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UDC 338.439.4:633.853.494:005.52:657.478.8
EFFICIENCY OF COLZA PRODUCTION WITHIN APPLICATION OF THE MARGINAL ANALYSIS
Suhoceva N.A., Candidate of Economic Sciences Orel State Agrarian University, Orel City, Russia E-mail: [email protected]
ABSTRACT
From an economic point of view, economic conditions make rural producers look for different ways of increasing production efficiency and competitiveness of the produced products, but the volatility of the market requires constant consideration of all factors, which ensure the production of colza and the level of its profitability. Production efficiency should be based on an integrated and comprehensive analysis and an integral part of this analysis should be, in our opinion, the margin analysis of the efficiency of crop production.
KEYWORDS
Oil and fat subcomplex; Oilseeds; Agrarian economy; Efficiency; Colza; Marginal analysis; Costs; Economic conditions.
The region’s oil and fat subcomplex is an integral part of the agro-industrial complex in the Oryol region, presenting a set of organizations that involve the unity of the process of oilseed production, storage, transportation, refining and marketing of oil and fat products. At the present stage improving the efficiency of oil and fat subcomplex is crucial for the achievement of food security in the country. Due to the high biological value, oil-and-fat production plays an important role in a balanced diet of the population.
Rape remains one of the most demanded oilseed crops both in the domestic and global market. The European industrial countries have already appreciated the advantages of rape production and use as a biodiesel fuel. At present biofuel use by transport is 6% of the traditional, and by 2015 it will have reached 8%. [4]. Rape takes one of the leading positions in the world oilseed production. Countries are more and more interested in the crop due to favorable conditions in the global market of rapeseed and rapeseed oil. Active worldwide consumption of its products, both in food and in technical applications, leads to further use by domestic producers. [5]
All the foregoing words prove the particular relevance and practical value of rape production. In addition, the solution to the problem will significantly reduce the industry's dependence on imports of vegetable oils and other oil-containing foods, as well as promote the growth of food security of the country and the region. In the CIS countries and, above all, in Russia there is a large untapped potential of land resources to grow agricultural products, both for food and for a long-term production of biofuel.
The State Program «Development of agriculture and regulation of markets for agricultural products, raw materials and food for the period 2008-2012» contemplated expansion of sown area of winter and spring oilseed rape in farms of all categories up to 2 million hectares for the period and an increase in gross yield seeds up to 3 million tons. However, increase in acreage, yield and total yield of rapeseed in the farms of various organizational and legal forms of ownership is not fast, as it was planned in the State program. Analyzing the Russian acreage, on which oilseeds are cultivated, we can say that in 2010 they accounted for 9,615.6 thousand hectares, of which 18% (1735.2 thousand ha) is the Central Federal District (CFD). Among 17 areas included in the Central Federal District for the cultivation of oilseeds the Oryol region takes the 6th place (4%, or 67.4 million hectares). The largest share (36%) is occupied by the Voronezh region (1st place), 21% of the area of oilseeds in the CFD is occupied by the Tambov region (2nd place). The Belgorod region takes the 3rd place. Its total area of sowing oilseeds is 246.9 thousand hectares. With a break of 66 hectares the Lipetsk region takes the 4th place. In 2010, the Kursk region took
the 5th place (9%), in 2009 the Kursk region left the Orel region behind, and is moving forward at a solid pace. [7]
In particular, in 2010 it was the first time the area of spring rape cultivation in Russia had reached 638.3 thousand hectares. 34% of the area or 216.3 thousand hectares were cultivated in the Central Federal District. The share of the Oryol region accounted for 17% (36.5 million hectares), and it ranks second after the Lipetsk region according to the size of the area under colza (70 ha). If we consider winter rape, in 2010, crops were grown on 217 thousand hectares, of which only 4% (9.1 million hectares) were in the Central Federal District, 30% of the acreage of winter rape were in the Orel region and 32% - in the Smolensk region. It should be noted that the Lipetsk region was not involved into winter oilseed rape cultivation in 2010. It must be mentioned strongest increase of planted area in 2011 occurred in Western Siberia and the Urals - by 49 and 46%, respectively. In sum, the eastern regions ensured an increase of 95 thousand ha compared to 2010. Of course, the production of any product provides the attachment of certain investments in the sector, which, at the end of the production cycle, must be reimbursed and profitable. Table 1 shows the crop area, yield and total yield of oilseeds in the Oryol region (2010 - 2011). [7]
