrate how DCF analysis can improve decision making in the sheep enterprise and in public decision making.

Topic 05: Wool Marketing in Australia

The aim of this unit is to provide background on wool marketing and illustrate some of the tools that are used in wool market analysis. Development of a strong marketing strategy emanates from a thorough analysis of the underlying trends within each end use market. At the completion of this unit you should be able to describe the influence of the buffer stock scheme and reserve price scheme and the factors that influence the supply and demand for wool; you will have a good understanding of why wool markets must be separated into their end use properties to properly evaluate changes or marketing strategies; you will know how to interpret elasticities of demand and supply; and you will understand the methods that producers employ to mitigate market risk, including futures and options contracts.

Topic 06: Overview of the Sheepmeat Marketing Supply Chain

Meat sheep may be marketed in Australia as stud, store or finished stock. This paper deals with slaughter (finished) lambs or sheep and the various systems for marketing these. The sheepmeat marketing supply chain could be described as the various methods and steps used to deliver sheepmeat from producers to end-users. This chapter will also describe attempts over the last two decades to make the supply chain more value based and with stronger alliances between and within sectors.

Topic 07: Analysis of Mixed Enterprises Including Sheep Production

The primary emphasis in this topic is on comparisons of profitability of activities in the sheep enterprise, and appropriate management and product marketing to maximise profit. There are also elements of risk management associated with enterprise/activity mix, management and product marketing.

Topic 08: Managing Risk in Sheep Production

Sheep production, like most agricultural enterprises, is typically a risky business. Farm decision makers face much uncertainty about future prices, costs and interest rates, and about future environmental conditions that affect production (yields). Managing risks and uncertainty is the essence of the management challenge of the farm business. This topic is designed to provide students with an introduction to managing risk in sheep production.

Topic 09: Economic Sustainability

On completion of this topic you should have:

  • An appreciation of the background to the current focus on sustainability in Australia and elsewhere
  • An understanding of the determinants of world wool market trends and how they impact on the economics of wool growing
  • An understanding of the key economic principles associated with sustainability
  • An introduction to how government can promote sustainability.

Topic 10: Finance and Taxation Issues

The focus of this topic is to discuss how there is more to managing finances than just receiving the income from sales, paying the bills and hoping there is some money is left over at the end. Managing a sheep enterprise is about managing a margin; in other words knowing what the cost of production is and marketing the produce (wool and animals) at a higher price than the cost of production; the difference being the margin. It’s about achieving a return on the assets employed in the operation that reflects a profitable business that is driven by productivity and efficiency.

Topic 11: Legal Issues in Sheep Regulation

The law which regulates the sheep enterprise is not one discrete area of law but draws upon a number of legal areas. These notes are therefore designed to provide a broad introduction to some of the important legal issues that are involved in managing a sheep enterprise. Their purpose is not to turn you into a legal expert in each of these areas but to highlight those aspects of managing the sheep enterprise that can lead to legal problems and so alert you to the possibility of where you may need to gain further advice.

Topic 12: The Economics of Disease Control in the Sheep Industry – The Case of Ovine Johne’s Disease

The primary focus of this topic is on how to make decisions about disease control in the sheep industry, with specific examples involving ovine Johne’s disease (OJD). At the farm level, this entails a producer making optimising (cost-minimising) decisions about the appropriate form of action to deal with a livestock disease. But the response to livestock diseases also requires that account is taken of the externalities they cause and the public good nature of a disease-free status. It is a suitable situation in which to apply benefit-cost analysis to make investment decisions of public interest in the sheep enterprise. Benefit-cost analysis (BCA), which was introduced in Topic 9, is a tool to assist decision making in the public arena about disease control in the sheep industry.

Topic 13: The Sheep Production Sector in the Australian Economy

This topic is directed to an analysis of the sheep enterprise in the Australian economy. The main purpose is to develop an understanding of the processes of change in the enterprise as economic development has occurred.

Topic 14: Implementing Drought Policy

Drought is inevitable in farming in Australia. Current government policy for dealing with the consequences of drought wastes resource and worsens public well-being. Drought policy perversely penalizes farmers who run their businesses in ways to cope with drought. Instead it encourages farmers and those with whom they deal to take more risk. Farmers and people in their markets for inputs and outputs can do many things together to manage farm risk, including drought. Farm businesses with good prospects for profit and growth would be better off if drought risk was no longer subsidized, and instead, if these farmers increasingly worked through markets to manage the risks of their farm businesses, including drought. Nearly everyone else would be better off too.

Topic 15: Economic Policy Issues and their Implications for Australian Sheep and Wool Producers

To gain some understanding of the extent to which Government policies can impact of farm businesses, this paper examines policy developments in four policy areas that have had an impact on sheep and wool producers in recent decades. These are;

  • Natural resource management,
  • Trade,
  • Energy, and
  • Climate change.

In each case, the opportunity is available to examine the impact of policy decisions that have already been made, as well to consider the potential future impact of some likely future policy decisions.

Topic 16: Current Economic Research Issues in the Sheep Industry

This final topic in the unit provides an overview of the principal types of economic research that is taking place in the sheep industry. This research occurs at two main levels: macro/industry level and micro/company/farm level. Macro/industry-level economic research has been in four main areas: assessment of the benefits and costs of research and development; analysis of the effectiveness of marketing and promotion; analysis of trade liberalisation; and market intelligence and forecasting Economic research at the micro/company/farm level has focused mainly on the economics of research and development, and the adoption of new technologies on the farm and in wool and sheep meat marketing.