Choice of Farm Enterprises in Agribusiness

High Value crops in Kenya

Choice of farm enterprises from among several possible alternatives in agribusiness is critical. Production resources are scarce and they must be used for maximum profit which is the main theme of agribusiness.  Gross margin analysis is the best management tool to use for enterprise selection, as it indicates whether an entity will cover its cost of production, and only the relevant costs are considered. Therefore the Gross Margin of a farm enterprise is the difference between gross income and the variable costs directly associated with the enterprise. Gross income is calculated by multiplying total yields by the current market price while, Variable cost refers to expenses which can be allocated to a specific enterprise; and they change with alteration of scale. For instance an extra hectare of crop will increase the expenditure on seeds, fertilizer and machinery. Similarly, an increase in the number of sheep in a herd will increase the expenditure on drenching, shearing, and animal feeds. Gross margins do not consider fixed and overhead costs. Fixed costs are expenses which are not affected by a change in the scale of operation. Examples are expenses of vehicle registration which are incurred regardless of whether you plant an extra hectare of crop on the farm or not.

	GROSS INCOME
Minus	VARIABLE COSTS
=	GROSS MARGIN
Minus	FIXED COSTS/ Overheads
=	NET MARGIN
Minus	CAPITAL COSTS  e.g. finance cost, depreciation
=	PROFIT (pre-tax)

In addition, there are other farm costs which cannot easily be charged to a particular commodity because they are spread across all activities on the farm and they are called Overheads. Examples are accountancy fees, vehicle ownership expenditure, electricity charges. Gross margins do not calculate profit but indicates potential profitable enterprises; they are used for comparing relative costs and returns for similar farm activities e.g. wheat vs. barley, predicting the performance of potential alternative farm enterprises, planning farm enterprise mix, and estimating impacts of changes in expected yields, prices and costs.

KALE'S Gross Margin analysis/acre/season

Item	Unit	Quantity	Price/unit- KSH	Value- KSH
Total yields/output	Bags	50	1,200	60,000
Gross income				60,000
Variable costs
Seeds	Kg	0.5	1,000	500
DAP fertilizer	Bag	1	2,500	2,500
CAN fertilizer	Bag	1	1,800	1,800
Nursery establishment & management	MDS	4	150	600
Fertilizer application	MDS	2	150	300
Manure purchase	Tons	1	1,500	1,500
Manure application	MDS	4	150	600
Transplanting	MDS	6	150	900
Insecticide	Litres	1	1,000	1,000
Spraying	MDS	4	150	600
weeding/Harvesting	MDS	10	150	1,500
Total variable cost				11,800
Gross Margin				48,200

Gross margins are most often calculated per production unit e.g. one hectare/acre, one dairy cow or per unit of output e.g. one bag of kales, one kilogram of milk or the whole farm assessment. Gross Margins are most useful when expressed in terms of the most limiting resource, consequently when capital is the most limiting resource, express as gross margin per KSH invested; and when land is the most limiting resource express it per hectare of land. The enterprise with the highest returns to the most limiting resource is preferred. Farm records and accounts are crucial in determining and tracking expenses and returns from various enterprises.