Table 1 - Production figures of some oilseeds in the Oryol region
Figures Farms of all categories, 2011 Farms of all categories, 2010 2011 in % to 2010
Oilseeds-total
Sown area, ha 93948 67441 139,3
Yield, q from 1 ha 19,9 9,3 2,1 p
Gross yield (weight after processing), t 1629562 479939 3,4 p
Sunflower
Sown area, ha 28157 9947 2,8 p
Yield, q from 1 ha 23,8 14,2 167,6
Gross yield (weight after processing), t 653072 127955 5,1 p
Soy
Sown area, ha 14703 15499 94,9
Yield, q from 1 ha 21,7 9,4 2,3 p
Gross yield (weight after processing), t 314203 99113 3,2 p
Rapeseed
Sown area, ha 48139 39256 122,6
Yield, q from 1 ha 17,0 8,1 2,1 p
Gross yield (weight after processing), t 649904 244978 2,7 p
Therefore, a necessary condition for profit is a certain degree of production development, providing the excess of sales proceeds over costs for its production and marketing. The effectiveness of investments in the production of rapeseeds or any other product depends largely on the price for the goods at the time of its admission to the relevant market, and we should take into account the level of production costs relating them to the possible price level. Besides outputs and colza sales affect production efficiency. Profitability or unprofitability of colza production, therefore, depends on the complex influence, price mobility, costs and outputs. That’s why it is very important for Agricultural Organization to determine the precise point. If it passes the point rapeseed production will bring loss. [6]
In the future, when production reaches top results, the financial stability of organizations, will largely depend on the size of its level of profitability and level of payback of the made investments. We consider that the agricultural organizations making colza, and also the state organizations leading agrarian and industrial complex of the region, have to monitor constantly tactical trends in the colza market. Volumes of colza realization made in the Oryol region in 2011 [8] are presented in table 2.
Thus, the analysis of the rapeseed market is influenced by the fact that the operation of the market is carried out in a perfect (pure) competition, where producers cannot influence the price. The manufacturer has to accept the current market price. That’s why the organization should, where possible, respond to changing market conditions through appropriate organizational and management decisions aimed at increasing or decreasing volume of sales, maximizing profits or minimizing losses.
Table 2 - Sales volumes of rapeseed produced in the Orel region in 2011
Regions sold total including on sales channels out of the total volume sold
quantity, tons 2011 in % to 2010 revenue, thousand rub. to the processing organizations and the organizations of wholesale trade outside the territorial subject of the Russian Federation Including outside the Russian Federation
quantity, tons revenue, thousand rub. quantity, tons quantity, tons
The Oryol region 29021 124,6 293510 29007 293349 11847
Trosnyanskij 1576 - 16254 1576 16254 - -
Kromskoj 2415 126,3 25320 2415 25320 - -
Orlovskii 2289 4,6p 24291 2275 24131 640
Zalegoshhenskii 690 77,7 6888 690 6888 - -
Verkhovskij 1080 - 13240 1080 13240 - -
Novodereven'kovskij 4924 3,4p 38226 4924 38226 2491
Livenskij 5889 110,2 53211 5889 53211 3532
Kolpnyanskij 2992 109,8 27987 2992 27987 2012
Dolzhanskij 3397 51,2 42841 3397 42841 3172
Oryol 3768 101,9 45251 3768 45251 - -
Therefore, the questions of priority directions aimed at increasing rapeseed economic efficiency, forecasting the volume of its production, including the utilization of innovative technologies remain open and require further study. In this regard, we consider it is necessary to conduct a margin analysis of rapeseed effectiveness. This approach to the analysis of the effectiveness will reveal influence of prices, costs and volumes of rapeseed production on profit margin by determining the break-even level of its production and sales [1]. The marginal analysis allows to determine accurately the break-even volume of rapeseed production knowing or supposing price-cost ratio (fixed and variable). Here the determination of the minimum output (sales) colza in an agricultural organization is the benchmark that shows the "threshold" (point), when it is self-sufficient, that is, when the proceeds from the rapeseed sale compensate total costs (Formula 1).
P - (AFC + AVC), (1)
where P - price, rub. / c; AFC - average fixed costs, rub. / c; AVC - average variable costs, rub. / c; 0 - zero.
The volume of rapeseed production, which provides break-even of its cultivation, is defined as the ratio of fixed costs to the marginal revenue (Formula 2).
TFC
Q = me - (2)
where Q6 - the minimum amount of rapeseed production per 1 ha, c; TFC - the sum of the fixed costs per 1 ha, rub.; MD - profit margins, rub. / c.
MD = P - AVC (3).
For calculations according to the formulas it is necessary to make the balance of income and expenditure of a total planned production of rapeseed (Formula 4).
