Successful farmers recognize that gross margin analysis is
critical for good crop selection. The gross margin is determined by
deducting the direct variable input costs of growing a crop from
the gross income of selling the crop. Knowing the gross margin of
each crop helps farmers choose the most profitable combination to
grow.
The only costs included in this category are those that can be
measured and allocated on a crop-by-crop basis. A farm should know
with some accuracy the seed and chemical costs of a pea crop
compared to a flax crop. However, when asked about the cost of fuel
or machinery repairs on a wheat compared to a canola, the farmer
would have to use an arbitrary method of allocating the farm's
total cost by acre, number of passes, or as a percentage of gross
revenue.