TFC + TVC = Qn (4)
TVC = AVC * Qn, (5)
where TVC - the sum of the variable costs per 1 ha, rub.; Qn - planned volume of rapeseed production from 1 ha, c. Taking into account the current market situation of rape, each farm enterprise must determine the minimal limit of its production, when the total costs will be paid off and the desired (target) profit will be achieved. The level of required return is calculated as the ratio of fixed costs (TFC) and the target profit to the marginal revenue (Eq. 6).
^ TFC + n ^
Qn = Md ' (6)
where Qn - the production volume providing receipt of standard (target profit), c; n - target profit per 1 hectare, rub. For calculation of Qn it is necessary to make a balance of revenues and expenses (formula 7).
TFC + TVC + n = Qn, (7) therefore TVC = AVC * Qn, (8)
The marginal analysis allows determining a zone of stability (safety) of colza production that reveals possible reducing volumes of colza production to "threshold" of break-even. Of course, if the volume of rapeseed production, prices, or costs change the «threshold» of break-even, and therefore, the zone of production will change immediately too [2].
Thus, the methodological approaches to analysis of rapeseed production effectiveness in market conditions make it possible for agricultural firms to take organizational and management decisions based on the main components of marginal analysis - price, costs, output and profits. The researches made in one of the agricultural organizations in the Oryol region showed that using marginal efficiency analysis of rapeseed production allows to trace accurately the impact of a number of factors on separate economic indicators of colza production [3].
Fixed costs are usually such costs that remain constant with the change of output (rent, interest on loans, accrued depreciation of fixed assets, certain types of wage). It should be noted that the separation of costs into fixed and variable is arbitrary, because many costs are semi-variant (semi-permanent). The fixed costs for rapeseed production are amortization, salaries, and other costs. Variable costs are costs of seeds, fuel, fertilizer and plant protection products (Table 3).
Table 3 - General and average costs for rapeseed production in agricultural organization
Figures 2011
Area, ha 4281
Yield, t/ha 23,5
Gross production (output), c 100604
Sales volume, c 100410
Amount of fixed costs, thous. rub. 15564
Amount of variable costs, thous. rub. 27512
Gross amount (total) costs, thous. rub. 43076
Average fixed costs of 1c, rub. 1155
Average variable costs of 1c, rub. 1274
Average gross (total) costs of 1c, rub. 2429
In an agriculture organization it is annually cultivated about 4,000 hectares with an average yield of rapeseed 23.5 t / ha (2011). Production volumes and sales volumes in the
economy are practically the same (production is 10.6 million tons, the realization is 10.4 tons), which allows carrying out cost analysis, using data from the calculation of rapeseed production costs. In the farm in the total costs fixed costs are 36.1% and variables ones are 63.9%.
Producing rapeseed the proportion of fixed costs is at the proper level, and since they do not change according to the volume of produced (sold) products, it is, in the case of a significant yield reduction, will not lead to a reduction of the target profit or a loss. For the prevailing balance of price, costs and volumes of production, the critical volume of rapeseed production in the economy is 67,211.7 c. (15.7 c / ha * 4281 ha), which corresponds, at a stable crop area, yield 15, 7 c per 1 hectare of rapeseed (Table 4).
It follows from calculations that the ratio of the actual prices, costs and volumes of rapeseed production is stable enough for the organization. This safety zone is 33.1%. However, not in all agricultural organizations, as rapeseed production is still quite unstable. Sometimes there are large fluctuations in the ratio of sowing and harvesting rapeseed acreage (for example, in 2006, they planted 60 hectares, and harvested 38 ha), and, especially in the yield of rapeseed. Prices in rapeseed market is also not stable enough, and although they are growing, but the rate of increase below the rate of increase in the cost of production.
Table 4 - Calculation of the «threshold» of break-even in rapeseed production
Output, thous. c. Q Yield, c/ha Fixed costs per 1 ha, rub. (TFC) Average variable cost per 1 c, rub. (AVC) The average total cost per 1 c, rub. (ATC) Price for 1 c, rub, (P) Profit from 1c, rub. (n)
67,2 15,7 3636 1410 1565 1565 0
100,4 23,5 3636 1274 1429 1565 136
57,8 13,5 3636 1476 1631 1631 0
57,8 13,5 3636 1476 1631 1565 -66
It is important to investigate the relationship of factors that impact on the efficiency of rapeseed production. Actual figures are taken for comparison. In this case, the calculations were made on the four options, taking into account firstly - price reduction, secondly -increase in variable costs, - thirdly - increase in fixed costs, finally - on the totality of the above factors (Table 5).
According to the first option we calculated the efficiency of rapeseed production in the case of price reduction at the time of its implementation. It should be noted that the price fluctuation in agricultural market is quite common. Variation in price is fixed at the commodity exchanges (eg, Prices for rapeseed in France and Germany at the end of 2012 were fixed at the following marks EUR 464-475 / t CPT Rouen / Hamburg, EUR 452-462 / t compared to the first half of February, 2012 ). The gap between the highest and lowest price was about 40%. Seasonal price fluctuations in agricultural products have a direct impact on the organization’s profitability.
Table 5 - Efficiency of colza production (the factorial analysis) (area of 4281 hectares)
Figures Basis Options taking into account changes of efficiency factors
1 (P) 2 (TFC) 3 (FVC) 4 (P, TFC, AVC)
Price 1 c, rub. 1565 1515 1565 1565 1515
Fixed costs per 1 ha, rub. 3636 3636 3709 3636 3709
Variable costs per 1 c, rub. 1274 1274 1274 1493 1493
Break-even level of productivity per 1 hectare), c 15,7 17,4 15,8 16,3 18,5
Profitable production volume (implementations), thousand c 67,2 74,5 67,6 69,8 79,2
Standard (planned) profit per 1 hectare, rub. 3078 3078 3078 3078 3078
The production volume (implementation) providing receipt of target (planned) profit, thousand c 23,1 27,9 23,3 24,9 30,9
The production volume (implementation) providing receipt of target (planned) profit in % to basis, % 100,0 120,8 100,9 107,8 133,8
The second option assumes that variable costs per unit of output will increase due to the steady tendency to rise in the cost of resources used in the cultivation of rapeseed (electricity, fertilizers, fuel, etc.).
On the average during 3 years material costs increased 3 times, which was caused by a sharp increase in rapeseed production and the increase of material costs were 80%. That’s why this increase is provided in calculations for this option.
According to the third option it was assumed that the future costs of such expenditure as the repayment of loans, market research, lease payments, skills development, etc. may increase. This situation is also quite natural, but the large increase in fixed costs can not be, unless the activities of the agricultural organizations are radically modernized. According to the calculations, the increase in fixed costs is 2% of the basic version.
Investigating the effect of various factors separately and in their entirety, it is likely to predict the consequences of their changes. So, as a result of lower prices, the critical volume of rapeseed production increases (in our example, from 67.2 thousand c to 74 thousand c), marginal revenue and stability of rapeseed production decrease. Increase of costs also leads to a change in the break-even «threshold» towards its increase, as well as reduce of profitability and sustainability of rape as a whole. To ensure the standard (target) profit for all of the above changes, you will need to increase production through higher yields, at least through the expansion of cultivated area, as well as the adoption of certain decisions (channel search of the rape implementation at a higher price, increasing the shelf life before more favorable market conditions, etc.).
Thus, the variability in determining the effectiveness of rapeseed production through marginal analysis allows taking into account objectively possible consequences of the key factors that directly affect the organization’s profitability.
The fourth option includes all the factors taken into account in the calculations of the first three options.
As noted earlier, rape is grown in all soil-climatic zones of the Orel region, its production is concentrated in the south-east zone. The studies show that there is a clear upward trend in the acreage of rape in all soil-climatic zones but it cannot be said about the yield of this crop. During the study years, the yield of rapeseed was different every year.
The instability of the rapeseed market requires continuous monitoring of all the factors that ensure the rapeseed production and its level of profitability. Thus, the development of rapeseed production must be based on an integrated and comprehensive analysis and an integral part of this analysis is to become, in our opinion, the efficiency marginal analysis of crop production, including rapeseed.
Margin analysis of the effectiveness of rapeseed production can determine quite objectively critical level of productivity for certain agricultural organizations that provides break-even production of rapeseed, to define the limits (zone) of sustainability of its production, and also to determine that level of productivity which provides receipt of standard (desirable) profit in case of the average (developed) costs and the price.
However, it should be noted that we determined the fixed and variable costs on the basis of the actual production costs and process maps rapeseed cultivation.
Margin analysis shows that at the existing level of prices, fixed and variable costs, the minimum level of productivity providing break-even rapeseed production is from 10.1 to 14, 0 c/ ha.
Thus, our study confirms that it’s necessary to increase the volume of rapeseed production in order to meet population’s needs in vegetable (rapeseed) oil and animal’s needs in feed. The expansion of rapeseed production will improve the financial position of the enterprise and improve the overall efficiency of the agrarian economy. In this case, the possible changes in the market situation of rape, shifts in the prices of resources or factors of production, affecting costs, are objectively reflected on the economic results. Therefore the marginal analysis of rapeseed production is accessible to us for any agricultural organization.
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